Seoul High Court 2016Nu46504 (Law No. 16, 2017)

Where a preemptive right is acquired through a third financial institution, gift tax under Article 40 of the Inheritance Tax and Gift Tax Act may not be levied.

Where a preemptive right is acquired through a third financial institution, gift tax under Article 40 of the Inheritance Tax and Gift Tax Act may not be levied.

Article 40 (Donation of Benefits from Conversion, etc. of Convertible Bonds, etc. into Stocks)

The appeal is dismissed.

The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 40 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter referred to as the "former Inheritance Tax and Gift Tax Act") provides that "where any of the following profits is acquired by converting into or exchanging stocks with convertible bonds, bonds with warrant (referring to warrant certificates where the securities are separated) or other stocks or by issuing bonds entitled to take over stocks (hereinafter referred to as "convertible bonds, etc."), the amount equivalent to such profits shall be deemed the value of property donated to the person who has acquired such profits." subparagraph 2 (b) provides that "where the largest shareholder of a corporation which issued convertible bonds, etc. or his/her specially related persons, who is a shareholder, has acquired and acquired them in excess of the number of stocks allocated from the corporation in proportion to the number of stocks owned by him/her (including cases where he/she has acquired and acquired them from an underwriter under Article 9 (12) of the Financial Investment Services and Capital Markets Act, etc. or profits acquired by converting them into or acquiring them directly from the convertible bonds under subparagraph 1 or 2 "the profits acquired by converting them:

2. In full view of the evidence adopted by the lower court, the lower court determined that the instant bonds or the instant preemptive right cannot be imposed pursuant to Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act, on June 30, 208, when ○○○○ Securities Co., Ltd. (hereinafter “○○○ Securities Co., Ltd.”) issued the instant bonds on the same day, and transferred the instant bonds to ○○○○○○ Limited Co., Ltd. (hereinafter “○○○”) on the same day, and that △△△△△ also sold the instant preemptive right separately to the Plaintiff on the date of the issuance of the instant bonds. Based on these facts, the lower court determined that the instant bonds and the instant preemptive right cannot be deemed as having been acquired by ○○ Securities Co., Ltd. for the purpose of making an offer to sell to, or soliciting an offer to purchase, ○○ Securities Co., Ltd. to, 50 or more individual investors. Furthermore, on the following grounds, taxation of gift tax cannot be considered as grounds for taxation of gift tax.

(1) From January 8, 2000, △△△△ Corporation promoted a small and medium enterprise’s asset-backed securitization support project to support small and medium enterprises with technology but with difficulty in raising funds through financial markets. Of them, ○○○○ Asset-backed Securitization Support Project, △△△△△ was established on May 8, 2008 by the Asset-Backed Securitization Act.

(2) In a financial difficult situation, ○○○○ applied for the funding of ○○○ Asset-backed Securitization Support Project and was selected as the target company. Accordingly, the ○○○ Securities and the instant bonds concluded an underwriting agreement with respect to the instant bonds, and subsequently, the ○○○ issued the instant bonds and sold them en bloc on June 30, 208.

(3) On June 30, 2008, the ○○○○○ Asset-backed Securitization Support Project was acquired by a small and medium enterprise, including ○○○○○○, and transferred the bonds to △△△△△△ on the same day. Thereafter, the △△△△△△ issued asset-backed securities based on an underlying asset, including the bonds in this case.

(4) Meanwhile, on June 30, 2008, the △△△△△△ sold the instant preemptive right to the Plaintiff separately from the instant bonds, which was anticipated to be limited to the demand for the warrant certificates issued by ○○○○○○ as well as the demand for the warrant certificates issued by ○○○○. △△△△△△△△ was able to recover investment profits early by having the Plaintiff, a major shareholder of ○○○○○○○, purchase the instant preemptive right as soon as possible, thereby minimizing management restrictions following the issuance of the warrant certificates, while securing the operating funds of ○○○○ and the Plaintiff as well.

(5) All of the conditions on the instant preemptive right, including the initial exercise price of the instant preemptive right, were objectively determined between ○○○ and ○○ and ○○ Securities or △△△△△△△, without a special relationship.

(6) Even if the Plaintiff obtained gains from the acquisition and exercise of the instant preemptive right, it is the result that it has been assumed for a considerable period of time that ○○○○’s business activities or credit risk, etc. Furthermore, it cannot be denied that ○○○○’s share price increase due to financing due to the issuance of the instant bonds, efforts to improve the KOSDAQ listing and management, etc. Furthermore, there is no ground to readily conclude that ○○○○○’s share price increase was sufficiently anticipated at the time of the Plaintiff’s exercise of the instant preemptive right at the time of the exercise.

(7) It is difficult to deem that the Plaintiff intended to acquire marginal profits by acquiring ○○○’s new shares through a series of acts, such as the issuance of the instant bonds, the acquisition of the instant warrant certificates, and the exercise of preemptive rights.

(8) Ultimately, it cannot be readily concluded that the aforementioned series of acts were used as a means for the purpose of allocating excessive profits from the share price increase to the Plaintiff, who is a major shareholder of ○○○○, from the beginning.

3. Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine as to Article 40(1)2 (b) and Article 40(1)3 of the former Inheritance Tax and Gift Tax Act, contrary to what

4. The Defendant’s appeal is dismissed as it is without merit, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.