[1] Whether the denial of wrongful calculation under Article 52 of the former Corporate Tax Act applies only to cases where the calculation of a natural and unreasonable act is deemed to have neglected economic rationality (affirmative), and the method of determining whether economic rationality exists

[2] Whether the “transaction between a corporation and a specially related person” under Article 88(1) of the former Enforcement Decree of the Corporate Tax Act includes a transaction made through a person other than a specially related person (affirmative), and whether the transaction constitutes an abnormal act lacking economic rationality, in case where a corporation and a specially related person obtained an economic benefit by making a transaction with an unrelated person, and thus, such transaction cannot be deemed an act lacking economic rationality (negative)

[3] In a case where Company A purchased Company B’s shares from Company C, a financial institution, on behalf of the representative director Eul, and the head of the competent tax office deemed that Company B purchased shares at a price higher than the market price on behalf of Company B and distributed profits equivalent to interest expenses for the excess of the market price to Company B, and thus denied the excess of the market price as a wrongful calculation, and thereby included Company A’s gross income in the calculation of income amount, and accordingly disposed of the income accordingly, and notified Company A’s correction and notification of corporate tax, the case holding that even if Company A purchased shares at a price higher than the market price on behalf of Company B, such transaction cannot be deemed as subject to the avoidance of wrongful calculation, as an abnormal transaction lacking economic rationality in light of sound social norms and commercial practices

[1] Article 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 88 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22951, Jun. 3, 2011) / [2] Article 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 201); Article 88 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22951, Jun. 3, 2011) / [3] Article 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 8 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22951, Jun. 3, 2011)

[1] [2] Supreme Court Decision 2016Du54213 Decided May 30, 2019 (Gong2019Ha, 1327) / [2] Supreme Court Decision 2013Du20127 Decided April 10, 2014 (Gong2014Sang, 1062)

1. The term “the term” means “the term” means “the term” means “the term” means “the term” means “the term.

Head of Central Tax Office

Busan High Court Decision 2016Nu21862 decided January 25, 2017

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

The grounds of appeal are examined.

1. Article 52 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides, “Dispact of wrongful calculation” means a system where a corporation’s act of wrongful calculation is deemed to have avoided or reduced tax burden by abusing various forms of transactions listed in each subparagraph of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 2011; hereinafter the same) without using a reasonable method from a person with a special relationship. This system is limited to cases where, in light of an economic person’s position, the tax authority denies it and deemed that there exists income objectively and reasonably deemed objective and reasonable by the method stipulated in the relevant Act and subordinate statutes. Determination of economic rationality ought to be made based on whether the transaction was performed in light of sound social norms or sound practices, taking into account the various circumstances of the transaction in question.

Meanwhile, Article 52 of the former Corporate Tax Act and the main text of Article 88(2) of the former Enforcement Decree of the Corporate Tax Act apply to transactions between the relevant corporation and related parties. Article 88(1) of the former Enforcement Decree of the Corporate Tax Act applies to transactions between the relevant corporation and related parties. However, if such transactions cannot be deemed to be abnormal acts lacking economic rationality, even if a person having a special relationship with a corporation gains economic benefits by making transactions with unrelated parties, such transactions cannot be deemed to be subject to the avoidance of wrongful calculation under each subparagraph of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (see Supreme Court Decisions 2013Du20127, Apr. 10, 2014; 2016Du54213, May 30, 2019).

2. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

A. Status of the instant company

The chemical ethyl Co., Ltd. (hereinafter “instant company”) is an unlisted company established on September 19, 2007 with the manufacture, sale, etc. of thermal pressure and voltage products as its business purpose and is an affiliated company of the same steel company (hereinafter “identical steel”).

B. Acceptance of the shares of the instant company, such as a new Capital Capital;

1) On July 27, 2009, New Capital Co., Ltd. (hereinafter “New Capital”) purchased KRW 200,000 (hereinafter “instant shares”) of the instant company’s 10,000 per share from the same steel company (hereinafter “instant shares”) in total of KRW 20,000 per share. At the time, New Capital Co., Ltd. (hereinafter “New Capital”) entered into a contract with the Nonparty to sell the instant shares to the Nonparty “the date one year has elapsed from the date when the transaction was closed” to “the date one year has elapsed from the date when the transaction was closed” to “the date when the company was closed to the first purchase price plus the amount calculated at a rate of 13% per annum from the date when the company was closed to the date when the company was closed” (hereinafter “instant put option contract”). In addition, the instant put option contract included the Nonparty’s “the Nonparty’s exercise of put options.”

2) Meanwhile, on July 27, 2009, the new bank (hereinafter “new bank”) purchased KRW 200,000,000 per share of the instant company from the same steel and entered into a contract with the Nonparty to provide put options to the new bank under the same conditions as put options contract of this case.

C. Circumstances of the instant transaction, etc.

1) On the grounds that it is difficult for New Capital to hold the unlisted stocks for a long time around August 2010, the Plaintiff opened a board of directors meeting on November 10, 2010 to the Nonparty, who is the person liable to purchase the instant stock pursuant to the put options contract, and the Plaintiff decided to the effect that “the purchase of the instant stocks, etc. held by New Capital Capital, etc., but the details of the instant stocks will be entrusted to the Nonparty representative director.” Accordingly, the Nonparty designated the purchaser of the instant stocks as the Plaintiff. On November 23, 2010, the Plaintiff purchased the instant stocks from New Capital amounting to KRW 23,518 won per share in accordance with the calculation method stipulated in the put options contract of the instant case (hereinafter “the instant transaction”).

2) Meanwhile, the new bank exercised put options against the Nonparty, a stock purchaser, and accordingly, the Nonparty purchased 200,000 shares of the instant company from the new bank on November 23, 2010 at the same price as the instant transaction.

D. Operational status, etc. of the instant company

1) As a result of the instant company’s commencement of production around April 2009 by securing an independent production technology for “Titty straw,” which is a mold for shipbuilding, the instant company maintained sales revenue of approximately KRW 95.5 billion for the first time in 2009. In 2010, approximately KRW 2,12.6 billion increased compared to the previous year. Since 2010, the instant company maintained sales revenue of KRW 20 billion continuously until 2013.

2) In addition, since its establishment in 2007, the instant company recorded approximately KRW 2.3 billion in 2007, approximately KRW 2.3 billion in 2008, KRW 4.9 billion in 2009, KRW 5.8 billion in 2010, and approximately KRW 2.5 billion in 201, but the operating profit rate was continuously increased by 0.6% in 2009, KRW 2.91% in 201, and KRW 71% in 201, and KRW 6.7 billion in 2012, and KRW 16.9 billion in 2013.

3) Since then, the instant company had been listed on the KOSDAQ market around July 2014, as a measure to divide shares for listing was taken in around 2013.

4) Meanwhile, on December 20, 2013, before the instant company was listed on the KOSDAQ market, the Plaintiff sold the instant shares to the New Growth Power Furura Private Equity Fund, thereby obtaining approximately KRW 3.3 billion transfer margin.

E. Disposition, etc. of this case

1) As a result of examining the change of shares with the Plaintiff from January 13, 2014 to February 25, 2014, the head of Busan Regional Tax Office: (a) deemed that the Plaintiff, instead of the Nonparty’s duty to purchase shares under the instant put option contract, distributed the interest cost of KRW 153,463,836 to the Nonparty for gains from transfer that he/she acquired from the Nonparty’s new capital gains; and (b) accordingly, notified the Plaintiff of the change of the amount of income; and (c) the Plaintiff did not object to this.

2) After conducting an audit of the Busan Regional Tax Office from September 15, 2014 to October 2, 2014, the Board of Audit and Inspection issued a request to the Director of the Busan Regional Tax Office to the effect that “the Plaintiff, as the Plaintiff performed, instead of the Nonparty’s duty to purchase shares under the instant put option contract, purchased the instant shares at a higher price of KRW 23,518 per share with the market price exceeding 20,000 per share, thereby denying the market price of KRW 703,60,000 per share as a wrongful calculation, to include the Plaintiff’s gross income as well as the Nonparty’s disposal accordingly.”

3) On March 1, 2015, the Defendant, as the competent authority, notified the Plaintiff of the change in the amount of income of KRW 550,136,165, which was the Nonparty’s person to whom the Nonparty belonged, and notified the Plaintiff of the correction and notification of KRW 157,879,450 of the corporate tax for the business year 2013, March 4, 2015 (hereinafter collectively referred to as “instant disposition”).

3. A. Examining the following circumstances revealed through such factual relations and records in light of the legal principles as seen earlier, even if the Plaintiff purchased the instant shares at a price higher than the market price by instead of performing the Nonparty’s obligation to purchase shares through the instant transaction, it is difficult to view such transaction as an abnormal transaction lacking economic rationality in light of sound social norms and commercial practices. This also applies to the case where the Nonparty, in a special relationship with the Plaintiff, was exempted from the obligation to purchase the instant shares due to the instant transaction, thereby gaining any economic benefits.

1) At the time of the instant transaction, both the Plaintiff and the Nonparty were the representative director, and the Plaintiff was the largest shareholder of the instant company. Accordingly, the Plaintiff appears to have been well aware of the corporate value of the instant company. As to the details of the instant transaction, the Plaintiff consistently proposed from the tax trial stage to the effect that, inasmuch as the Plaintiff was at the time of the instant transaction, the sales amount of the instant company was 2 times or more higher than that of the previous year, new Capital offered to the Plaintiff to purchase the instant shares at KRW 23,518 per share with only interest on the cost for acquisition, under the circumstance that he was aware of the foregoing information. Considering the future value of the instant company, the calculation of the market value of the instant shares was anticipated to be more than 40,000 won per share, and the possibility of the instant company’s disclosure was high, the Plaintiff argued that the new capital would not sell the instant shares or would have made a high sales price by deeming the instant transaction.”

However, in fact, the company of this case plans and prepares for the disclosure and listing of the company from July 27, 2009, which is the transfer date of this case, and thereafter was listed in the KOSDAQ market around July 2014 through the increase of sales and the improvement of profit structure, etc. Furthermore, in light of the fact that the company of this case sold the shares of this case before the listing as above and obtained approximately KRW 3.3 billion gains from transfer, it seems objectively reasonable to determine that the market price per share of this case is much higher than KRW 23,518, when considering the future value of the company of this case at the time of the transaction of this case.

Considering the relationship between the Plaintiff and the instant company, and various circumstances related to the instant company before and after the instant transaction, even if the market value per share of the instant shares at the time of the instant transaction, such as the instant disposition grounds, is recognized as KRW 20,000 under the relevant Acts and subordinate statutes, it cannot be concluded that the instant transaction, which assessed the company’s future value from a long-term point of view, expected transfer margin, etc. of the instant shares, and purchased the instant shares in KRW 23,518, is abnormal, and thus, economic rationality is nonexistent.

2) Meanwhile, the new bank purchased 200,000 shares of the company of this case from the same steel on the same day as the trade of this case, and exercised put options against the non-party on the same day as the trade of this case. The non-party performed his duty to purchase shares and purchased the shares at the same price as the trade of this case. If the non-party had intended to be exempted from such duty to purchase shares because the price of the shares at the time of the transaction of this case was higher than the market price at the time of the transaction of this case, the non-party was designated as the purchaser and had the plaintiff purchase the shares of this case with the shares of this case. In light of the fact that the non-party purchased the shares directly from the new bank, it is difficult to conclude that the non-party had

B. Nevertheless, solely on the grounds indicated in its reasoning, the lower court determined that the instant disposition was lawful on the erroneous premise that the instant disposition was rendered on the grounds that the Nonparty, the representative director of the Plaintiff, who was a special relationship with the Plaintiff, should purchase the instant shares at a high price, and that the Plaintiff, who was not obligated to purchase such shares at a high price, was a transaction that lacks economic rationality, and that the Plaintiff’s above act constitutes an act corresponding to Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act, and constitutes “the profit sharing” as stipulated in Article 88(1)9 of the former Enforcement Decree of the Corporate Tax Act, and thus, constitutes “the profit sharing” under Article 8

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jong-hee (Presiding Justice)