[1] Standard 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 may be levied on the shares acquired as the sale price for the shares held in title, which was first deemed as gift and have been imposed or may be imposed, and again transferred under the name of the same person by applying Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (negative in principle) / In the case of an all-inclusive share swap under the Commercial Act, whether in principle the above legal doctrine applies to new shares allocated to the company becoming a wholly owning parent company (affirmative)

[1] An all-inclusive share swap under the Commercial Act is a combination of transactions where the shares of a company becoming a complete subsidiary are transferred to a company becoming a complete parent company, and where shareholders of a company becoming a complete subsidiary receive from a company becoming a complete parent company an allocation of new shares related to consideration for the shares of a company becoming a complete subsidiary and become shareholders of a company becoming a complete parent company. In addition, whether shareholders of a company becoming a complete subsidiary gain profits through an all-inclusive share swap shall be determined based on whether there exists the difference between the appraised value of the shares of a company becoming a complete subsidiary transferred to the company becoming a complete parent company and the appraised value of new shares allocated by a company becoming a complete parent company under the Inheritance Tax and Gift Tax Act,

In full view of the transaction structure and characteristics of an all-inclusive share swap under the Commercial Act, and the language, legislative purport, system, etc. of the relevant provisions, gift tax shall not be imposed on profits earned 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 former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007) concerning donation of profits from the transfer of property at a high price, or Article 39(1)1 Item (c) of the same Act concerning donation of profits from the issuance of new stocks at a low price, and the gift tax shall not be imposed by applying Article 42(1)3 of the same Act concerning donation of profits from the trade to increase corporate capital.

[2] In a case where a person who is a shareholder of a company becoming a complete subsidiary through an all-inclusive share swap under the Commercial Act receives new shares from the complete parent company in his/her name in return for the transfer of such shares to the company becoming a complete parent company, and completes the transfer of title, the new shares is a new title trust relationship that is different from the previous title trust relationship between the title truster and the title trustee. As such, the new shares are subject to the donation of title trust donation under Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007).

However, as an exception to the substance over form principle in order to prevent the act of title trust for the purpose of tax avoidance, the said provision permits the imposition of gift tax by deeming the relevant property to have been donated from the actual owner to the title holder. As such, in the case of stocks, where the first stocks subject to a deemed donation are sold after being taxed or taxable, and another stocks are acquired with the sale price, and a transfer is again made in the same name under the same person after being transferred under the same name, the imposition of gift tax without restriction on other stocks re-transfered may result in inconsistency that denies the effect of deemed donation of the first title trust stocks in relation to the imposition of gift tax. The same applies to the first stocks after the first title trust stocks are acquired with the sale price and then transferred under the same name to the same person, if the provisions on deemed donation of the first title trust stocks are applied to the other stocks after being transferred under the same person’s name, it is inconsistent with equity in the imposition of gift tax, and thus, the same applies to the case where the first stocks or its purchase fund becomes contrary to equity in the imposition of gift tax.

[1] Article 35(1)2 (see current Article 35(1)2 (see current Article 35(2) and (2), Article 39(1)1 (c) [see current Article 39(1)1 (c) and (d)], Article 42(1)3 (see current Article 42-2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Article 360-2 of the Commercial Act / [2] Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Article 360-2 of the Commercial Act

[1] Supreme Court Decision 2011Du23047 Decided April 24, 2014 (Gong2014Sang, 1150), Supreme Court Decision 2012Du6797 Decided September 26, 2014 / [2] Supreme Court Decision 2011Du10232 Decided February 21, 2017 (Gong2017Sang, 646), Supreme Court Decision 2014Du4217 Decided March 22, 2017, Supreme Court Decision 2012Du5848 Decided April 13, 2017

Plaintiff 1 and two others (Law Firm Dadam, Attorneys Jeong Jae-hun et al., Counsel for the plaintiff-appellant)

Plaintiff 2 (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Mapo Tax Office et al.

The Director of the Pacific District Office

Seoul High Court Decision 2012Nu18297 decided November 16, 2012

The part of the judgment of the court below as to Plaintiff 2 is reversed, and that part of the case is remanded to the Seoul High Court. All appeals by Defendant Mapo Tax Office, the Head of Ansan Tax Office, and the Head of Mapo Tax Office are dismissed. The cost of appeal between Plaintiff 1 and the Head of Mapo Tax Office is assessed against Defendant Mapo Tax Office, the cost of appeal between Plaintiff 3 and the Head of Ansan Tax Office is assessed against Defendant Ansan Tax Office, and the cost of appeal between Plaintiff 4 and the Head of Ansan Tax Office is assessed

The grounds of appeal are examined.

1. As to Plaintiff 2’s ground of appeal

A. An all-inclusive share swap under the Commercial Act is a combination of transactions in which the shares of a company becoming a complete subsidiary are transferred to a company becoming a complete parent company, and where shareholders of a company becoming a complete subsidiary receive from a company becoming a complete parent company an allocation of new shares related to consideration for the shares of a company becoming a complete subsidiary and become shareholders of a company becoming a complete parent company. In addition, whether shareholders of a company becoming a complete subsidiary obtain profits through an all-inclusive share swap or not shall be determined by whether there exists the difference between the appraised value of the shares of a company becoming a complete subsidiary transferred to the company becoming a complete parent company and the appraised value of new shares allocated by a company becoming a complete parent company under the Inheritance Tax and Gift Tax Act

In full view of the transaction structure and characteristics of an all-inclusive share swap under the Commercial Act, and the language, legislative purport, system, etc. of the relevant provisions, gift tax may not be imposed by applying Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Capital Tax Act”) on donation of profits accruing from the transfer of property at a higher price to a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act, and Article 39(1)1(c) of the former Inheritance Tax and Gift Tax Act on donation of profits arising from the issuance of new stocks at a low price. In addition, gift tax should not be imposed by applying Article 42(1)3 of the Inheritance Tax and Gift Tax Act on “the donation of profits arising from the trade to increase corporate capital” (see, e.g., Supreme Court Decision 2011Du23047, Apr. 24, 2014).

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

1) The Nonparty and Plaintiff 2 participated in the capital increase issued on November 24, 2005 by Lone Star Entertainment Co., Ltd. (hereinafter “Lone Star”) (hereinafter “instant capital increase”). The Nonparty was allocated 5,00 shares each in the name of Plaintiff 1, Plaintiff 3, and Plaintiff 4 (hereinafter “Plaintiff 1”) and 3,000 shares each in the name of Plaintiff 1, Plaintiff 3, and Plaintiff 2.

2) On December 5, 2005, Lone Star entered into a contract for an all-inclusive share swap under the Commercial Act with a complete parent company and a wholly owned subsidiary by the shareholders of Lone Star, a corporation registered on KOSDAQ (hereinafter “Lone Star”) and the shareholders of Lone Star, by transferring the entire shares of Lone Star and acquiring new shares issued by the new shares issued by the Company.

3) After that, on December 20, 2005, Company A and Company A revised the share exchange ratio, thereby acquiring 86,500 shares of Company A, and entered into a share swap contract with the shareholders of Company A to issue 36.4625 shares of Company A’s shares. Accordingly, on February 27, 2006, Company A issued new shares of Company B to the Plaintiffs in return for acquiring the shares of Company A from the Plaintiffs.

4) The director of the tax office levied gift tax on Plaintiff 2 by applying Article 35(2) of the Inheritance and Gift Tax Act on the ground that the value of the Company Company’s shares was excessively assessed in the process of such comprehensive exchange of shares, and Plaintiff 2, etc. donated profits by transferring Company A’s shares at a higher price.

C. Examining these facts in light of the legal principles as seen earlier, gift tax may not be imposed by applying Article 42(1)3 of the Inheritance Tax and Gift Tax Act on the donation of profits accruing from the comprehensive exchange of stocks to the profits earned by Plaintiff 2 through the comprehensive exchange of stocks, by applying Article 35(2) of the Inheritance Tax and Gift Tax Act on the donation of profits accruing from the transfer of property at a higher price.

Nevertheless, the lower court determined otherwise, that it was lawful to levy gift tax on profits earned by the shareholders of a company becoming a complete subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 35(2) of the Inheritance Tax and Gift Tax Act. In so determining, the lower court erred by misapprehending the legal doctrine on statutes applicable to the imposition of gift tax on profits accruing from an all-inclusive share swap, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal

2. As to the grounds of appeal by the defendant Mapo Tax Office, the director of Ansan Tax Office, and the director of Ansan Tax Office

A. Article 45-2(1) of the Inheritance and Gift Tax Act (hereinafter “instant legal provision”) provides that “where the actual owner and the nominal owner are different with respect to property which requires a transfer or exercise of the right, the value of the relevant property shall be deemed to have been donated to 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: Provided, That this shall not apply to cases falling under any of the following subparagraphs.” Article 45-2(1)1 provides that “Where property is registered, etc. under another person’s name without the purpose of evading taxes, or a transfer is not made under the name of

In a case where a person who received a title trust of shares is a shareholder of a company becoming a complete subsidiary through an all-inclusive share swap under the Commercial Act, and the relevant shares are transferred to the company becoming a complete parent company under his/her name, and the title truster and the title trustee have completed a transfer of shares, the new shares are subject to a new title trust relationship different from the previous title trust relationship. As such, the said new shares are subject to a deemed donation of title trust under Article 45-2(1) of the Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2013Du5791, Aug. 23, 2013).

① However, in order to prevent the act of title trust for the purpose of tax avoidance, the legal provision of this case permits the imposition of gift tax by deeming the pertinent property to have been donated from the actual owner to the title holder as an exception to the principle of substantial taxation. As such, in order to prevent the act of tax avoidance, it should be applied to only to the extent necessary and appropriate to prevent the act of tax avoidance. ② In the case of shares, where the first title trust shares, which were subject to taxation or are able to be taxed upon the deemed donation, are acquired with the sale price, and another shares are transferred to the same person under the name of the same person, and where a transfer of ownership is again made with the acquisition of another shares under the name of the same person, without any restriction, the imposition of gift tax by separately applying the legal provision of this case on the other shares, which re-transfered as mentioned above, may result in inconsistency with the effect of deemed donation of first title trust shares in relation to the imposition of gift tax, and thus, if the provisions on separate deemed donation of shares are applied to the same person after acquiring the first title trust shares under the name of 20.

B. According to the reasoning of the lower judgment and the record, the Nonparty, as seen earlier, participated in capital increase in the name of Plaintiff 1, etc. and acquired the shares of Company A in return for the transfer of Company A’s shares, the Nonparty: (a) deemed that the Nonparty trusted the shares of Company A and the new shares of Company B in trust with Plaintiff 1, etc. in return for the transfer of Company A’s shares; and (b) based on the instant legal provision, the Nonparty imposed gift tax on Company A’s shares by deeming that the Nonparty trusted the shares of Company A and the new shares of Company B respectively; and (c) on the new shares of Company B, the fact that

Examining these facts in light of the legal principles as seen earlier, since the Lone Star stocks acquired in the name of Plaintiff 1, etc. is the first title trust stocks that the Nonparty transferred in the future to Plaintiff 1, etc., it may be deemed as a gift by applying the legal provisions of this case, and thus, the new stocks acquired in the name of Plaintiff 1, etc. fall under the shares of the same person in the name of the same person as the price for the transfer of the stocks first donated during the comprehensive exchange of stocks, and thus, tax cannot be imposed by applying the legal provisions of this case.

The lower court erred in determining that Plaintiff 1, etc. cannot be deemed to have re-entrusted the new shares of Company A, other than Company A’s new shares, because the new shares of Company B are merely a modified substance of Company A’s shares. However, the lower court was justifiable to have determined that the imposition of gift tax on new shares of Company B was unlawful. In so determining, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on

3. Conclusion

Therefore, the part of the judgment of the court below against plaintiffs 2 is reversed, and that part of the case is remanded to the court below for a new trial and determination. All appeals by the chief of Mapo Tax Office, the chief of Ansan Tax Office, and the chief of Mapo Tax Office are dismissed. The costs of appeal between plaintiffs 1 and the chief of Mapo Tax Office are all costs of appeal. The costs of appeal between plaintiffs 3 and the chief of Ansan Tax Office are assessed against the chief of Mapo Tax Office, the costs between plaintiffs 3 and the chief of Ansan Tax Office, and the costs of appeal between plaintiffs 4 and the chief of Ansan Tax Office are assessed against the chief of Ansan Tax Office.

Justices Lee Ki-taik (Presiding Justice)