Whether the act of distributing profits to a person with a special relationship through subscription for new stocks constitutes the subject of wrongful calculation, and whether the calculation of acquisition value of new stocks is appropriate.

The acquisition of new shares in this case is equivalent to the case where a corporation, such as a shareholder, distributes profits to another shareholder, who is a person with a special relationship, and constitutes the subject of wrongful calculation, and the amount exceeding the market price should be excluded in calculating the acquisition price of shares.

Article 88 of the Enforcement Decree of Corporate Tax Act

Suwon District Court 2017Guhap62823 Revocation of Disposition of Imposing Corporate Tax

AAA Corporation

K Director of the Korean Tax Office

November 9, 2017

December 21, 2017

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s imposition disposition of KRW 201,274,350 of corporate tax for the business year 2010 against the Plaintiff on March 29, 2016 (including additional tax) shall be revoked.

1. Details of the disposition;

A. Status, etc. of the parties

1) The Plaintiff is a corporation established for the purpose of mining and manufacturing aggregate on July 1, 1989. qq around 2007 held 53.1% of the Plaintiff’s issued shares and WW owned 46.9% of the Plaintiff’s spouse’s remaining 46.9%.

2) AAAA Co., Ltd. (formerly: PP development, Co., Ltd.) is a corporation established for the purpose of collecting and selling aggregate on December 3, 2004.q and WW’s children BB and CCC respectively held 50% of the total number of shares issued by AAAAA Co., Ltd in around 2007.

B. The Plaintiff’s acceptance and transfer of shares

1) On April 3, 2007, AAA Co., Ltd. held a board of directors to newly issue 89,500 common shares, and first allocated them to its shareholders, but if shareholders do not accept them, it decided to allocate them to a third party. On April 5, 2007, the Plaintiff acquired 89,500 new shares of the above new shares forfeited on April 5, 2007 (hereinafter “instant shares”) at KRW 895,00,000 (=89,500 shares x KRW 10,00 per share).

2) On August 5, 2010, the Plaintiff transferred each of the instant shares to BB and CCC at KRW 44,750 (i.e., KRW 89,500 x 1/2) respectively (=4,750 x 44,750 x 3,000 per share).

3) On March 30, 201, the Plaintiff reported and paid corporate tax for the business year 2010 to the Defendant for inclusion of KRW 626,50,000, which is the difference between the acquisition amount and the transfer amount of the instant shares, in deductible expenses: KRW 895,00,000; - (134,250,000 x 2; hereinafter referred to as “the difference in this case”).

(c) Imposition of corporate tax;

1) As a result of the integrated investigation of the Plaintiff’s corporate tax from January 27, 2016 to April 2, 2016, the Commissioner of the National Tax Service determined that the instant difference should not be included in the deductible expenses and notified the Defendant of the pertinent taxation data.

2) On March 28, 2016, the Defendant sent a written disposition to correct the corporate tax attributed to the Plaintiff for the business year 2010 KRW 201,274,350, and the Plaintiff was served on March 29, 2016 (hereinafter “instant disposition”).

3) On June 24, 2016, the Plaintiff dissatisfied with the instant disposition, filed an appeal with the Tax Tribunal, but was dismissed on December 20, 2016.

2. The parties' assertion

The Defendant asserts that the disposition of this case is lawful on the grounds of its grounds for disposition and relevant statutes. The Plaintiff asserted as follows and asserted that the part of KRW 192,767,660 (including additional tax) of the disposition of this case (hereinafter “instant part”) was unlawful.

① The Defendant may deny the Plaintiff’s wrongful calculation only for profits distributed by the Plaintiff to BB and CCC, a person with a special relationship. The key part of the instant case is KRW 532,525,000, the amount exceeding KRW 93,975,000, out of the instant difference in profits under the relevant statutes.

(i) (i) 626,50,000 won - 93,975,000 won is also calculated by non-Inclusion in deductible expenses (hereinafter referred to as the "Chapter 1").

② The instant disposition was made after the lapse of the exclusion period of imposition ( March 31, 2013), for corporate tax belonging to the business year of 2007, where the acquisition transaction date of the instant case falls (hereinafter “section 2”).

3. Whether the instant disposition is lawful

(a) Relevant statutes;

It is as shown in the attached Form.

B. Determination

1) Article 41(1)3 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that the acquisition value of assets acquired by a domestic corporation shall be the amount prescribed by Presidential Decree at the time of acquisition of the assets acquired by a domestic corporation, other than the assets purchased by another person (paragraph 1) or the assets acquired by a person himself through manufacturing, production, construction or any other similar method (paragraph 2). Article 72(3)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010; hereinafter the same) provides that the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) shall be excluded from the acquisition value of assets. Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act provides that the stockholder, etc., who is a person with a special relationship, shall calculate profits.

In full view of the language, structure, and purpose of the above Act, the market price under Article 72 (3) 3 of the former Corporate Tax Act concerning the calculation of acquisition value of assets shall be deemed to be the market price at the time of acquisition of new stocks at the same time as the market price under Article 88 (1) 8 (b) of the former Enforcement Decree of Corporate Tax Act concerning high-priced acquisition of new stocks among the types of wrongful calculation, and it is not different in cases where Article 8 (1) 9 of the former Enforcement Decree of Corporate Tax

2) We examine the instant case in light of the aforementioned legal principles. According to the above facts, the Plaintiff acquired the instant shares at a price higher than the market price (10,000 won per share) and distributed profits to BB andCCC, which is a related party. As such, the Plaintiff’s acquisition of the instant shares constitutes an unfair act under Article 52 (1) and (4) of the former Corporate Tax Act and Article 88 (1) 8 (b) of the former Enforcement Decree of the Corporate Tax Act.

In calculating the acquisition value of the Plaintiff’s shares, the amount exceeding the market price under Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act should be excluded. Thus, the acquisition value of the shares of this case shall be zero won. Therefore, even if the Plaintiff transferred the shares of this case, which the Plaintiff acquired as zero won per share under the Corporate Tax Act, to 3,000 won per share, any loss cannot be deemed to have occurred. Thus, the disposition of this case which excluded the amount of

3) Article 88(1)9 and 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act provides that a tax base shall be calculated with respect to an unfair act falling under Article 88(1)9 and 8(b) of the former Enforcement Decree of the Corporate Tax Act, and that other tax adjustment shall not be made. However, Article 89(6) of the former Enforcement Decree of the Corporate Tax Act provides that profits distributed to shareholders through capital transactions shall be denied from the calculation of losses as an unfair act. Article 72(3)3 of the same Enforcement Decree provides that the acquisition value of assets shall be determined in order to prevent an unreasonable decrease in tax burden due to excessive appropriation of assets. Thus, the application of Article 72(3)3 of the former Enforcement Decree of the Corporate Tax Act to any transaction involving the acquisition of assets constitutes an unfair act falling under Article 88(1)9 and 8(b) of the former Enforcement Decree of the Corporate Tax Act shall not be excluded from the application of Article 72(3)3 of

4) The Plaintiff’s Chapter II provides that the business year to which the date of acquisition of the asset belongs is the business year of accrual of earnings and losses. However, Article 40(1) and (2) of the former Corporate Tax Act and Article 68(1)3 of the former Enforcement Decree of Corporate Tax Act provide that the business year of accrual of earnings and losses arising from the transfer of assets other than commodities shall be the business year to which the date of settlement of the price belongs. Thus, the instant disposition taken within five years from the deadline for filing the corporate tax for the business year of 2010, which includes the date of disposal of the instant stocks, cannot be deemed to have expired.

The plaintiff's above assertion is without merit.

4. Conclusion

Thus, the plaintiff's claim seeking revocation on the ground that the disposition of this case is illegal is dismissed as it is without merit.