In the case of multilateral mergers, the standard for determining whether the major shareholder’s gains from the merger of major shareholders under Article 28(3)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act are more than 300 million won, and whether gift tax may be imposed on the gains from the merger of major shareholders of the merged party which is less than 300 million won in case where the total amount of gains from the merger of the major shareholder who held the stocks of not less than 2 stocks of the merged party corporation whose price was excessively assessed is more than 300 million won, is less than 300 million won (negative)

In the case of multilateral mergers, the fulfillment of taxation requirements under Article 28(3)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18177, Dec. 30, 2003) that large shareholders will have more than 300 million won shall be determined on the profits of the large shareholders by the corporation of the merged party, as in the case of bilateral mergers. Therefore, even if the total sum of profits accruing from the mergers is more than 300 million won, if the large shareholders who hold stocks of not less than 2 large-scale corporations of the merged party are more than 30 million won, the gift tax shall not be imposed on the profits accruing from the mergers of the large shareholders of the merged party which is less than 30 million won.

Article 38(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 7010, Dec. 30, 2003); Article 28(3)1, 2, and 4 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 18177, Dec. 30, 2003);

Plaintiff (Law Firm Dakon, Attorneys Seo Jong-ho et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office

Seoul High Court Decision 2010Nu41071 decided June 24, 2011

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. Regarding ground of appeal No. 2

A. Article 38(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003 and enforced January 1, 2004; hereinafter “the Act”); Article 28(3)1, 2, and (4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 18177 of Dec. 30, 2003; hereinafter “Enforcement Decree”) provides that the major shareholder of the merged company shall be deemed to have obtained 0 billion won or less from the appraised value of the merged company as provided in Article 28(3)1 of the Enforcement Decree of the former Act (amended by Presidential Decree No. 1817 of Dec. 30, 2003; hereinafter “the former appraised value of the newly incorporated or surviving corporation”) and the appraised value of the merged company after the merger 】 (the former appraised value of the merged corporation after the merger 】 (the former appraised value of the merged corporation after the merger 】

B. (1) citing the reasoning of the judgment of the court of first instance, the court below acknowledged the following facts: (a) around December 30, 2003, Apepe Industries Co., Ltd. (hereinafter “Apepe Industry”), an unlisted corporation, also divided and merged (hereinafter “each divided business division of this case”) each of the building materials sections of Apeju Industry Co., Ltd. (hereinafter “Au-high-tension concrete”); (b) during the process of the instant divided and merger, the Plaintiff, a major shareholder of 3 major shareholders of Apeju Industry, as a shareholder of Apeju Industries and Yang Mo-high-tension concrete, received the price for a merger; and (c) during the instant divided and merger, the Plaintiff, as a major shareholder, determined that the price for the new stocks issued by Bpe Industries, which were the major shareholder of Ape Industries, had been less than the price for the share price of Ape Industries, which had been calculated by the Defendant’s evaluation of the merger and merger, as well as the price for Puju Industries’s evaluation of the largest Industries.

(2) According to the above facts, the Plaintiff received the price for the division and merger of materials related to the high-tension concrete building sector as new stocks issued by the Ape Industries, and the value of the Apepe Industries’s new stocks received as such exceeds the value of the stocks of the Pucom Construction Department prior to the merger. In addition, in full view of these circumstances and the contents and purport of the above provisions, the lower court is acceptable to determine the appraised value per share after the merger as the assessment value per share of the Apepe Industries, which is a corporation surviving the merger after the merger of this case, in calculating the merger profits acquired as a large shareholder of the Yangsan High-tension concrete due to the merger of this case. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the calculation of gift profits

C. (1) Meanwhile, citing the reasoning of the judgment of the court of first instance, the court below rejected the Plaintiff’s assertion that the Plaintiff should be excluded from gift tax on the following grounds: (a) citing the reasoning of the judgment of the court of first instance: (b) the Plaintiff’s acquisition of evaluation marginal profit and evaluation marginal profit equivalent to KRW 1,121,652,76 as a major shareholder of the Apeju Industries due to the instant merger; and (c) the Plaintiff’s evaluation marginal profit and evaluation marginal profit equivalent to KRW 226,417,737 as a major shareholder of the Apeju Industries; and (b) the Plaintiff’s evaluation marginal profit should be determined whether all of the evaluation marginal profit together meet the requirements for gift tax under Article 28(3)2 of the Enforcement Decree; and (c) since the evaluation marginal profit acquired as

(2) However, Article 28(3)1 of the Enforcement Decree requires that the amount calculated by subtracting the appraised value per share before the merger from the appraised value per share after the merger with the taxation requirement of gift tax should be more than 30/100 of the appraised value per share after the merger. In light of the language and text and purport thereof, it is natural to determine whether, even in the case of multilateral mergers, the share price per share price is calculated for each merged party corporation at which the over-evaluation was made and the above requirement is determined. In light of the above, it is reasonable to determine whether the case of subparagraph 2 falls under the requirement by each merged party corporation.

In addition, there is no reasonable ground to view that in the case of multilateral mergers, it is necessary to determine whether the requirements for gift tax assessment under Article 28 (3) 1 and 2 of the Enforcement Decree should be met by applying different criteria from the case of successive mergers between the two parties.

In addition, Article 28 (3) 1 and 2 of the Enforcement Decree excludes large shareholders from the subject-matter of gift tax in the event that the merger marginal profit of large shareholders falls short of a certain scale, the purpose of Article 28 (3) 1 and 2 of the Enforcement Decree is to resolve the problems such as the imposition of gift tax in the case of minor changes in the stock price of the merged party corporation between the merger merger and the merger registration date which is the basis for calculating the profit of gift as the effective date of merger. The possibility of such problems

(3) In full view of the above circumstances, it is reasonable to determine whether the taxation requirement under Article 28(3)2 of the Enforcement Decree in the case of multilateral mergers is met that the large shareholder gains more than 300 million won, as in the case of bilateral mergers, for the interests of the large shareholder by the corporation of the merged party, as in the case of the merger between the two parties. Therefore, where the large shareholder who held stocks of more than 2 large-sized corporations of the merger party is more than 300 million won, even if the total sum of the profits accruing from the merger is more than 30 million won, gift tax shall not be imposed on the large shareholder of the corporation of the merger party, which is less than 30 million won, as in the case of the merger between the two parties.

Nevertheless, the lower court rejected the Plaintiff’s assertion that, on the erroneous premise that, in the case of multilateral mergers, it should be determined as to whether all of the valuation profits should be satisfied the requirements for gift tax under Article 28(3)2 of the Enforcement Decree by adding up all of them, since the merger gains acquired as a major shareholder of high-tension concrete fall short of 300 million won, the relevant part should be excluded from the subject of gift tax. Therefore, the lower court’s determination is erroneous in the misapprehension of legal doctrine as to the requirements for gift tax imposition under Article 28(3)2 of the Enforcement Decree, which affected the conclusion of the judgment

2. As to the grounds of appeal Nos. 1 and 3

A. Article 28(6) of the Enforcement Decree provides that the appraised value per share before the merger shall, in principle, be based on the appraised value under Article 63 of the Act. In addition, Articles 63(1)1(c), 54(2), and 55 of the Enforcement Decree provide that when calculating the appraised value per share of unlisted stocks, the net asset value of the relevant corporation shall be the value calculated by subtracting the liabilities from the appraised value under Articles 60 through 66 of the Act as of the base date of appraisal.

B. Based on the reasoning of the judgment of the court of first instance, the court below rejected the Plaintiff’s assertion that the net asset value of each of the divided projects in this case, which was divided into Aju Industries and Yang Motension concrete, should be calculated on the basis of the assessment conducted by the Defendant pursuant to Articles 60 through 66 of the Act. On the other hand, the court below assessed the net asset value of Aju Industries and Yang Motension concrete before the merger through division respectively pursuant to Articles 60 through 66 of the Act. On the other hand, the court below rejected the Plaintiff’s assertion that the net asset value of each of the divided projects in this case, should be calculated on the basis of multiplying the net asset value of each of the divided projects in this case, by the ratio of the net asset value of each of the divided projects in this case, to the net asset value of each of the divided projects in this case, before the merger through division (hereinafter “net asset value under the Corporate Tax Act”) to the net asset value of each of the respective divided projects in this case, and rejected the Plaintiff’s assertion that the Plaintiff’s failure to pay additional tax on the following grounds.

C. Examining the reasoning of the lower judgment in light of the relevant provisions, including the foregoing provisions, and the evidence duly admitted, the lower court did not err by misapprehending the legal doctrine regarding the calculation of net asset value in the division business sector and by exempting the imposition of penalty tax.

3. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Shin Young-chul (Presiding Justice)