Whether the purpose of the secondary tax liability system under Article 40 of the Framework Act on National Taxes and the requirements for its application ought to be strictly construed (affirmative) / In cases where the procedures for disposition on default, such as seizure under the National Tax Collection Act, are limited for reasons other than restriction on transfer by law, whether it constitutes “where the transfer of investors’ stocks, etc. is restricted by law” under Article 40(1)2 of the Framework Act on National Taxes (negative)

Article 40(1) of the Framework Act on National Taxes provides that when the property of the general partner or oligopolistic stockholder (hereinafter referred to as “investors”) is insufficient to cover the national tax, additional dues, and disposition fee for arrears to be paid by the investors as the property of the general partner or oligopolistic stockholder, the juristic person shall be liable to pay the shortage within the limit of the value of the investor’s stocks or investment shares.

Article 40 of the Framework Act on National Taxes stipulates that the secondary tax liability system of a corporation under Article 40 of the Framework Act on National Taxes is to ensure tax collection and achieve substantial equality in taxation by minimizing judicial order in cases where it is deemed that there is a shortage of tax to be collected even after taking a disposition on default on the property of an investor who is the original person liable for tax payment.

However, the secondary tax liability of such a corporation is exceptionally imposed on an investor, a third-party corporation, who is not the original taxpayer, even though the investor and the corporation are the subject of independent rights and obligations, and the interpretation of tax laws and regulations must be strictly interpreted, so the requirements for its application should be strictly interpreted.

Article 40(1) of the Framework Act on National Taxes provides that only a case falling under any of the subparagraphs of Article 40(1) shall be subject to secondary tax liability, and subparagraph 2 of the same Article provides that “Where the transfer of investors’ stocks or investment shares is restricted by law or the articles of incorporation of the juristic person” (hereinafter “instant provision). In full view of the intent of the secondary tax liability system of the juristic person, the strict interpretation of the applicable requirements, the language and text of the aforementioned provision, the limitation on transfer, and the nature and relationship of the restriction on seizure, etc., of the investors’ stocks cannot be deemed as falling under the requirements prescribed in the National Tax Collection Act even when the procedures for disposition on default, such as seizure, etc. under the National Tax Collection Act, are limited due to the stocks, etc. issued by a foreign juristic person and are located in the head office or principal office of the foreign juristic person, and thus, the procedure for disposition on default, such as seizure, etc. under the National Tax Collection Act is limited.”

Article 40 of the Framework Act on National Taxes

Mel Social Social Social Social Social Ltd. (Law Firm LLC et al., Counsel for the defendant-appellant)

The director of the tax office (Law Firm Namsan, Attorneys Jeong U.S. et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2015Nu37060 decided April 20, 2016

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

The grounds of appeal are examined.

1. Requirements for establishing the secondary tax liability of the corporation;

A. Article 40(1) of the Framework Act on National Taxes provides that where the property of a general partner or oligopolistic stockholder (hereinafter “investors”) is insufficient to cover the national tax, additional dues, and disposition fee for arrears to be paid by the investor as of the expiration date of the payment period of national tax, the juristic person shall be liable to pay the shortage within the limit of the value of the investor’s stocks or investment shares.

Article 40 of the Framework Act on National Taxes stipulates that the secondary tax liability system of a corporation under Article 40 of the Framework Act on National Taxes is to ensure tax collection and achieve substantial equality in taxation by minimizing the disturbance of judicial order in cases where it is deemed that there is a shortage of tax to be collected even after taking a disposition on default on the property of an investor who is the original taxpayer.

However, the secondary tax liability of such a corporation is exceptionally imposed on an investor, a third party, who is not the original taxpayer, even though the investor and the corporation are the subject of independent rights and obligations, and the interpretation of tax laws and regulations must be strict. Therefore, the requirements for its application should be strictly interpreted.

B. Article 40(1) of the Framework Act on National Taxes provides that only a case falling under any of the subparagraphs of the same Article shall be subject to secondary tax liability, and subparagraph 2 of the same Article provides that “Where the transfer of investors’ stocks or investment shares is restricted by law or the articles of incorporation of the juristic person” (hereinafter “instant provision”). In full view of the purport of the secondary tax liability system of the juristic person as seen earlier, the strict interpretation of the applicable requirements, the language and text of the instant provision, the restriction on transfer, and the nature and relationship of the restriction on seizure, etc., of investors’ stocks cannot be deemed as falling under the requirements of the instant provision until the procedure of disposition on default, such as seizure under the National Tax Collection Act, is limited due to reasons other than the restriction on transfer under the Act. Therefore, even if the disposition on default, etc. under the National Tax Collection Act, including stocks issued by a foreign juristic person, etc. of investors’ stocks, etc., constitutes the property located in the head office or principal office of the relevant foreign juristic person, such reasons cannot be deemed as “where the transfer of investors’ stocks, etc.”

2. Regarding ground of appeal No. 2

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

1) The Plaintiff is a foreign corporation established in Hong Kong in 2006. The Plaintiff is a foreign corporation that is established in Hong Kong in 2006. The Plaintiff is a shareholder holding 100% of the Plaintiff’s equity interest. The Nonparty held 100% of the Plaintiff’s equity interest, and the Nonparty held title trust in the Lystford Business Inc. of the Republic of Korea.

2) On April 13, 2011, the Defendant imposed and notified the Non-Party’s comprehensive income tax in 2006 or 2010, respectively.

3) On the premise that the non-party’s property is insufficient to collect national taxes in arrears, the Defendant: (a) pursuant to Article 40 of the Framework Act on National Taxes, the Plaintiff was designated as the secondary taxpayer of the non-party; (b) on April 3, 2013, the Plaintiff imposed global income tax, etc. on the Plaintiff on April 25, 2013 to the extent of the Plaintiff’s net asset value; and (c) on April 12, 2013, the payment deadline was changed to April 20, 2013 pursuant to Article 14(1)7 of the National Tax Collection Act on the ground that the Plaintiff is likely to evade national taxes.

4) On April 23, 2013, the Defendant seized each of the above real estate based on the above taxation claim against the Plaintiff on the premise that the Plaintiff owned the forest land located in Seosan-si ( Address omitted) and the wooden bridge and roof housing located in Seodaemun-gu Seoul, Seodaemun-gu.

5) On June 22, 2015, the Defendant seized each of the above claims against the Plaintiff on the premise that the Plaintiff owned the claim, such as the Plaintiff’s right to claim for issuance of share certificates and the right to claim dividends, on the premise that the Plaintiff owned shares issued and shares issued by E.S. companies, City/Do merchant vessels, target Heavy Industries Co., Ltd., and leading shipping companies.

B. Examining these facts in light of the legal principles as seen earlier, even if the Nonparty is a shareholder who actually holds 100% of the Plaintiff’s shares, the grounds that the Plaintiff’s shares issued by a foreign corporation and the procedures for disposition on default, such as seizure under the National Tax Collection Act, are limited cannot be deemed as “cases where the transfer of investors’ shares is restricted by law” under the instant provision, and unless otherwise alleged and proven that the Nonparty satisfied the requirements under each subparagraph of Article 40(1) of the Framework Act on National Taxes, the Nonparty cannot be deemed as having secondary tax liability for the national taxes in arrears of the Plaintiff under Article 40

C. Nevertheless, the lower court acknowledged the facts as indicated in its holding, on the ground that the Plaintiff’s shares are located overseas and are not subject to compulsory execution by the tax authority, and on the ground that the transfer of Plaintiff’s shares constitutes limited cases under the customary international law having the same effect as the domestic law, determined that the Defendant’s secondary liability to pay the Plaintiff the amount of national tax in arrears pursuant to the instant provision was lawful. In so determining, the lower court erred by misapprehending the legal doctrine on the interpretation of “where legal transfer is limited,” thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal on

3. Conclusion

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 Jong-hee (Presiding Justice)