Seocho 2015west 1246 ( November 26, 2015)

Savings bank is an underwriter, and the profits from exercising preemptive rights shall constitute donation.

Although the savings bank did not obtain authorization or registration from the Financial Services Commission, it constitutes an underwriter, and the plaintiff acquired the preemptive right from the underwriter or bypass transaction, and there is no justifiable reason in light of the transaction practices, the disposition that deemed the exercise profit of preemptive right as a gift is legitimate.

Article 40 (1) (b) of the Inheritance Tax and Gift Tax Act

Article 8 of the former Capital Markets Act

The Seoul Administrative Court 2016Guhap5049 Revocation of Disposition rejecting to correct gift tax

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○ Head of tax office

September 23, 2016

October 28, 2016

1. The plaintiff's claim of this case is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The defendant's disposition rejecting to correct the gift tax of KRW 000 against the plaintiff on September 16, 2014 is revoked.

1. Details of the disposition;

On July 14, 2010, AA Co., Ltd. (hereinafter referred to as "the company of this case") issued bonds with warrants (hereinafter referred to as "bonds with warrants") with the following contents (the same content was published to the Korea Exchange) and theCC Savings Bank (hereinafter referred to as "CC Savings Bank") on the same day on the same day.

○ Type of bonds: 3rd bearer bonds with non-guaranteed private placement in bearer form.

○ Total face value of bonds: 10 billion won

○ Issuance Price of bonds: 100% of the total face value of bonds

○ Issuance date of bonds: July 14, 2010

○ due date of bonds: July 14, 2014

○ Method of issuing bonds: Private placement

○ Exercise price of preemptive rights: 597 won per share.

○ Period for exercising preemptive rights: From July 14, 2011 to June 14, 2014 (three years)

○ Bond Subscription Acceptance:CC Savings Bank

Matters concerning the sale of warrant certificates

- The scheduled date of sale: Within one week from the date of publication

- The total face value of the scheduled sale: 5 billion won per day (2.5 billion won per day)

- Sale counterpart: KimD, EF

- The relationship between the selling counterpart and the company: the largest shareholder of the issuing company

At the time of the issuance of the instant bonds with warrants, the Plaintiff was the spouse and two shareholders of KimD, the largest shareholder of the instant company (13.98%) at the time of the issuance of the instant bonds with warrants. On July 21, 2010, the Plaintiff acquired 5 million shares of the instant bonds with warrants (hereinafter referred to as “instant preemptive rights”) fromCC Savings Bank from 125,000,000 won, and acquired 5 million shares of the instant company by exercising the said preemptive rights on February 14, 2012.

On May 31, 2012, the Plaintiff reported and paid KRW 000 to the Defendant on the ground that the gains from stock conversion acquired by exercising the preemptive right of this case fall under Article 40(1)2(b) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax and Gift Tax Act”). (The Defendant confirmed that there was an error in the calculation of the gift tax return and tax amount, and corrected the amount of KRW 000).

On July 21, 2014, the Plaintiff filed a request for correction with the Defendant for refund of KRW 583,556,432 on the ground that theCC Savings Bank does not constitute an underwriter under Article 9(12) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11758, Apr. 5, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”). However, the Defendant rejected the request on September 16, 2014 for correction on the ground that (i) theCC Savings Bank falls under an underwriter under the former Financial Investment Services and Capital Markets Act or (ii) the Plaintiff directly acquired the instant preemptive right from the company, or (iii) the Plaintiff acquired the instant preemptive right from theCC Savings Bank, but it cannot be deemed that there was a justifiable reason for such transaction practice (hereinafter “the Defendant’s disposition rejecting correction”).

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 7 (including paper numbers; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Whether it constitutes a case of acceptance and acquisition by an underwriter under the Capital Markets Act

1) Interpretation of the relevant statutes

Article 40 (1) 2 (b) of the former Inheritance Tax and Gift Tax Act provides that "the largest shareholder of a corporation that has issued bonds with warrants (referring to bonds with warrants, if such bonds are separated) or his/her specially related person, who is a shareholder, has acquired and acquired them (including cases of acquisition and acquisition from an underwriter under Article 9 (12) of the Financial Investment Services and Capital Markets Act) in excess of the number of stocks with warrants allocated under equal conditions in proportion to the number of stocks held by the corporation, shall be deemed to be the value of property donated to the person who has acquired the profits."

Meanwhile, Article 9(12) of the former Financial Investment Services and Capital Markets Act provides that "an underwriter" means a person who enters into a contract with a third party to acquire all or part of the securities with the intention of acquiring them or to acquire the remainder of the securities when there is no person who acquires them in whole or in part." In addition, Article 8(1) of the former Financial Investment Services and Capital Markets Act provides that "financial investment business entity" means a person who engages in a financial investment business (Article 6(1)1 and (2) of the former Financial Investment Services and Capital Markets Act (Article 11, Article 17, Article 44 subparag. 1 and Article 45 subparag. 1 of the former Financial Investment Services and Capital Markets Act) upon obtaining authorization from the Financial Services Commission or upon registering with the Financial Services Commission to engage in a financial investment business (Article 6(1)1 and (2) of the former Financial Investment Services and Capital Markets Act (Article 6(1) of the former Financial Investment Services and Capital Markets Act).

Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act covers not only cases where a specially related person of the largest shareholder of a corporation that issued bonds with warrants directly acquires or acquires bonds with warrants, etc. from the issuing corporation, but also cases where bonds are acquired or acquired from an underwriter under Article 9(12) of the former Capital Markets Act. The reason for taxation is that where a person with a special relationship with a corporation directly acquires or acquires bonds with warrants, etc. from the relevant corporation in the course of capital transaction, such as capital increase, and where an underwriter of such bonds with warrants, etc. under the former Capital Markets Act acquires or acquires them from the relevant corporation without compensation or at a very low cost by separating warrant certificates from the relevant corporation and there is no difference between the transfer of direct profits from the relevant corporation and the economic substance, and there is a need to impose taxes on such irregular donations. Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act does not necessarily include cases where an underwriter under Article 9(1)2 (b) of the former Capital Markets Act acquires or acquires them from the Financial Investment Services Commission.

2) In the instant case:

On July 14, 2010, the instant company issued the instant bonds with warrants toCC Savings Bank with the selling price of KRW 2.5 billion (total of KRW 5 billion) with the Plaintiff and his spouse KimD, and with the selling price of KRW 2.5 billion. On July 21, 2010,CC Savings Bank sold the instant bonds with the Plaintiff and KimD, it can be deemed that it had acquired the instant bonds with warrants for the purpose of acquiring the instant preemptive right to the Plaintiff and KimD, a third party. Since it had already been planned to sell the instant bonds with warrants from the time of issuance, it is difficult to view thatCC Savings Bank acquired the instant bonds with warrants without any agreement on damages arising from false entries in acceptance fees, investment prospectus, etc., or the Plaintiff, holding the bonds after the sale of the bonds with warrants, and it is difficult to view that it did not constitute a pure purpose of selling the instant bonds with warrants for the purpose of the Financial Investment Services and Capital Markets Act, rather than a judicial measure to acquire the instant bonds with warrants even if it did not have been denied.

Meanwhile, the Plaintiff asserts that the securities that the Plaintiff acquired from the issuer and the securities that the third party acquired from the underwriter are identical. In this case,CC Savings Bank claimed that the Plaintiff did not constitute an underwriter since it sold only the preemptive right to new stocks to the Plaintiff after acquiring the bonds with warrants from the instant company. However, the issue of whether the underwriter who acquired the bonds with warrants from the issuer sells them in the form of bonds with warrants, and whether only the bonds with warrants are sold separately shall be determined in accordance with the economic judgment at the time of the sale of the bonds with warrants, or the agreement with the issuing company, and it is difficult to view that the underwriter of the bonds with warrants sold the securities

Therefore, theCC Savings Bank constitutes the “takeover” under Article 9(12) of the former Capital Markets Act, and the Plaintiff who was in a special relationship with the largest shareholder of the instant company (spouse) can be deemed to have acquired the instant preemptive right from the said underwriter.

B. Whether it can be deemed that the instant preemptive right was directly acquired from the instant company

A) Interpretation of the relevant statutes

Article 2(4) of the former Inheritance Tax and Gift Tax Act provides that where it is deemed that the gift tax has been unjustly reduced by indirect means via a third party, or by means of two or more acts or transactions, it shall be deemed that such acts or transactions are directly conducted by the parties concerned, or such acts or transactions are deemed as one of the continuous single acts or transactions and thus, it shall be deemed that such acts or transactions constitute donation. In this case, the term “unfair reduction of gift tax” shall not be deemed as normal transactions conducted by a reasonable economic person

B) In the instant case, in full view of the following facts and circumstances, which can be acknowledged by adding the aforementioned facts and evidence, Gap evidence No. 9, and Eul evidence No. 12 to the entire purport of the pleadings, the Plaintiff may be deemed to have unjustly reduced the gift tax by acquiring the instant preemptive right through theCC Savings Bank. Thus, the Plaintiff may be deemed to have acquired the instant preemptive right from the instant company in excess of its own share ratio.

① At the time of issuance of the instant bonds with warrants, the other party to the sale of the instant bonds with warrants had already been already stipulated as the Plaintiff’s spouse, and the Plaintiff actually acquired the instant bonds with warrants after one week from the date of issuance of the instant bonds with warrants by separating them, etc., was scheduled to purchase the Plaintiff’s bonds with warrants

② At the time of acquiring the instant preemptive right, the Plaintiff did not anticipate the rise in the share price of the instant company. In fact, in light of the fact that the share price of the instant company was lower than the exercise price after the issuance of the instant preemptive right, the Plaintiff asserted that the acquisition of the instant preemptive right cannot be deemed to have been made for the purpose of evading gift tax. However, the Plaintiff was the spouse of the largest shareholder of the instant company and the second shareholder, who was in a position to know in detail the inside information of the instant company. The theoretical value of the instant preemptive right publicly announced at the time of issuance of the instant warrant bonds was KRW 106,00,000 per share (= KRW 25,000 per share ± 5,000 per share). The Plaintiff acquired the instant preemptive right to new stocks at KRW 25,00 per share (= KRW 125,000 per share ±5,000).

③ As alleged by the Plaintiff, even if the instant company was inevitable to raise funds at the time of the issuance of the instant preemptive right, the said provision cannot be deemed not to apply solely on the ground that Article 2(4) and Article 40(1)3 of the former Inheritance Tax and Gift Tax Act applies to the case where the corporation issues bonds with warrants for the purpose of raising funds. In particular, the instant company issued bonds with warrants in an amount of KRW 8 billion by means of public offering on January 11, 201. At the time of the issuance of the instant bonds with warrants, the company’s share price was lower than the time of the issuance of the instant bonds with warrants, but was offered approximately KRW 1 billion. The instant bonds with warrants were only for the purpose of raising funds by the Plaintiff, etc. as the purchaser of the instant bonds with warrants, and the decrease in gift tax was merely an incidental effect therefrom. The Plaintiff’s circumstance cited by the Plaintiff is insufficient to view that the instant company directly acquired the instant bonds with warrants from the Plaintiff due to the practice of trading the instant bonds with the Plaintiff as the purchaser of the preemptive right.

Although the Plaintiff took the form of transaction by acquiring the instant preemptive right issued by the instant company from theCC Savings Bank, it appears that the economic substance of the Plaintiff was an influence transaction that differs from the Plaintiff’s direct acquisition of the instant preemptive right from the instant company having a special relationship with the instant company. Therefore, since the Plaintiff was deemed to have avoided or reduced the gift tax that the Plaintiff directly acquired through the indirect method of acquiring the instant preemptive right through theCC Savings Bank, which was the third party, on the grounds that Article 40(1)2(b) of the Inheritance Tax and Gift Tax Act applies to the profits accruing from the exercise of the instant preemptive right (Meanwhile, it can be deemed that the Plaintiff directly acquired the instant preemptive right from the instant company, and as long as it is difficult to view that the instant company’s issuance of the instant warrant bonds with the Plaintiff as the purchaser of the instant preemptive right does not have justifiable grounds under the transactional practice, it is no further examined whether Article 42(1)3 of the former Inheritance Tax and Gift Tax Act, which

3. Conclusion

Thus, the plaintiff's claim of this case is dismissed as it is without merit.