In a case where the profit from free lending, etc. is deemed to be a donation under Article 41-4(1) of the former Inheritance Tax and Gift Tax Act, the time of donation of the profit (i.e., the date of receiving the loan and the date following the date of receiving the loan every one year), and the standard time to determine whether the profit constitutes “property donated by an ancestor to a person who is not an heir within five years before the commencement date of inheritance” included in the taxable value of inheritance pursuant to Article 13(1)2 of the same Act

Article 41-4(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter “the Act”) provides that where money is leased free of charge or at low interest rates, the amount prescribed in each subparagraph shall be deemed as the value of donated property to the lender on the date of receiving the loan. In addition, in the latter part, where the loan period is at least one year, the difference between the appropriate interest rate and the appropriate interest rate shall be calculated on the following day of the first year. The legislative purpose of the provision is to impose gift tax on the difference between the appropriate interest rate and the appropriate interest rate where money is leased without compensation or low interest rate to avoid the burden of gift tax due to direct donation between the related parties. In light of the above, since the lending period from a person with a special relationship is at least KRW 100 million at a low interest rate, the time of donation and the value of loan profits shall be determined on the basis of the commencement date of inheritance tax every 15 years prior to the date of donation.

Articles 13(1)2 and 41-4(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007)

Plaintiff 1 and three others (Law Firm Han-dong, Attorneys Park Jong-dong et al., Counsel for the plaintiff-appellant)

Head of Namyang District Tax Office

Seoul High Court Decision 2010Nu26508 decided April 22, 2011

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

Article 13(1)2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “the Act”) provides that the value of inherited property shall be calculated by adding the value of property donated by an ancestor to a person other than his/her heir within five years before the date inheritance commences, and Article 41-4(1) provides that “where money exceeding KRW 100 million is loaned from a person in a special relationship at a rate lower than the reasonable interest rate, the amount falling under any of the following subparagraphs shall be deemed the value of donated property of the person who has received the relevant money on the date of loan. In such cases, if the loan period is not determined, it shall be deemed that the loan period has been newly granted each year on the date following the first year, and if the loan period is more than one year, it shall be deemed that the relevant amount has been calculated by multiplying the adequate interest rate by the loan amount.”

However, the first sentence of Article 41-4 (1) of the Act provides that the amount prescribed in each subparagraph shall be deemed as the value of donated property to the person who has received the loan in a free or low interest rate, while the latter part of the same Article provides that where the loan period is at least one year, the difference between the appropriate interest rate shall be deemed to have been newly received on the day following the first year. The legislative purport is to impose gift tax on the difference between the appropriate interest rate and the appropriate interest rate in the case of lending money without compensation or low interest rate for the purpose of avoiding the burden of gift tax on direct donation between persons with a special relationship. In light of the fact that the lending of money from a person with a special relationship under Article 41-4 (1) of the Act is to impose gift tax on the difference between the adequate interest rate and the appropriate interest rate, the time of donation shall be deemed to be the date when the money was loaned and the date when the loan comes every one year thereafter, and whether it constitutes the property value included in the inheritance tax within five years prior to the commencement date of inheritance.

Nevertheless, for reasons indicated in its holding, the court below determined that the issue of whether an ancestor constitutes "property donated by an ancestor to a person who is not an heir within five years before the commencement date of inheritance" included in the taxable value of inherited property pursuant to Article 13 (1) 2 of the Act should be determined based on the time when the first loan was made, not on the donation date stipulated in Article 41-4 (1) of the Act, not on the donation date of money under Article 41-4 (1) of the Act. In so doing, the court below erred by misapprehending the legal principles as to the timing of donation of profits, which affected the conclusion of the judgment. The ground of appeal pointing this out is with merit, since the Supreme Court precedents cited by the court below

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below. It is so decided as per Disposition by the assent of all participating Justices.

Justices Shin Young-chul (Presiding Justice)