[1] In cases where the provisions on deemed donation of trust property under the name of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act apply, the burden of proving that there exists an agreement on the establishment of title trust, which is a case where the nominal owner of the pertinent property is different from the actual owner

[2] In a case where the title trust was made for another reason, not for tax avoidance, but for other reasons, and only a minor reduction of tax has occurred as incidental to the title trust, whether the “purpose of tax avoidance” under Article 45-2(1) of the former Inheritance Tax and Gift Tax Act exists (negative)

[1] Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007) provides for constructive gift of trust property under the name of the actual owner and the nominal owner of the property requiring registration, etc. for the transfer or exercise of rights applies to cases where the actual owner and the nominal owner of the property are different. In such a case, the tax authority must prove that the nominal owner of the relevant property differs from the actual owner due to the existence

[2] Where it is recognized that the title trust was made for another reason, not for tax avoidance, and only a minor reduction of tax incidental to the title trust occurs, it cannot be deemed that there was a purpose of tax avoidance under Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007).

[1] Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007) / [2] Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007)

[1] Supreme Court Decision 2009Du5404 Decided September 24, 2009, Supreme Court Decision 2017Du31460 Decided May 30, 2017 (Gong2017Ha, 1410) / [2] Supreme Court Decision 2004Du7733 Decided May 12, 2006 (Gong2006Du19331 Decided April 9, 2009 (Gong2009Du24104 Decided March 24, 201, Supreme Court Decision 201Du10232 Decided February 21, 2017, Supreme Court Decision 201Du10329 Decided February 21, 2017; Supreme Court Decision 201Du103197 Decided June 131, 2017; Supreme Court Decision 201Du163297 Decided June 21, 2017Du163197Du6161797.

Plaintiff 1 and one other (Attorneys Lee Jae-soo et al., Counsel for the plaintiff-appellant)

Head of Seodaemun Tax Office (Law Firm LLC, Attorneys Man-soo et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2012Nu21415 decided June 5, 2013

The judgment of the court of first instance is reversed. The part on imposition of additional tax among the judgment of the court of first instance is revoked, and this part of the lawsuit is dismissed. The remaining part on the disposition except for additional tax

The portion of penalty tax shall be determined ex officio, and the grounds of appeal on the remainder other than penalty tax shall be determined.

1. Ex officio determination on the additional tax portion

When an administrative disposition is revoked, such disposition shall lose its validity and no longer exists, and a revocation lawsuit against a non-existent administrative disposition is unlawful as there is no benefit of lawsuit (see Supreme Court Decision 201Du15343, Oct. 13, 201, etc.).

According to the records, since the defendant, around December 6, 2012, revoked ex officio the part concerning additional tax from the disposition of this case against the plaintiffs on the disposition of this case. Thus, this part of the lawsuit by the plaintiffs is to seek revocation of the disposition which has not already been extinguished, and it is unlawful as there is no benefit of the lawsuit.

2. Determination on grounds of appeal Nos. 2 and 3

A. Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same) on deemed donation of trust property under the name of the actual owner of the property and the nominal owner are different. In such a case, the existence of an agreement on the establishment of title trust between the parties and the fact that the nominal owner of the pertinent property differs from the actual owner should be attested by the tax authority (see Supreme Court Decision 2017Du31460, May 30, 2017). Meanwhile, if it is recognized that the title trust was made for any reason other than the purpose of tax avoidance, and it is merely a minor reduction in taxes incidental to the title trust, it cannot be deemed that there was a purpose of tax avoidance under Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (see, e.g., Supreme Court Decisions 2004Du7333, May 12, 2006; 2016Du16968.

B. Review of the reasoning of the lower judgment and the record reveals the following facts.

(1) On September 3, 1999, Plaintiff 2, a domestic corporation, established the Corporation (hereinafter “C.C.C.”). On September 3, 199, Plaintiff 2, in order to acquire and hold shares of the Open Forest Technology Co., Ltd. (hereinafter “heat Technology”), Malaysia established the Corporation (hereinafter “C.C.C.”), and all shares of C.C. C.C. were owned by Quuuter Ltd. (hereinafter “Guter”). At that time, the Plaintiff owned all shares of the Common Holdings.

(2) On September 21, 199, C.C. entered into a contract with Nonparty 1, Nonparty 2, and Nonparty 3, a shareholder of the Open Forest Technology, on which “C.C.C. purchases 160,000 won of the shares held by the said shareholders from the said shareholders,” and “A.C.C. acquires 2,40,000 won of the new shares of the Open Forest Technology issued by C.C.C.,” and “A.C.C., to assign 2,40,000 won of the new shares to C.C...”

(3) On September 29, 199, C.C. exchanged USD 16,750,00 from the C.C. branch office in the Hanmi Bank of Korea to KRW 20.32,2775,00 won, and deposited the above purchase price and the acquisition price into the account. The above funds were raised by Plaintiff 2 from the income of operating Gundo Ho Ho Ho Ho K, Gundo Ho International Lt. in Hong Kong. C.C. was issued as a shareholder of the above new shares 2.40,000, and was entered as a shareholder of the shares purchased or acquired as above in the list of changes in the shares. C.C. became the largest shareholder who held approximately KRW 49.26% of the issued shares in the C.C. shares. The above shares acquired by C.C. were transferred free of charge, divided, and transferred 40,000 won of the shares free of charge, and 304.37% of the shares were transferred.

(4) On September 2007, the Open Forest Technology selected and prepared treatment securities to list their issued stocks on the KOSDAQ market as a securities company in charge, and the result of its review was presented on and around September 2007. The content was that “The C.C.C., the largest shareholder of the Heat Forest Technology, is at issue with qualitative examination items such as safety of management and independence of management in the course of listing as a foreign nominal company, and thus, should change its governance structure by a nominal company.”

(5) Around December 2007, both of the shares of C.C. C.C. and (C) were owned by Quuter, and all of the shares of Quter were owned by the New Ocean Limited established in BVI (hereinafter “New Ocean”), and all of the shares of the New Ocean were owned by the nominal shareholders who entered into a name shareholder agreement with the Plaintiff. As such, Plaintiff 2, who was the actual final shareholder of C.C.C.C. issued and managed all shares of the holding company’s governance structure, controlled and managed C.C.C.C. and completed the written agreement on December 21, 2007.

(6) In the above agreement, the phrase “transferr: C.C.,” “transferee: Plaintiff 1,” and “C.C.,” stated that “the stock subject to transfer: (a) is a transaction of lending the transferee’s name to the transferor, not a transaction of actual acquisition of the stocks; and (b) on December 21, 2007, a transfer of ownership is completed in the name of Plaintiff 1 as to “3 million shares of Open Technology Co., Ltd., a transferor under the contract.”

(7) On April 3, 2008, Heat Technology paid dividends of KRW 300 million to Plaintiff 1, a resident of Singapore, and withheld and paid KRW 45 million,5 million, in accordance with the Convention between the Government of the Republic of Korea and the Government of the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.

(8) The Defendant applied Article 45-2(1) of the former Inheritance Tax and Gift Tax Act, applying Article 45-2(1) to Plaintiff 1 on December 21, 2010, on the ground that “The actual right holder of the said C.C. C. C.C. shares under the name of the company named in name, was the Plaintiff 2, and Plaintiff 2 trusted the said shares to Plaintiff 1 for the purpose of tax avoidance.” The Defendant imposed gift tax of KRW 11,687,104,00 (including penalty tax) on the gift on December 21, 2007. Plaintiff 2 deemed the joint and several taxpayers under Article 4(5) of the former Inheritance Tax and Gift Tax Act, and imposed gift tax of the same amount on Plaintiff 2.

C. Considering the following circumstances revealed by the record based on the above facts acknowledged as above, it is reasonable to view that Plaintiff 2, who acquired and owned heat technology stocks, not Plaintiff 2, and C.C.C.C., around September 199, acquired and owned them, and Plaintiff 2, who actually operated C.C.C.C. on or around December 21, 2007, may be deemed to have held a title trust with Plaintiff 1 on behalf of C.C.C., and therefore, it is reasonable to deem that Plaintiff 2, on December 21, 2007, held a title trust with heat technology stocks held by C.C.C., not Plaintiff 2, and C.C., a title trust with Plaintiff 1.

(1) C.C.C. and its upper holding company have legal personality as a legal entity duly established. The mere fact that Plaintiff 2 controls and manages C.C.C., a nominal company, as a final shareholder of the holding company’s governance, cannot be deemed as denying the legal personality of C.C.C. and its legal effect and legal relationship premised on C.C. and C.C., not the final controlling shareholder, but the Plaintiff 2, the final controlling shareholder of the C.C., acquired the Open Forest Technical Stocks.

(2) Plaintiff 2 established C.C. C.C. for the purpose of acquiring, holding, and disposing of heat technology stocks in order to invest them, and C.C.C. for the purpose of acquiring, holding, and disposing of them under its own name, concluded a stock sales contract and a stock acquisition contract, and made payment of the funds, thereby acquiring heat technology stocks for the intended purpose from the time of its establishment. Therefore, C.C. may be deemed to have acquired ownership not only externally but also in the relationship with Plaintiff 2, a shareholder who is the final one of the holding company’s governance, and it is difficult to deem that Plaintiff 2 reserved ownership in the relationship with C.C.C..., in the course of its tax investigation. Meanwhile, in the course of its tax investigation, Plaintiff 2 was invested by the method of acquiring heat technology stocks through the said company, and was considered to have been invested as a nominal company, and it is difficult to readily conclude that there was an agreement between Plaintiff 2 and C.C.C. on the sole basis that there was no such relationship or evidence exists between Plaintiff 2C and C.C.

(3) On December 21, 2007, no such legal relationship was maintained even at the time of title trust with Plaintiff 1. On such premise, Plaintiff 2 made an agreement on a title trust agreement with Plaintiff 1 on behalf of Plaintiff 1 on behalf of the actual operator of C.C.C.C., and stated in the agreement that “the name of Plaintiff 1 is lent to the transferor C.C.C.”

(4) Among the contents of the written agreement, there is a statement that “the exercise of voting rights and subsequent disposition following the ownership of stocks and the economic profits therefrom revert to Plaintiff 2.” However, the immediate upper part of the written agreement states that “the actual shareholder of Plaintiff C.C., the transferor of the stock acquisition agreement, and Plaintiff 1, the transferee of the said share acquisition agreement, agree as follows.” The above contents can be deemed to be related to both the rights exercised as the controlling shareholder of C.C. C.C., the truster, and the corresponding obligations.

D. Furthermore, comprehensively taking account of the following circumstances revealed by the record based on the above facts, it is reasonable to view that C.C.C., around December 21, 2007, title trust of heat technology stocks with Plaintiff 1 was made on the obvious reason for enabling heat technology to pass a listing on the KOSDAQ market, and it is merely a minor reduction of tax incidental to such title trust.

(1) From the perspective of C.C.C.C., holding stocks for the purpose of investment, the listing of the KOSDAQ market promoted by C.C.C., is an opportunity to expand investment benefits. In the process of promoting the listing of the KOSDAQ market, the result of the listing review conducted by a securities company in which “a nominal c.C.C., a major shareholder, may interfere with the listing review process” was presented, and it is deemed that C.C., which held stocks for a long time under its name on December 21, 2007, held the stocks under title trust around December 21, 2007. Ultimately, such title trust is a direct means to promote the expansion of investment benefits of C.C.C., which is the direct means of promoting the listing of the KOSDAQ market. Accordingly, it can be inferred that it was conducted in accordance with the result of active consultation by the securities company supervising the listing review conducted by the securities company on the apparent reason for the promotion of the listing of the KOSDAQ market.

(2) Considering the ratio of Open Forest Technical Stocks held by C.C.C. to the total stocks issued by Open Forest Technology, it is difficult to find out the purpose of tax avoidance regarding deemed acquisition tax on oligopolistic shareholders and secondary tax liability.

(3) From September 199 to December 21, 2007, the reason why C.C. (a) acquired heat technology stocks did not appear to have been distributed from around September 21, 2007 to around December 21, 2007, but the Open Forest Technology was distributed once on April 3, 2008, which was after the title trust. However, the difference between the withheld tax amount and the withheld tax amount received under the name of the Plaintiff 1, the title trustee, without the title trust, is sufficiently proven in light of all the circumstances, such as the quantity and value of the stocks held in a title trust, the period held in his own name, and other obvious reasons for the title trust, which is not the purpose of tax avoidance, and there is no reason to deem that the dividends have been additionally paid. Therefore, it is difficult to deem that the title trust was made in order to avoid the withholding tax amount.

(4) In addition, the lower judgment cited as one of the reasons why the proviso to the corporate tax collection related to the Open Tech is discovered. However, the Open Tech is merely the person who issued the stocks subject to the title trust, and it is difficult to view that there is any direct relation with the title trust. Therefore, it is difficult to recognize the purpose of tax avoidance of the title trust.

E. Nevertheless, the lower court determined that, on September 21, 2007, Plaintiff 2 held a title trust with C.C. and around December 21, 2007, the title trust relationship was resolved, the title trust was held by Plaintiff 2, who held the heat technology stocks through C.C. and C.C., which was only the nominal company of Plaintiff 2, from September 1999 to December 21, 2007, and the title trust was held by Plaintiff 1. Furthermore, on this premise, the lower court rejected the Plaintiffs’ assertion that Plaintiff 2’s act of title trust with Plaintiff 1 was the primary purpose of meeting the standards for listing on the grounds that, even if Plaintiff 2, the title truster, was able to satisfy the standards for listing on the transfer of a title trust, it is difficult to view that the act of title trust was the principal purpose of meeting the standards for listing on the dividend income, rather, it was recognized that there was a purpose of tax avoidance, such as avoiding comprehensive income tax reduction and additional collection on foreign-invested enterprises.

3. Conclusion

The judgment of the court below is omitted and the decision of the court below is reversed. The part concerning the imposition of additional tax by the defendant ex officio is sufficient for the Supreme Court to directly render a judgment. The part concerning the imposition of additional tax among the judgment of the court of first instance is revoked, and this part of the lawsuit is dismissed, and the remaining part concerning the imposition of additional tax 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 Lee Ki-taik (Presiding Justice)