Where a corporation which has only losses for the business year to which the date of donation without losses belongs falls under a specific corporation, which has losses under Article 41(1) of the former Inheritance Tax and Gift Tax Act and Article 31(1)1 of the Enforcement Decree of the former Inheritance Tax and Gift Tax Act.

Article 41(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter “the Act”), Article 31(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042 of Feb. 18, 2010; hereinafter “Enforcement Decree”), the purpose of Article 31(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the time when the liability for payment of gift tax is established and the procedure for reporting, payment and imposition thereof, and Article 31(1)1 of the Enforcement Decree of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042 of Feb. 18, 2010; hereinafter “corporation with losses”) provides that “corporation with losses in the business year to which the date of donation belongs” constitutes “corporation with a specific scope of losses under Article 14(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act.”

Article 41(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 6780, Dec. 18, 2002); Article 41(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Article 31(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 22042, Feb. 18, 2010)

Plaintiff (Law Firm KEL, Attorneys Kim Yong-hoon et al., Counsel for the plaintiff-appellant)

The Head of Gangnam District Tax Office (Law Firm LLC, Attorneys Lee Sin-le et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2012Nu28058 decided January 28, 2014

The part of the lower judgment pertaining to the imposition of gift tax amounting to KRW 87,840,640 is reversed, and that part of the case is remanded to the Seoul High Court.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. Article 41(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “the Act”) and Article 31(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter “Enforcement Decree”) provide for the donation of profits through transaction with a corporation with a loss or suspension or discontinuance of business (hereinafter “specific corporation”), while, with respect to a “corporation with loss”, the Korea Stock Exchange has no loss under Article 18(1)1 of the Enforcement Decree of the Corporate Tax Act until the business year in which the donation date belongs. In this case, the said corporation has not been listed in the Korea Stock Exchange with respect to the “corporation with loss”, it shall be deemed that the loss has not been compensated by the donation of property pursuant to Article 41(1) of the Act, but the donation for the business year to which the donation date belongs shall be included in gross income pursuant to Article 41(1) of the Corporate Tax Act.

The purport of these provisions, the time when gift tax liability is established, the procedure for reporting, payment, and imposition thereof, and Article 31(1)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that “corporation having losses until the business year to which the date of donation belongs” shall be “corporation having losses for at least two consecutive years” (Article 41(1)1 of the Inheritance Tax and Gift Tax Act prior to amendment by Act No. 6780 of December 18, 2002). In full view of the fact that “corporation having losses for the business year to which the date of donation belongs” is added to “corporation having losses for the business year to which the date of donation belongs” and that the scope of a specific corporation is extended without losses for the business year to which the date of donation belongs, barring any special circumstances, it constitutes a specific corporation as “corporation having losses” under Article 41(1) of the Act and Article 31(1)1 of the Enforcement Decree of the Income Tax and Gift Tax Act.

B. In full view of the adopted evidence, the lower court determined that: (a) on March 3, 2006, no deficit was incurred at the time of donation of the instant real estate on March 3, 2006, but on December 31, 2006, the value of the instant real estate was 7,896,809 won before including the value of the instant real estate in the gross income as of December 31, 2006; (b) even though the operating income for the business year 2006 was 17,114,382 won; (c) in light of the fact that the loss was incurred due to the disposal loss of securities, which is non-business expenses, 29,730,610 won, and that the Plaintiff’s loss was 10 months from the date of donation until the end of the business year 2006, and that the loss was 16 months from the date of donation to the date of donation; and (d) that the Plaintiff did not claim that the loss was 16 months from the date of donation was 20.

Upon examining the reasoning of the judgment below in light of the above provisions, legal principles, and records, we affirm the fact-finding and judgment of the court below as just, and there is no error of law such as misunderstanding of legal principles as to specific corporations or misunderstanding of facts due to

2. Regarding ground of appeal No. 2

A. Relevant statutes

Article 2(1) of the Act provides that gift tax shall be imposed on donated property from another person’s donation. Article 2(3) of the Act provides, “The term “donation” means a free transfer (including a transfer at a remarkably low price) of tangible or intangible property (including a transfer at a remarkably low price) to another person, either directly or indirectly, or an increase in the value of another person’s property by contribution.” Article 41(1)1 of the Act provides, “Where a person having a special relationship with a shareholder or investor of a specific corporation (hereinafter “shareholders, etc.”) obtains profits from a certain corporation through “transaction of free provision of property or services” with a specific corporation, the amount equivalent to such profits shall be deemed the value of property donated to a shareholder, etc. of a specific corporation.

B. Introduction and limitation of the complete taxation system of gift tax

(1) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) does not stipulate any unique definition on the concept of donation under the Civil Act, and borrows the concept of donation under the Civil Act, and thus, “where one of the parties expresses his/her intention to grant property to the other party without compensation and the other party agrees to give property by accepting it.” However, with respect to the transfer of a donation without compensation between the parties, a separate provision on the legal fiction of donation (Articles 32 through 42) was formulated and imposed. As a result, in the case of gratuitous transfer of a portion by means of new financial techniques or capital transactions, etc. which are not listed in the regulations on legal fiction of donation, there was a limit to block the transfer of a portion without any appropriate tax burden.

Therefore, the Inheritance Tax and Gift Tax Act amended by Act No. 7010, Dec. 30, 2003, in order to realize fair taxation by allowing the taxation authority to levy gift tax on not only the taxable subject of gift tax originally intended, but also the transaction and act similar to that of the same or similar economic substance as well as the original taxable subject of gift tax, was introduced by comprehensively defining the subject of gift tax including not only the donation under the Civil Act, but also the “transfer of property directly or indirectly without compensation,” and the “increased property value by another person’s contribution” as the concept of donation, and converting the previous provision on the deemed donation into the provision on the time of donation and calculation of the donated property (hereinafter “value calculation provision”), thereby introducing the so-called comprehensive taxation system of gift tax.

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with the changing inheritance and donation in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, in a case where a certain transaction or act constitutes the concept of gift under Article 2(3) of the Act, it is possible to levy gift tax according to Article 2(1) of the Act.

(2) However, the conversion of the provision on the calculation of the value of a deemed donation into the provision on the deemed donation requires that the title of Section 2 of Chapter 3 on the deemed donation be changed from “the deemed donation, etc.” to “Calculation of the value of donated property”, and the title of the provision on individual deemed donation should be changed from “the deemed donation” to “the value of donated property” as “the value of donated property.” As a result, the provision on the calculation of the value has left as it remains in relation to taxation requirements, such as taxable objects and scope of taxation, which have been regulated in the previous provision on the deemed donation. In other words, the individual provision on the calculation of the value requires that a special relationship exists between the parties to a transaction exists, or that the difference between the market price, etc. is more than 30% of the market price, or that the difference between the market price, etc. is more than a certain amount. Such taxation object or scope of taxation has been amended from time to time. This ought to be seen as having been reflected in the previous provision on the scope of taxation of a deemed gift tax.

Therefore, in order to ensure the predictability, etc. of taxpayers, in cases where the individual value calculation rule limits only a certain transaction or act to taxable subject to gift tax, and limits the scope of taxation by prescribing the scope and limit of taxation of gift tax, the gift tax cannot be imposed even if the transaction or act excluded from the taxable subject or scope of gift tax among the transaction or act regulated by the individual value calculation rule conforms to the concept of gift under Article 2(3) of the Act.

(c) limitations on taxation of profit gifts through transactions with specific corporations;

Article 41(1) of the Act and Article 31(6) of the Enforcement Decree of the Act provide for the calculation of the value of donated property where any person having a special relationship with shareholders, etc. of a corporation having losses (hereinafter referred to as “contributed corporation”) or stockholders, etc. of a corporation under temporary closure or permanent closure makes transactions, such as gratuitous provision of property to a specific corporation, and the profits earned by such shareholders, etc. are at least KRW 100 million, subject to gift tax. This purport is to impose gift tax on an irregular donation that gives profits to shareholders, etc. of a specific corporation without paying corporate tax on the donated value by means of offsetting the donated value as losses (see Supreme Court Decision 2008Du6813, Apr. 14, 201). In other words, each of the above provisions provides for the calculation of the value of donated property to the extent of losses in the case of a corporation subject to temporary closure or permanent closure in the case of a corporation other than a deficit.

This is clear that the legislative intent of intending to exclude profits acquired by stockholders, etc. from taxable subject to gift tax is based on transactions with corporations that bear corporate tax on capital increase profits, etc. while running a business normally, and it cannot be deemed that such legislative intent has been changed due to the introduction of a comprehensive gift tax taxation system. As such, “the portion exceeding losses out of profits arising from transactions with corporations, or profits arising from transactions with corporations that do not have losses other than corporations that suspend and discontinue business” should be deemed to have set the limit for imposing gift tax on stockholders, etc.

D. Determination

According to the reasoning of the judgment of the court below, the plaintiff acquired 548 shares of the family building business on February 27, 2006 among the 5,000 shares issued by the plaintiff. ② The non-party, the non-party, who is the external assistant of the plaintiff, donated the real estate to the family building business on February 28, 2006 and completed the registration of ownership transfer on March 3, 2006. ③ The family building business included 6,379,127,750 won in the gains from the receipt of assets from the gift of the real estate of this case, and reported and paid corporate tax 1,567,90,230 won for the business year 206, and ④ the defendant considered the profits equivalent to the increase in the value of shares held by the plaintiff as the donation of this case on July 1, 201, and applied Article 2(3) of the Act to the taxation of gift tax, additional tax on the gift of this case (including additional tax on the gift of this case).

Examining these facts in light of the aforementioned provisions and legal principles, even if the non-party indirectly donated the instant real estate to the head of the family building business to the Plaintiff, who is a shareholder of the head of the family building business, an increase in the value of the stocks held, the instant real estate donation constitutes a donation of property to a corporation with no deficit, and thus, the head of the family building business bears corporate tax on the gains from the receipt of the assets, and thus, the gift tax may not be imposed on the above interest of the plaintiff pursuant to Article 2(3)

Nevertheless, the lower court determined that this part of the disposition was lawful on the grounds that the Plaintiff’s profits derived from the donation of real estate in this case may be subject to gift tax pursuant to Article 2(3) of the Act. In so doing, the lower court erred by misapprehending the legal doctrine on the scope of application and the relationship with the provision on the calculation of value under Article 2(3) of the Act, thereby adversely affecting the conclusion of the judgment. The

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the part concerning the imposition of gift tax due to the gift of this case among the judgment below is reversed, and this part of the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices.

Justices Jo Hee-de (Presiding Justice)