[1] Criteria for determining whether a shareholder of a company becoming a complete subsidiary has gained profits through an all-inclusive share swap under Article 360-2 of the Commercial Act

[2] Whether gift tax should be levied on profits earned by the shareholders of the company becoming a complete subsidiary through an all-inclusive share swap by applying Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (affirmative)

[1] Articles 35(1)2 and (2), 39(1)1, and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Article 360-2(1) and (2) of the Commercial Act / [2] Articles 35(1)2 and (2), 39(1)1 (c), and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Article 360-2(1) and (2) of the Commercial Act

[2] Supreme Court Decision 2011Du23047 Decided April 24, 2014 (Gong2014Sang, 1150)

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

Yongsan Tax Office (Attorney Kim Yong-ho, Counsel for the defendant-appellant)

Seoul High Court Decision 2011Nu17273 decided February 8, 2012

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter “Capital Increase Tax Act”) provides for “the donation of profits from the transfer of property at a high price” concerning “the donation of profits from the transfer of property at a lower price,” and Article 39(1)1 provides for “the donation of profits from the issuance of new stocks from among donations of profits from capital increase,” and Article 42(1) provides for “the donation of other profits” as “the donation of profits from the issuance of new stocks at a lower price,” and Articles 33 through 41, 41-3 through 41-5, 44 and 45 provide for “the value of the relevant profits from the conversion of stocks at a price higher than or higher than that determined by Presidential Decree, such profits shall not apply to the conversion of stocks at the time of the conversion or exchange of stocks from the price of stocks to the said person:

Meanwhile, according to Article 360-2 of the Commercial Act, a company may hold the total number of outstanding shares of another company by an all-inclusive share swap (hereinafter “wholly owning parent company”). If an all-inclusive share swap is made, shares of the company becoming a wholly owned subsidiary shall be transferred to the company becoming a wholly owning parent company on the date of share swap. The shareholders of the company becoming the said wholly owned subsidiary shall be entitled to the allocation of new shares issued by the company becoming the said wholly owning parent company for share swap (Paragraph 2). As can be seen, an all-inclusive share swap under the Commercial Act is combined between the shares of the company becoming a wholly owned subsidiary and the shares of the company becoming a wholly owned subsidiary are transferred by the company becoming a wholly owning parent company after being allocated new shares of the company becoming a wholly owning parent company for consideration for shares of the company becoming a wholly owned subsidiary and transactions becoming a shareholders of the company becoming a wholly owned subsidiary after being given a consideration for shares of the company becoming a wholly owned subsidiary. Therefore, whether a shareholder of the company becoming a wholly owned subsidiary benefits through an all-inclusive share swap ratio is determined by the appraised value under tax laws or other tax laws.

In full view of the structure and characteristics of the comprehensive exchange transaction of stocks, and the language, legislative purport, and system of the relevant provisions under the Inheritance Tax and Gift Tax Act including the aforementioned provisions, gift tax may not be imposed on profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 35(1)2 and (2) of the Inheritance Tax and Gift Tax Act or Article 39(1)1(c) of the Inheritance Tax and Gift Tax Act concerning donation of profits arising from the issuance of new stocks at a low price, and Article 42(1)3 of the Inheritance Tax and Gift Tax Act concerning donation of profits arising from the transaction to increase corporate capital should be imposed by applying Article 2(1)3 of the Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2011Du23047, Apr. 24, 2014).

2. Nevertheless, the lower court determined that the imposition of gift tax of this case was lawful on the premise that the Plaintiff, who was a shareholder of the non-listed corporation, received benefits from the transfer of the stocks of this case to the company becoming a complete parent company in the course of the comprehensive exchange of the stocks of this case conducted pursuant to Article 360-2 of the Commercial Act by applying Article 35(1)2 of the Inheritance Tax and Gift Tax Act, calculated the difference between the transfer value of the stocks of this case and the market value thereof as a gift by applying Article 35(1)2 of the Inheritance Tax and Gift Tax Act to the profits earned by the shareholders of the company becoming a complete subsidiary through an all-inclusive share swap under the Commercial Act. In so doing, the lower court erred by misapprehending the legal doctrine on the statutes and method of calculating gift tax applicable to the gift tax on the profits derived from the comprehensive exchange of stocks, thereby adversely affecting the conclusion of the judgment. The ground of appeal assigning this error is with merit.

3. Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Yong-deok (Presiding Justice)