Whether “justifiable cause exists in light of transaction practices” under Article 35(2) of the former Inheritance Tax and Gift Tax Act in a case where there is no reasonable ground to believe that the transaction party who acquired property at a higher price is the normal price that reflects the objective exchange value, and where there is no reasonable ground to believe that the assignee’s acquisition of property at a reasonable market price was an abnormal reason from a reasonable economic person (affirmative)

The legislative purport of Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter “the Act”) is to cope with and promote fairness in taxation by imposing gift tax on the profits earned by the counterparty in a case where profits equivalent to the difference between the price and the market price are de facto gratuitously transferred through abnormal means that manipulates the transaction price for the benefit of the counterparty. However, it is difficult to deem the difference to have been donated to the counterparty solely on the ground that there is a difference between the price and the market price on the grounds that there is a difference between the transaction between the unrelated parties and the transaction between the unrelated parties. In full view of these, it is reasonable to deem that the transaction between the parties to the transaction who transferred or acquired property at a higher price had reasonable grounds to believe that there was a reasonable price reflecting the objective exchange value, and even if the transferee does not have any such reason, it is reasonable to deem that there was a reasonable reason to deem that there was no justifiable reason from the perspective of economic practice.

Article 35(2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 9916, Jan. 1, 2010); Article 26(6) and (7) 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 LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office

Seoul High Court Decision 2012Nu15700 decided January 24, 2013

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

The grounds of appeal are examined.

1. Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter “the Act”) provides that where a property is transferred to a person other than a specially related person at a price substantially higher than the market price without justifiable grounds in light of transaction practices, the transferor of the property shall be presumed to have received a donation of the amount equivalent to the difference between the price and the market price, and the amount equivalent to profits prescribed by the Presidential Decree shall be deemed to be the value of the property donated to the person who acquired such profits. Article 26(6) 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”) upon delegation, provides that “Where the market price differs by at least 30/100 of the market price” and Article 35(7) of the same Act provides that “The difference between the market price and the profits prescribed by the Presidential Decree shall be deducted from the market price.”

2. Based on evidence adopted by the Plaintiff, the lower court acknowledged the fact that the Plaintiff purchased 300,00 shares (hereinafter “instant shares”) totaling 300,00 shares issued by Nonparty 1, an unlisted corporation, etc. (hereinafter “Nonindicted 2”) on March 2, 207 to Nonparty 2 without any special relationship, and transferred 10,000 won per share to Nonparty 2 who had no special relationship with the same day (hereinafter “instant transfer”), and determined that the Plaintiff’s transfer of shares to Nonparty 2 without any change in its shares to Nonparty 2, who was the shareholder of the global 20,000, would not have been able to purchase the shares at the market price of the instant global 20,000 won for the reason that it would have been difficult for the Plaintiff to purchase the shares at the price of the instant global 20,000 won for the reason that the Plaintiff had no special relationship with the 20,000,000 won at the market price of the instant shares.

3. However, it is difficult to accept the above determination by the court below for the following reasons.

A. The legislative purport of Article 35(2) of the Act is to: (a) in a case where profits equivalent to the difference between the price and the market price are actually transferred without compensation through abnormal methods that manipulate the transaction price for the benefit of the transaction partner, to cope with and promote fair taxation by imposing gift tax on the profits earned by the transaction partner. However, since the transaction between the unrelated parties does not coincide with each other; (b) it is generally difficult to deem that the difference was donated to the transaction partner solely on the basis that there is a difference between the price and the market price, and thus, Article 35(2) of the Act added the taxation requirement, “No justifiable reason exists for the transaction between the unrelated parties,” unlike the transaction between the unrelated parties.

In full view of these facts, it is reasonable to view that there was a reasonable ground to believe that the parties to a transaction who transferred or acquired property at a higher price had properly reflected the transaction price at a normal price that reflects the objective exchange value, and that there was a “justifiable reason in light of the transaction practice” under Article 35(2) of the Act even in cases where there was an objective reason that the transferee could not be deemed to have been an abnormal reason from a reasonable economic standpoint even if there was no such reason.

Meanwhile, in order for taxation to be lawful pursuant to Article 35(2) of the Act, the taxation authority should prove not only that the transferor transferred the property at a significantly higher price than the market price to an unrelated party, but also that there is no justifiable reason for transaction practice (see Supreme Court Decision 2011Du22075, Dec. 22, 2011).

B. However, according to the facts acknowledged by the court below, the following facts are revealed: (a) Nonparty 2, after the transfer of this case, takes part in the management of part of the global entertainment, such as taking the position of director of global entertainment, etc., and attracting investment in Japan; and (b) the Plaintiff, around February 27, 2008, purchased the shares of this case from Nonparty 2 at the price of KRW 10,000 per the initial transfer value, which is the initial transfer value, pursuant to the Plaintiff’s express or implied promise. Furthermore, according to the evidence duly admitted by the court below, the global entertainment is a company specializing in the investment; (b) the Plaintiff did not hold only 4.41% of the shares of the company before and after the transfer of the shares of this case; (c) the Plaintiff was recognized as a manager, and exercised the overall authority over the operation of the investment fund and attracting investment as the representative director from the beginning of the incorporation of the above company.

Examining these circumstances in light of the aforementioned legal principles, even if it is difficult to deem that there was any reasonable ground to believe that the transaction parties at the time of the transfer of the instant shares reached KRW 10,000 per share of the objective exchange value, there is room to deem that Nonparty 2’s acquisition of the instant shares by the said price was an abnormal reason from the viewpoint of a reasonable economic person. Accordingly, the lower court further deliberated on this point and determined whether there was no justifiable reason in light of the practice of the transfer transaction of the instant case.

C. Nevertheless, without further deliberation and determination as to this point, the lower court determined that the Plaintiff’s transfer of the instant shares to Nonparty 2 in KRW 10,000 per share to Nonparty 2 for the reasons indicated in its reasoning does not have justifiable grounds for transaction practice. In so doing, the lower court erred by misapprehending the legal doctrine on “justifiable reasons for transaction practice” as stipulated in Article 35(2) of the Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal

4. 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 Shin (Presiding Justice)