Whether the imposition of gift tax pursuant to the deemed donation of stock title trust is legitimate

It is reasonable to view that the actual owner and the nominal owner are different in cases where the Plaintiff did not pay the acquisition price related to shares and the Kim○○ couple actually owned the company and did not receive the transfer price, and thus, the title trust was held by the Plaintiff.

Donation of title trust property under Article 41-2 of the Inheritance Tax and Gift Tax Act

The appeal is dismissed.

The costs of appeal are assessed against the Plaintiff.

The grounds of appeal are without merit. It is so decided as per Disposition by Articles 4 and 5 of the Act on Special Cases concerning the Procedure of Appeal.

Daejeon High Court Decision 2006Nu802 ( October 16, 2006) Decision

1. The plaintiff's appeal is dismissed.

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

The decision of the first instance court is revoked. The defendant's disposition of imposition of KRW 20,000,000 and additional tax of KRW 8,00,000 against the plaintiff as of January 3, 2005 (the notice of the purport of the claim and appeal seems to be an obvious clerical error of January 31, 2005) is revoked, respectively.

1. Details of taxation; and

A. On November 29, 2001, 201, 2001, ○○○○○○○○○○, a non-listed company (hereinafter “instant company”), as a specialized restructuring company, established a representative director Kim○○ on the corporate register. The shareholder registry was registered as holding 300,000 shares of the instant company at par 50 won (hereinafter “instant shares”).

B. However, the tax authority determined that the Plaintiff was in title trust only on the register of shareholders, which was the actual shareholder and the representative director who actually paid 3 billion won the initial capital of the instant company in full, but only on the register of shareholders, the tax authority held that the instant company lent 2.89 billion won to the Plaintiff, who is the representative director, and imposed 73,379,162 won as corporate tax on the portion belonging to the year 2002, but failed to pay the corporate tax, the tax authority deemed the Plaintiff as the oligopolistic shareholder and designated and notified the Plaintiff as the secondary tax liability under the Framework Act on National Taxes, and separately imposed 260,190,000 won interest on the said 2.89,190,000 won as loans to the Plaintiff, and imposed 92,603,818 won as global income tax corresponding thereto.

C. Accordingly, the Plaintiff filed a lawsuit for revocation of the corporate tax and global income tax and disposition with the Seoul Administrative Court No. 2004Guhap00000, on the ground that it is not the actual shareholder and representative director of the instant company. The tax authority conducted a reinspection of facts around November 2004, and the tax authority revoked the above global income and disposition with respect to the Plaintiff, including the Plaintiff, by September 2, 2002, the above Kim○, who is the husband of the instant Kim○, owned 100% of the shares of the instant company, until September 2, 2002, when the shares of the said Kim○, including the Plaintiff, were transferred to Kim○, Kim○, Kim○, Kim○, Kim○, Kim○, Kim○, Park○, and new○, etc. were transferred to Kim○, Kim○, the Plaintiff’s husband of the said Kim○, and the secondary

D. After that fact-finding, the Defendant deemed that Kim ○, the actual owner of the instant shares, was in title trust with the Plaintiff. After that fact-finding, the Defendant deemed that Kim ○, the actual owner of the instant shares, pursuant to Article 41-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; hereinafter the “Inheritance Tax and Gift Tax Act”) donated the value of the instant shares to the Plaintiff as of December 1, 2001. After that, the Defendant deemed that Kim ○ donated the value of the instant shares to the Plaintiff as of December 1, 2001, the face value of the instant shares was 150 million won (5 million won X3 million won), and on January 3, 2005, imposed on the Plaintiff KRW 20 million with the principal gift tax for the year 200,000,0000 won for each additional tax imposed on the Plaintiff as of January 3, 2005.

E. Accordingly, on March 7, 2005, the Plaintiff filed a request for a national tax trial with the National Tax Tribunal, but was dismissed on July 29 of the same year.

[Reasons for Recognition] Facts without dispute, Gap evidence 1-1, 2-3, Gap evidence 2-3, Gap evidence 3, 8, Eul evidence 1-1, 2, Eul evidence 2 and 3, and the purport of the whole pleadings.

2. Whether the taxation disposition is legitimate

A. The plaintiff's assertion

The instant taxation disposition is unlawful for the following reasons.

First, the Plaintiff’s entry as the owner of the instant shares on the register of shareholders in accordance with the Plaintiff’s business proposal, which had a know-how on the corporate restructuring, was to obtain the right to purchase the instant shares at a par value as a result of its business performance in the future from Kim○○ as a result of the Plaintiff’s establishment of the instant company, and to secure this, and it does not mean that Kim○○ entrusted the Plaintiff with the instant shares.

Second, since there was no tax avoidance purpose, the regulation on deemed donation under the Inheritance Tax and Gift Tax Act cannot be applied.

Third, the company of this case constitutes a specialized restructuring company under Article 55 of the former Restriction of Special Taxation Act (amended by Act No. 6538 of Dec. 29, 2001) and is subject to non-taxation.

Fourth, according to the use of the so-called best payment method, which borrowed and paid the first 3 billion won capital from the bond company at the time of the establishment of the company, and then withdraws and return to the bond company, the company of this case did not have any substantial capital. After that, the Plaintiff did not exercise all the rights to the shares of this case due to the transfer of all shares including the shares of this case to Kim○, etc. around September 2, 2002, when the company did not conduct substantial business activities. As a result, even if the Plaintiff was registered as the owner of the shares of this case on the register of shareholders, the taxation of this case is in violation of the substance over form principle.

B. Relevant statutes

Attached Form 3 is as shown in the "relevant Acts and subordinate statutes".

C. Determination

(1) As to the plaintiff's first argument

According to the evidence Nos. 3, 4, and 7, there is no dispute between the parties, or the first capital of the company of this case was paid in borrowing money from the bonds company by the Kim○ couple, and the plaintiff did not have paid the acquisition price or the payment to the Kim○ couple. Accordingly, it can be acknowledged that the plaintiff did not actually own the company of this case even at the time the company's shares were transferred to Kim○○, etc., and that the company of this case did not receive the transfer price of this case. Accordingly, according to the above facts of recognition, it is reasonable to view that the actual owner is different from the nominal owner, and even if he was granted the right to purchase the shares of this case as a result of business performance remuneration from Kim○○, as alleged by the plaintiff, even if he was entitled to purchase the shares of this case at the face value, such circumstance does not affect the property of title trust.

Therefore, the plaintiff's first argument is without merit.

(2) As to the second argument by the Plaintiff

The legislative intent of Article 41-2(1) of the Inheritance Tax and Gift Tax Act recognizes exceptions to the substance over form principle in the purport that the act of tax avoidance by using the title trust system is effectively prevented, thereby realizing the tax justice. Thus, only if the purpose of tax avoidance is not included in the purpose of the title trust, the proviso of the same Article can be applied. However, according to the provisions of paragraph (5) of the same Article, the taxes provided in the proviso of paragraph (1) cannot be limited to the gift tax, and furthermore, in the case of the title trust under the provisions of paragraph (2) of the same Article, the burden of proving that there has been no purpose of tax avoidance in the

However, in the instant case, there is no evidence to acknowledge that there was no tax avoidance purpose at the time of title trust of the instant shares to the Plaintiff by Kim ○, etc., even if the Plaintiff alleged that there was no tax avoidance purpose at the time of the Plaintiff’s claim, the presumption that the instant shares had a tax avoidance purpose at the time of title trust cannot be deemed to have been destroyed by the above presumption that the instant shares had a tax avoidance purpose at the time of title trust.

Therefore, the plaintiff's second argument is without merit.

(3) As to the plaintiff's third assertion

Even if the instant company constitutes a specialized restructuring company as stipulated in Article 55 of the former Restriction of Special Taxation Act, the said provision does not stipulate that the gift tax, which is the instant taxation disposition, is exempt, nor does it find any provision that the said provision is exempt from the gift tax imposed under the Inheritance Tax and Gift Tax Act, depending on the title trust of the shares of the specialized restructuring company under the Industrial Development Act even under the statutes

Therefore, the plaintiff's third argument cannot be accepted.

(4) As to the plaintiff's fourth argument

(A) According to Article 60(1) and (2) of the Inheritance Tax and Gift Tax Act, the value of the donated property on which the gift tax is levied is based on the market value as of the date of donation of the donated property to which the donee belongs to, that is, on the basis of the value deemed ordinarily constituted if a transaction is made freely between many and unspecified persons, and the purport of calculating the value of the donated property based on the market price is that imposing a tax on the basis of the value exceeding the actual profit that the donee should be deemed to belong to.

Meanwhile, under Article 60 (3) of the Inheritance Tax and Gift Tax Act, where it is difficult to calculate the market price of the donated property, the value of shares shall be assessed according to the method under Articles 61 through 65 of the Inheritance Tax and Gift Tax Act, taking into account the type, size, transaction status, etc. of the relevant property. In the case where the donated property is non-listed stocks, the value of shares shall be assessed according to the method of appraisal of securities under Articles 63 (1) 1 (c) of the Inheritance Tax and Gift Tax Act, Articles 54, 55, and 56 of the Enforcement Decree thereof, Articles 17, 17-2, and 17-3 of the Enforcement Rule thereof, in a supplementary way that it is difficult to calculate the market price of the donated property. In this case, the tax authority has the burden of proving the market price of the donated property (see Supreme Court Decision 96Nu9423, Oct. 29, 196). 198; and thus, the value of shares shall not be assessed as the donated property as the tax base.

However, in this case, in calculating the value of the shares of this case, the defendant did not calculate the value of the shares according to the market price or supplementary evaluation method as of the date of donation, and did not consider the value of the shares as the value of the shares above. Thus, the tax disposition of this case is erroneous in calculating the value of the donated property.

(B) However, in a lawsuit seeking revocation of a taxation disposition, the legitimacy of the disposition should be determined depending on whether it exceeds the legitimate tax amount. Therefore, we examine whether the instant taxation disposition exceeds the legitimate tax amount.

First of all, there is no evidence to prove the market price of the shares of this case, so the value of shares shall be calculated according to the complementary evaluation method.

Furthermore, Article 54(1) and (2) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that the net profit and loss (the rate prescribed by the Ordinance of the Ministry of Finance and Economy in consideration of the weighted average amount of net profit and loss or the average interest rate formed in the financial market for the last three years per share) shall be based on the net asset value if the value falls short of the net asset value, and as a result, the value of non-listed stocks shall be the lowest net asset value. Meanwhile, Article 55 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that the net asset value for calculating the net asset value shall be the value calculated by subtracting the liabilities from the corporation’s asset value as of the base date of appraisal.

However, as in this case, the net asset value at the time of incorporation is the capital, so the net asset value at the time of incorporation also at the time of incorporation is the par value calculated by dividing the capital by the total number

The Plaintiff’s assertion that at the time of the establishment of the instant company, the first capital was entirely withdrawn immediately after the payment of 3 billion won, and that the instant company did not have any substantial capital, or that the said company’s shares were transferred in the absence of substantial business activities thereafter, and as a result, there was no substantial benefit as a shareholder. As a result, the Plaintiff’s assertion does not affect the date of donation of the instant shares, which are donated property, (i.e., the date of appraisal after the

Ultimately, the value as of the appraisal base date of the shares of this case is 150 million won at par value (50 million won X3 million won) and thus, the tax disposition of this case based on it is consistent with the legitimate tax amount.

(C) Therefore, the plaintiff's fourth assertion is not accepted.

3. Conclusion

Therefore, since the taxation disposition of this case is legitimate, the plaintiff's claim seeking its revocation shall be dismissed as it is without merit, and the judgment of the court of first instance is just, and the plaintiff's appeal is dismissed as it is so decided as per Disposition.

Relevant statutes

former Inheritance Tax and Gift Tax Act (amended by Act No. 6780 of Dec. 18, 2002)

Article 41-2 Presumption of Donation of Title Trust Property

(1) In case where the actual owner and the nominal owner are different in property (excluding the land and buildings; hereafter in this Article the same shall apply), which requires a registration, etc. for the transfer or exercise of rights, the value of the relevant property shall be deemed to have been donated by the actual owner on the date when it is registered, etc. as the nominal owner, notwithstanding the provisions of Article 14 of the Framework Act on National Taxes:

1. Where assets are registered, etc. in the name of another person without any purpose of tax avoidance;

2. Where the title is converted to the actual owner during the period until December 31, 1998 (hereafter in this Article, referred to as the "suspension period") from among the stocks or equity shares (hereafter in this Article, referred to as the "stocks, etc."): Provided, That the same shall not apply to the case where the title is converted to the name of a person having a special relationship with the stockholders (including investors) of the corporation which issued the relevant stocks, etc., or that of a person who is a minor as of January 1, 1997, with respect to the stocks, etc. which are entered in the stockholders’ list or the stockholders’ list in the name of a third person or

(2) Where property is registered, etc. in the name of another person and the name of stocks, etc. is not converted into the name of the actual owner during the grace period under paragraph (1) 2, it shall be presumed that there exists an objective of

(3), (4) omitted.

(5) The term "tax inundation" in paragraphs (1) 1 and (2) means the national and local taxes as provided in subparagraphs 1 and 7 of Article 2 of the Framework Act on National Taxes and the customs as provided in the Customs Act.

(6) Omitted.

Article 60. Principles, etc. of Appraisal

(1) The value of property on which an inheritance tax or gift tax is levied under this Act shall be the market price as of the date the inheritance commences or the date of donation (hereinafter referred to as the "date of appraisal"). In such cases, the value appraised by the method of appraisal stipulated in Article 63 (1) 1 (a) and (b) (excluding cases falling under the provisions of Article 63 (2))

(2) The market price under paragraph (1) shall be the price which is considered to be normal in cases of free trade between many and unspecified persons, and shall include the expropriation and public auction price, appraisal price, and others which are deemed to be the market price under conditions prescribed by

(3) In the application of paragraph (1), where it is difficult to calculate the market price, the value assessed by the methods prescribed in Articles 61 through 65 in consideration of the type, size, transaction status, etc. of the relevant property.

(4) omitted.

Article 61 Omission of Details of the main text of appraisal of real estate

Article 62 Omission of Contents of Appraisal of Vessels and Other Tangible Property

Article 61 Appraisal of Securities, etc.

(1) The appraisal of securities, etc. shall be made by the following methods:

1. Appraisal of stocks and investment shares:

(a) omitted;

(c) Stocks and equity shares not listed on the Korea Stock Exchange other than those under item (b) shall be appraised by the method as prescribed by the Presidential Decree in consideration of corporate assets and revenues

2. The appraisal of country, grain, etc. and other securities except subparagraph 1 shall be made according to the method prescribed by Presidential Decree in consideration of the type, size, transaction conditions, etc. of the relevant property.

(2)-No.4

Article 64 Omission of Contents of Appraisal of Unauthorized Property Rights, etc.

Article 65 Omission of Other Details of the appraisal of conditional rights, etc.

66. Omission of the special text of the appraisal of property whose mortgage is created

Enforcement Decree of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 17459 of Dec. 31, 2001)

Article 54 Evaluation of Unlisted Stocks

(1) Stocks and investment shares not listed on the Korea Stock Exchange (hereinafter referred to as “non-listed stocks” in this Article) under Article 62 (1) 1 (c) of the Act shall be the value assessed by the following formula:

The value per share = The weighted average amount of net profits and losses for the latest three years per share ± the rate prescribed by the Ordinance of the Ministry of Finance and Economy in consideration of the average interest rate formed in the financial market (hereinafter referred to as the “net profit and loss value”).

(2) Where the value of unlisted stocks appraised under paragraph (1) falls short of the value appraised by the following formula, the value shall be the value appraised by the following formula:

The value per share = The net asset value of the corporation ± Total number of outstanding stocks (hereinafter referred to as “net asset value”).

(3) omitted.

(4) In applying the rule under paragraph (2), "total number of issued stocks" shall depend on the total number of issued stocks as of the base date of appraisal.

Article 55 (Calculation Method of Net Asset Value)

(1) The net asset value under Article 54 (2) shall be the value calculated by subtracting liabilities from the value appraised under Articles 60 through 66 of the Act as of the evaluation base date.

(2) In the application of the provisions of paragraph (1), the amount related to the evaluation of assets and liabilities such as deferred assets, reserve funds, allowances, etc. as prescribed by the Ordinance of the Ministry of Finance and Economy shall be deducted or added from

Article 56 (Calculation Method of Net Profit and Loss Amount per Share for the latest three years

(1) The weighted average of net profits and losses for the latest three years per week under Article 54 (1) shall be the value under subparagraph 1, and where the corporation concerned is prescribed by the Ordinance of the Ministry of Finance and Economy as being unreasonable to follow the value under subparagraph 1 on the grounds that the net profits and losses for the latest three years are less than three years after commencing its business, or the amount of net profits and losses for the latest three years due to a temporary contingency case, etc., the value under subparagraph 2 shall be made. In this case,

1. Omitted;

2. Average value of estimated profits per share, calculated by two or more specialized credit assessment institutions prescribed by the Ordinance of the Ministry of Finance and Economy or accounting corporations under the Certified Public Accountant Act, according to the standards prescribed by the Ordinance of the Ministry of Finance and Economy (limited to cases where the standard date and the date of calculating estimated profits per share and the date of commencing an inheritance or donation falls within the same year, in cases where a return on the return on the tax base of inheritance tax and the gift tax base is filed within the time limit for

(2)-3 omitted

Enforcement Regulations of the former Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 256 of April 4, 2002)

Article 17 (Appraisal, etc. of Unlisted Stocks)

(1) "Rate prescribed by Ordinance of the Ministry of Finance and Economy" in the formula of Article 54 (1) of the Decree means the interest rate publicly announced by the Commissioner of the National Tax Service in consideration of the rate of circulation of bonds

(2)-No.4

Article 17-2 (Calculation Method of Net Asset Value)

The method of deducting or adding the assets or liabilities of the corporation concerned in the evaluation of deferred assets, reserves, allowances, and other assets and liabilities under the provisions of Article 55 (2) of the Decree shall be based on the classification falling under each of the following subparagraphs:

1. The value of a right to be paid as of the evaluation base date shall be calculated by adding it to the assets;

2. Prepaid expenses (limited to those fixed as expenses as of the evaluation base date) and the value of deferred assets under Article 77 (1) 1 through 4 of the Enforcement Decree of the Corporate Tax Act shall be calculated by deducting from the assets; and

3. The value of the following items shall be calculated by adding them to each obligation:

(a) The amount of corporate tax on income generated by the evaluation criteria date, the amount of corporate tax reduced or exempted, or the amount of special rural development tax imposed on the tax base, and

(b) Dividends, bonuses, and other amounts of money for which the obligation to pay is determined as of the evaluation base date;

(c) Estimated amount payable as retirement benefits where all executives or employees who hold offices as of the evaluation base date retire;

4. It shall be calculated by deducting the various allowances as of the evaluation base date, and the various reserves under the Restriction of Special Taxation Act and other Acts from the liabilities, respectively: Provided, That this shall not apply to those falling under any of the following items:

(a) Reserves determined as expenses as of the evaluation base date;

(b) Liability reserves and contingency reserves of a corporation operating insurance business under Article 30 (2) of the Corporate Tax Act within the scope under Article 57 (1) through (3) of the Enforcement Decree of the same Act

Article 17-3 (Calculation Method of Net Profit and Loss per Share for the latest three years)

(1) The term “cases prescribed by the Ordinance of the Ministry of Finance and Economy” in the former part of the part other than each subparagraph of Article 56 (1) of the Decree means the cases where it is unreasonable to evaluate by the weighted average amount of net profits and losses per week for the

1. Where less than three years have passed since the commencement of business;

2. Where the weighted average amount of special profits and losses in the business accounting standards for the last three years exceeds 50 percent of the weighted average amount of ordinary profits and losses in the last three years;

3. Where the merger, division, or capital reduction has been made or major types of business have been changed during the period from the date when three years have elapsed before the evaluation base date to the evaluation base date;

4. Where the value of stocks of the merged corporation is calculated in order to compute the profits donated under Article 38 of the Act; and

5. Cases similar to subparagraphs 1 through 4, which fall under the causes determined and publicly announced by the Commissioner of the National Tax Service.

(2) "Institution specializing in credit assessment determined by the Ordinance of the Ministry of Finance and Economy" in Article 56 (1) 2 of the Decree means an institution specializing in credit assessment referred to in Article 36-13 (1) 2 of the Enforcement Decree of

(3) The term "standards determined by the Ordinance of the Ministry of Finance and Economy" in Article 56 (1) 2 of the Decree means the standards for calculating the estimated profits per share among the standards under Article 14 (4) of the Enforcement Decree of the Securities and

(4) omitted.

former Restriction of Special Taxation Act (amended by Act No. 6538 of Dec. 29, 2001)

Article 55 (Special Taxation on Specialized Restructuring Company, etc.)

(1) Any profits accruing from the transfer of stocks or equity shares invested by a specialized restructuring company under the Industrial Development Act (hereafter referred to as a "specialized restructuring company" in this Article) in an enterprise subject

No corporate tax shall be levied on capital gains and dividend income received from an enterprise subject to restructuring on or before December 31, 2003.

(2) Where a specialized restructuring company appropriates reserve for investment loss to its deductible expenses not later than the business year ending on or before January 31, 2003 in order to compensate for losses incurred by the investment and acquisition of an enterprise subject to restructuring, the amount calculated under the following subparagraphs, whichever is smaller, shall be included in deductible expenses in calculating its income for the relevant business year:

1. An amount calculated by multiplying the amount invested as prescribed by the Presidential Decree by 50/100; and

2. An amount obtained by subtracting the balance of reserve for investment loss from an amount invested as of the end of the business year: Provided, That where such amount is a negative, it shall be deemed zero.

(3) The provisions of Article 17 (2) and (3) shall apply mutatis mutandis to offsetting reserve for investment loss against losses, inclusion of reserve balance in the gross income, etc. under paragraph (2).

(4) In case where a resident transfers the stocks first acquired by investing on or before December 31, 2003 in a specialized restructuring company or a corporate restructuring investment company under the Corporate Restructuring Investment Companies Act (hereafter in this Article and Articles 17, 119 and 120, referred to as the “corporate restructuring company”), the provisions of Article 94 (1) 3 of the Income Tax Act shall not apply, and the provisions of Article 14 (4) of the Income Tax Act shall not apply to the dividend income paid by a specialized restructuring company or a corporate restructuring investment company not later than December 3

(5) A specialized restructuring company which intends to be subjected to the provisions of paragraph (2) shall submit a detailed statement of investment loss reserve under the conditions as prescribed by the Presidential Decree.

(6) In applying the provisions of paragraphs (1) through (5), the inclusion in deductible expenses or amounts included in gross income and other necessary matters shall be prescribed by the Presidential Decree.