Cho High Court Decision 2009Da1924 ( December 06, 2010)

The net asset value at the time of the evaluation of unlisted stocks shall be appraised as of the date of donation.

Considering the fact that the value of shares generally changes, the financial situation of the company is difficult to see the same at intervals of not less than half years since the date of donation and the date of donation as of the end of the immediately preceding business year, and the actual net income of the company actually changes, etc., the disposition imposing the net asset value as of the end of the immediately preceding business year is unlawful.

2011Guhap138 Revocation of Disposition of Imposition of Gift Tax

XX

Head of Eastern Tax Office

September 29, 2011

January 12, 2012

1. The disposition of imposition of gift tax of KRW 1,00,391,660 against the Plaintiff on January 2, 2009 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is the representative director of the company XX New Location Co., Ltd. (hereinafter referred to as the “P New Location”), and is the largest shareholder who owns 97.5% of the shares of the above company.

B. On July 26, 2006, the Plaintiff purchased 650,000 U.S. dollars (hereinafter referred to as "the instant shares") for the purchase price of 21,000 U.S. shares (hereinafter referred to as "the instant shares") of the Hong Kong company (hereinafter referred to as "the instant shares") from the Gangwon-do to the Hong Kong company (hereinafter referred to as "the instant purchase price"), and the said purchase price shall be paid as dividends received from the instant company from 2007 to 2011, and the said purchase price shall be paid in full by 2012.

(C) The director of Busan Regional Tax Office, from October 7, 2008 to December 12, 2010, assessed the shares of this case as the supplementary assessment method under the former Inheritance Tax and Gift Tax Act (amended by Act No. 8139, Dec. 30, 2006; hereinafter the same shall apply) 3,056,928,00 won [the value per share of the above shares shall be 145,568 won (3,928,000 won ± 21,000 won)] and assessed as 3,000 won (the value per share of the above shares shall be 145,56,928,000 won ± 306,000 won which is remarkably lower than the market price under the transaction practice; 4,000 won; 3,009,000 won and 36,709,79,0000 won and 379,005,01.

E. The Plaintiff dissatisfied with the instant disposition and filed a tax appeal with the Tax Tribunal on March 31, 2009, but was dismissed on December 9, 2010.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1, 2, 3, Eul evidence Nos. 1 and 2 (including numbers; hereinafter the same shall apply) and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The instant disposition, based on the premise that the said sale and purchase falls under the said provision, is unlawful, since it does not constitute the acquisition by transfer at a low price under Article 35(2) of the Inheritance Tax and Gift Tax Act on the following grounds.

A) The instant sales do not constitute “the acquisition of property at a price significantly lower than the market price”.

The company of this case was established by the joint investment with the Hong Kong and the OO Group (OG Group; hereinafter referred to as the "OO"). At that time, the company borrowed 750,000 U.S. dollars from putlwear (hereinafter referred to as the "probed") that is the subsidiary company of OO, and paid 50,000 U.S. dollars as the company's investment money. The company of this case acquired 50,000 shares of this case including the shares of this case. The company of this case, including the shares of this case, acquired 50,000 U.S. dollars. On December 31, 201, the company agreed to transfer the shares of this case to Kang on December 31, 200, the Gangwon-do agreed to pay the interest of 750,000 U.S. dollars and the unpaid 30,000 U.S. dollars to pay the above 50,5309 U.S. dollars shares.

However, since the sales contract for the instant shares between XX new materials and Gangwon-A was concluded from December 31, 2001 to July 26, 2006, the management status or financial structure of the instant company was almost changed, the sales price of the instant shares as of the time of the sales contract between XX and Gangwon-A, namely, the sales price of the instant shares at the time of the instant sales contract between 809,243 was the market price under the Inheritance Tax and Gift Tax Act at the time of the instant sales, and the said market price was 159,243 US dollars 159,243 calculated by subtracting US dollars 650,000 from the sales price of the instant shares at the said market price was 30% of the said market price (US US US 809, 24300.3= US 242,772.9 US). Thus, the sales price of the instant shares cannot be said to be remarkably lower than the market price.

B) Even if the sales price of the instant case is significantly lower than the market price, there is a “justifiable cause in light of the practice of trading” in the said sales.

The matter of whether the purchase price of this case was 650,000 U.S. dollars from December 21, 2001 to July 26, 2006 is based on the dividends received from the company of this case from the company of this case, based on the fact that the plaintiff was determined to calculate the dividend to be received from the company of this case, and that the company of this case, which operated around July 2006, was faced with the crisis of bankruptcy. In the event that the above shares were seized to the creditors due to bankruptcy, Gangwon has a set of liability for the debt of this case, and that there was no choice but to dispose of the shares of this case, and that the sale of this case is reasonable in calculating the above purchase price.

2) Even if the sale and purchase of this case constitutes the acquisition by transfer at a low price under Article 35(2) of the Inheritance Tax and Gift Tax Act, the shares of this case are inappropriate to be assessed as a supplementary evaluation method under the Inheritance Tax and Gift Tax Act on the following grounds, but the defendant calculated the value of the shares as a supplementary evaluation method and issued the shares,

A) According to Articles 54(1) and (2) and 55(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, the assessment of unlisted stocks shall be calculated by averaging the net profit and loss value and net asset value by adding them to the net asset value. In such a case, the net asset value should be calculated by dividing the amount obtained by deducting liabilities from the assets of the relevant corporation as of the base date

However, since the Defendant calculated the net asset value of the instant shares based on the balance sheet as of December 31, 2005 of the instant company, it cannot be deemed as the net asset value of the said company as of the base date of appraisal.

Therefore, it is inappropriate to assess the above shares as a supplementary assessment method in the situation where the net asset value of the above company at the time of July 26, 2006, which is the evaluation base date, is unknown.

B) Article 56(3) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that when calculating the net profit and loss value, the amount under Article 14(1)1 of the Corporate Tax Act shall be added to the income for each business year under Article 14 of the same Act, and then the amount under subparagraph 2 of the same Article shall be deducted, etc.

C) In assessing the instant shares in accordance with supplementary evaluation methods, the Defendant’s financial statements were based on the instant company’s financial statements from 2003 to 2005, which was submitted to the Defendant by XX new materials, but the said financial statements were prepared in accordance with the Hong Kong’s financial statements accounting standards, and were wrong to assess the instant shares based on the value of the said financial statements.

D) Most of the total assets of the instant company consisting of investment shares in the Chinese company located in the holding company. Since the said subsidiaries owned a large number of fixed assets, it is almost impossible to calculate the fixed assets in China as the provisions of the Inheritance Tax and Gift Tax Act of Korea.

Therefore, it is inappropriate to assess the shares of this case as a supplementary assessment method.

3) As such, the instant shares cannot be assessed in accordance with the supplementary assessment methods as above, the Defendant should assess the value of one share, which is the appraised value under the laws on the recognition of Hong Kong, on the basis of USD 488.464 ($ 59,949).

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

(c) Fact of recognition;

1) On April 25, 1998, UN and each of the U.S. dollars 1,500,000 were invested to establish the instant company. The said company’s shares of 100,000 shares (the shares issued by the instant company are 100,000 shares without changing from the time of establishment to the time of the instant transaction) are owned by each of 50,000 shares of the said company. However, the instant materials agreed to pay the above borrowed amount of 750,000 shares out of the investment amount of 1,50,000 U.S. dollars 1,50,000 from the TPP and to pay the borrowed amount as dividends received from the instant company.

2) On December 28, 2001, 201, LulCC transferred 21,00 shares of the said company to LulCC (Lul longCC) that was the representative director of the ▽▽▽△△, and instead, LulCC agreed to grant a discharge of 809,243 U.S. dollarss of the instant loan obligation against LulCC with respect to the ▽▽▽△△△△ located, but the LulCC did not have received the said shares under the said agreement due to the problems under the laws and regulations of the Hong Kong local law.

3) On December 31, 2001, the Russur and the subject matter are transferred to Doine, the representative director of Doeneia, who is the subsidiary of the Indonesia located in XX, to Doine, the 809,243 U.S. dollars. However, the Gangwon-do agreed to pay the subject matter as the dividend received by the company of this case, with a discharge of 809,243 U.S. dollars’s obligation.

4) On December 2003, Gangnam A resigned from the representative director of XX, and on July 26, 2006, the instant sales contract was concluded with the effect that the instant shares were transferred to the Plaintiff. At the time of the said sales contract, the instant loan obligations were fully repaid.

5) The XX materials submitted the financial situation table of a foreign subsidiary including the instant company upon reporting the tax base and amount of corporate tax to the Defendant. The financial situation table of the instant company from 2003 to 2005 (hereinafter “instant financial situation table”) is as follows. The financial situation table of the instant company was prepared as of December 31 of each corresponding year.

6) The Defendant assessed the shares in accordance with the supplementary assessment method under Article 63(1)(c) of the Inheritance Tax and Gift Tax Act, or Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, where the market price of the shares in this case is unknown. The specific calculation method is as follows.

A) Net asset value

The Defendant calculated by dividing the net asset value of the instant company’s total assets by the total amount of liabilities from the total amount of assets indicated in the financial situation table in 2005, pursuant to Articles 55(3) and 59(2) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, and then dividing it into 100,000 shares of the instant company, and the specific number of shares is as listed below.

B) Net value of profit and loss

The Defendant calculated the weighted average average amount of net profit and loss per share in accordance with Article 56(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act based on the net income per share under the instant financial situation table, and calculated the net profit and loss by dividing it into the net profit and loss exchange rate under Article 54(1) of the said Enforcement Decree. The Defendant did not add the increase or decrease and deduction under Article 56(3) of the said Enforcement Decree in calculating it, and the specific formula calculated by the Defendant is as follows.

O) The weighted average amount of net profits and losses per share for the preceding three years = [(27,023 won and losses per share for the business year that has become one year before the base date of appraisal) + (13,169 won and losses per share for the business year that has become two years before the base date of appraisal) + (3,869 wonx1 per share for the business year that has become two years before the base date of appraisal) + (3,869 won and losses per share for the business year that has become one year before the base date of appraisal)]-6 = 18,546 won

O Net value of profit or loss (value per share) 185,460 = 185,460 = The weighted average amount of net profit or loss for the last three years per share ± 18,546 ¡À10% of the net value of profit or loss;

7) On the other hand, on July 31, 2006, the Plaintiff sentenced the instant transaction details to the Hong Kong National Tax Service for the payment of stamp tax. The Hong Kong National Tax Service calculated the assessment value per share of the instant shares as Hong Kong USD 488.464 (Korean US$ 59,949) by calculating only the net asset value of the instant shares, and notified the Plaintiff of the payment of USD 20,516 as stamp duty to the Plaintiff by August 30, 2006.

[Ground of recognition] Facts without dispute, Gap's entries in Gap's 3, 4, 6, 8, 9, 11, 12, 13, 14, 15, 16, 20, 21, Eul's 2, 4, 5, 7, 14, 15, 16, 17, and 17, and the purport of the whole pleadings

D. Determination

1) Whether the sale and purchase of this case constitutes the acquisition by transfer at the low price under Article 35(2) of the Inheritance Tax and Gift Tax Act

A) As to whether the acquisition by transfer is between the market price and the market price.

According to the facts as seen earlier, when the Hong Kong National Tax Service issued a notice of stamp tax payment, the amount calculated only the net asset value of the shares of this case is about 59,949 won per share, and according to the evidence Nos. 2-4 and 6-6, the plaintiff filed a post-report on the acquisition of the shares of this case with the domestic tax office around May 18, 2007, and requested the mobilization accounting corporation to assess the net asset value of the shares of this case as of July 26, 2006, which is the date of the sales contract of this case, and the mobilization accounting corporation assessed the net asset value of the shares of this case at least 83,599 won. Accordingly, according to this, the net asset value of the shares of this case at the time of the sales contract of this case is at least 59,949 won (this is calculated only on the net asset value of the shares of this case, and if the net profit and loss value of this case is added, it will be above the value).

Therefore, the market price of the entire shares of this case is at least 1,258,929,00 won, and 639,154,000 won [lo,258,929,000 won-619,775,000 won (unified 650,000)] which is the difference between the above minimum market price and the sales price of this case is at least 1,258,929,00 won, is much more than 37,678,700 won which is 30% of the above market price. Thus, the sale of this case constitutes a case where the above shares are acquired at a price substantially lower than the market price.

Therefore, this part of the plaintiff's assertion is without merit.

B) Whether there are justifiable grounds for transaction practices

(1) As seen earlier, the instant transaction constitutes a case where the instant shares were acquired at a price significantly lower than the market price. As such, we examine whether there exists a justifiable reason in light of trade practice in acquiring the instant shares at a low price.

Since there is no particular provision of the Inheritance Tax and Gift Tax Act on the existence of “justifiable cause for the practice of transaction” under Article 35(2) of the Inheritance Tax and Gift Tax Act, the existence of justifiable cause should be determined by specifically examining whether the transaction concerned reflects the appropriate exchange value in light of the relevant transaction’s circumstances, relationship between the transaction parties, and the process of determining the transaction price.

(2) In full view of the facts acknowledged in the above 2.c., namely, ① one half of the investment funds when establishing the instant company jointly with the OO, and the loan funds shall be paid as dividends to be received from the instant company. In fact, even if the instant company invests only an amount equivalent to 25% of the company’s interests, it is difficult to easily obtain the instant company’s shares from the first process of acquiring 50% of the company’s interests. ② The instant shares were transferred from the date of the instant company’s purchase price to Gangnam, the representative director of Indonesia of the instant company, and again transferred 97.5% of the shares to the Plaintiff. In light of the relationship between the Plaintiff and the Plaintiff, it is difficult to view that the Plaintiff and the transferee of the instant shares were not able to receive the instant net assets at the price of the instant case, including the sale and purchase price of the instant shares, in light of the following circumstances: (i) the concept of net assets at the time of the instant purchase and sale, including the Plaintiff’s interests.

c)Indivate

Therefore, since the sale of this case constitutes "a case where an asset is acquired at a price significantly lower than the market price without a justifiable reason under the practice of transaction" under Article 35 (2) of the Inheritance Tax and Gift Tax Act, it is subject to the imposition of gift tax under the above provision.

2) Whether it is improper to evaluate the shares of this case by the supplementary evaluation method under the Inheritance Tax and Gift Tax Act

A) Provisions and legal principles of the Inheritance Tax and Gift Tax Act on the method of evaluating unlisted stocks

Article 60 of the Inheritance Tax and Gift Tax Act provides that the value of the property on which the gift tax is levied shall be the market price as of the date of donation, and in cases where it is difficult to calculate the market price, the value assessed by the method under Articles 61 through 65 shall be deemed the market price. In principle, in cases where it is not known, the value shall be calculated according to the market price, but it shall be deemed as a substitution of the market price after the property is evaluated as the supplementary method of assessment. Accordingly, Article 63 (1) 1 (c) of the Inheritance Tax and Gift Tax Act and Article 54 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provide that the supplementary method

However, the contents and legislative purport of Articles 60 and 63(1)1 (c) of the Inheritance Tax and Gift Tax Act, Articles 54 through 56, and Article 58-3 of the Enforcement Decree of the same Act, and the net value of profit and loss under Article 54 of the Enforcement Decree of the same Act, which reflects future expected profit at an interest rate which reflects the distribution profit rate of bonds with the maturity of three years in Korea, is reduced by the current value, so in principle, it can be deemed that the stocks of an unlisted corporation in Korea are subject to its application. In light of the above, if the stocks are stocks of an unlisted corporation in a foreign country, the above supplementary evaluation method can be applied only to "if the stocks are stocks of the unlisted corporation in a foreign country, it is not proper to apply the supplementary evaluation method under Article 54 of the Enforcement Decree of the same Act," and the burden of proving that applying the above supplementary evaluation method are "not only because they are the case where they are the stocks of the unlisted corporation in a foreign country."

B) Therefore, in accordance with such legal principles, we examine whether the Defendant’s evaluation of the shares of this case is appropriate as a supplementary evaluation method.

(1) As seen earlier, Article 54(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that “The net asset value per share shall be calculated by dividing the net asset value of the relevant corporation by the total number of issued and outstanding shares,” and “the net asset value per share shall be calculated by dividing the assets of the relevant corporation as of the base date of appraisal by the total number of issued and outstanding shares,” and “the net asset value of the relevant corporation as of the base date of appraisal shall be calculated by deducting the liabilities from the value appraised in accordance with Articles 60 through 66 of the Inheritance Tax and Gift Tax Act.”

However, the above "date of appraisal" refers to the "date of donation" under Article 60 of the Inheritance Tax and Gift Tax Act. Thus, it is reasonable to view the "date of donation" of this case as the date of the sales contract of this case, taking into account the details, form, method of payment, meaning of Article 23 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, etc.

Therefore, when the defendant evaluates the value of the shares of this case as a supplementary assessment method, the net asset value should be calculated by subtracting the debt from the appraised value of the company's assets of this case as of July 26, 2006, which is the date of the sales contract of this case.

(2) However, as seen earlier, the defendant calculated the net asset value by deducting the debt value from the asset value of the company of this case as of December 31, 2005. The shares generally have a significant change in their value, the above shares are difficult to view that the financial situation of the company of this case is the same for two years since there has been an interval of time more than half years, and the net income, etc. of the above company from 2003 to 205 is actually changed. Thus, the above calculation method of the defendant cannot be deemed the correct supplementary assessment method under the Inheritance Tax and Gift Tax Act, and it is ultimately inappropriate to apply the supplementary assessment method under the Inheritance Tax and Gift Tax Act in assessing the shares of this case by the defendant who could not know the financial situation of the above company at the time of July 26, 2006.

(3) Therefore, the Defendant’s evaluation of the shares by applying the above complementary evaluation method is unlawful without any need to further examine the remainder of the Plaintiff’s assertion.

3) Whether the market price should be calculated as the assessed amount under the laws of Hong Kong on the grounds of the Plaintiff’s assertion

Article 58-3 (1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "where it is inappropriate to apply the provisions of Article 60 or 65 of the Inheritance Tax and Gift Tax Act to a foreign donated property, the country in which the property is located shall be the evaluation amount assessed for the purpose of imposing capital gains tax, income

However, the appraised value of the Plaintiff’s assertion cannot be deemed as the valuation value for the purpose of imposing capital gains tax, income tax, or gift tax under Article 58-3(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act. Moreover, it cannot be deemed as the valuation value for the purpose of imposing tax based on the market price, which is the objective value of the stocks of this case, such as capital gains tax, income tax, or gift tax, and thus, it cannot be deemed as the valuation value for the purpose of imposing tax. As such, it is difficult to calculate the donation amount by deeming the Hong Kong US$ 488.464 (Korean US$ 59,949) as the appraised value of the Plaintiff’s assertion as the market price of the stocks of this case.

4) Sub-committee

The Plaintiff’s transfer of the instant shares constitutes a case where “acquisition of the property at a price significantly lower than the market price without a justifiable reason under Article 35 of the Inheritance Tax and Gift Tax Act”. However, in calculating the said donated property, it is unlawful for the Defendant to calculate the amount by the method as determined earlier by applying the supplementary evaluation method under the Inheritance Tax and Gift Tax Act and the Enforcement Decree thereof. Accordingly, the instant disposition is unlawful.

In addition, according to Article 58-3 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, where it is inappropriate to apply the provisions of Articles 60 through 65 of the Inheritance Tax and Gift Tax Act to a foreign property located in a foreign country, the country where the pertinent property is located shall have the value appraised for the purpose of imposing capital gains tax, income tax, gift tax, etc. as the appraised value by requesting it to two or more domestic or foreign appraisal agencies in the absence of such appraised value.

3. Conclusion

Therefore, the plaintiff's claim of this case is justified and it is so decided as per Disposition.