[1] Relationship between the principle of substantial taxation and the principle of no taxation without law under Article 14 of the Framework Act on National Taxes

[2] The case holding that in a case where Gap and Eul et al. established Byung corporation by acquiring the land from the Korea Land Corporation and transferred the right to sell the above land to Byung, they concluded a "land sale right and a contract for transfer and acquisition of stocks" with the Jung corporation which was trying to carry on the business of constructing and selling officetels on the above land, and received the transfer price of Byung's stocks from Byung company and completed the registration of ownership transfer in the company's future, and the competent director of a regional tax office deemed the above transfer price to fall under Byung's asset transfer income as a premium for the right to sell the above stocks, and disposed of the amount Gap and Eul as bonus, the court below erred in the misapprehension of legal principles as to the principle of substantial taxation, in light of all the circumstances, in a case where Gap and Eul acquired the above transfer price of stocks from Byung corporation as a bonus

[1] Article 14 of the Framework Act on National Taxes / [2] Article 14 of the Framework Act on National Taxes and Article 94 (1) of the Income Tax

[1] Supreme Court en banc Decision 2008Du8499 Decided January 19, 2012 (Gong2012Sang, 359)

Plaintiff 1 and one other (LLC, Kim & Lee LLC, Attorneys Cho Il-young et al., Counsel for the plaintiff-appellant)

Head of the tax office

Seoul High Court Decision 2016Nu65475 decided July 18, 2017

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. Article 14(1) of the Framework Act on National Taxes provides, “If the ownership of the income, profit, property, act or transaction subject to taxation is merely nominal, and there is another person to whom such income, profit, property, act or transaction belongs, and there is another person to whom such income, profit, or transaction belongs, the provisions on the calculation of the tax base in the tax-related Acts shall apply according to the substance regardless of the name or form of the income, profit, property, act or transaction,” and Article 14(2) of the same Act provides, “Where it is deemed that the benefit of this Act or the tax-related Acts is to be unduly received through indirect methods via a third party or through two or more acts or transactions, it shall be deemed that the party has directly traded or has engaged in a single act or transaction in succession, and thus, this Act or the tax-related Acts shall apply.”

The principle of substantial taxation is a practical principle for realizing the principle of equality, which is the basic ideology of the Constitution, in a tax law relationship. In a case where unreasonable form or appearance that is distinguishable from the substance of the facts requiring taxation is taken for the purpose of evading the burden of taxation, the main purpose of this principle is to regulate unfair acts of tax evasion and to realize tax justice by enhancing equity in taxation by imposing tax at a place where the taxable capacity exists, notwithstanding its form or appearance, regardless of its form or appearance. This is not in conflict with the principle of no taxation without law, which is the basic principle of the tax law, but rather, in applying economic and living relations changing various tax laws to the extent that predictability and legal stability are not undermined (see Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012, etc.).

2. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

A. Upon purchasing from the Korea Land Corporation (Korea Land Corporation on October 1, 2009 and became the Korea Land and Housing Corporation in consequence of its merger with the Korea Land and Housing Corporation; hereinafter “Korea Land and Housing Corporation”) around 2009, the Korea Land Corporation (hereinafter “Korea Land and Housing Corporation”) intended to jointly develop the instant land and jointly implement the business of newly constructing and selling officetels on the said land, along with the neighboring land on which the Korea Land and Housing Corporation already purchased the Korea Land and Housing Corporation (hereinafter “instant land”).

B. Catone et al. participated in the bid of the instant land supervised by the Korea Land Corporation, but, on September 21, 2009, the Plaintiffs and the Seoul Special Construction Co., Ltd., and Nonparty 1 sold the instant land jointly with KRW 44 billion and paid the down payment amount of KRW 4.4 billion (after that, Nonparty 2 entered the instant land as a co-purchase of the instant land on behalf of the Seoul Special Construction Co., Ltd., and hereinafter “Plaintiff et al.”).

C. C. C.C., the Plaintiff, etc. tried to succeed to the purchaser status of the instant land, including the right to purchase the instant land from the Plaintiff, etc. (hereinafter “instant right to purchase”), and the Plaintiff, etc. demanded excessive purchase price, and subsequently, on November 5, 2009, the Plaintiff, etc. entered into a land purchase service contract with C.C. Construction Co., Ltd. to purchase the instant right to purchase the instant land at a reasonable price, and agreed with the Plaintiff, etc.

D. On December 17, 2009, the Plaintiff et al. jointly established the Hydn&A Co., Ltd. (hereinafter “Hydn&A”), and held the shares issued by Hydn&A at the ratio of 143%, 225%, 120%, and 212%, and transferred the instant sales right to Hydn&A on December 18, 2009.

E. On January 8, 2010, the Plaintiff et al. concluded a “land sale right and a contract for transfer and acquisition of shares” with the content that the dydn&A, possessed by the Plaintiff et al., would transfer the entire shares of KRW 10 billion (a separate capital of the dydn&A; hereinafter “instant issues amount”); KRW 4.4 billion; and KRW 14.4 billion in total, of the instant sales right held by the dydn&A.

F. On April 7, 2010, the Plaintiff, etc., changed the share purchase price from 10 billion won to 10.15 billion won, and the Plaintiff, etc. received the said KRW 10.15 billion from 30 billion on April 7, 2010 and May 28, 2010.

G. On May 28, 2010, C&L entered into a contract to succeed to all rights and obligations under the sales contract between D&L and the Korea Land Corporation and the Korea Land Corporation, and the Korea Land Corporation. The Korea Land Corporation paid the remainder of KRW 39.6 billion out of the purchase price of the instant land, and completed the registration of ownership transfer in C&L.

H. The director of the Central Regional Tax Office: (a) deemed the instant issue amount as a premium for the instant sales right, and deemed that it falls under the income accruing from the transfer of the assets of D&A; and (b) calculated 10 billion won as the gross income of D&A for the business year 2010 by D&A; (c) among them, KRW 4.3 billion received by Plaintiff 1; and (d) KRW 2.5 billion received by Plaintiff 2 as the bonus for the Plaintiffs; (b) KRW 2 billion received by Nonparty 1; and (c) KRW 1.2 billion received by Nonparty 2 as the dividend against Nonparty 1 and Nonparty 2; and (d) notified the Plaintiffs of the change in income amount on January 7, 2014.

I. On March 31, 2014, the Plaintiffs filed a revised return and payment of the comprehensive income tax for the year 2010 following the notice of change in the amount of income. On May 12, 2014, the Plaintiffs filed a request for correction to the Defendant for the reduction of the tax base and tax amount of the global income tax for the year 2010 as the initial return. However, the Defendant rejected the request on July 7, 2014.

3. Examining the following circumstances revealed through the above facts and the record in light of the aforementioned provisions and legal principles, it cannot be deemed that part of the issues of this case constitute a bonus for the transfer income of the assets of D&A and thus, it cannot be deemed that some of them were reverted to the Plaintiffs. It does not change solely on the ground that D&A, such as the Plaintiff, etc., was closely related to the transfer of stocks and the transfer of the sales right of this case by D&A.

A. In a case where a corporation or an individual intends to acquire real estate owned by another corporation, the legal form of the transaction can be both the method of acquiring the pertinent real estate directly from the corporation and the method of acquiring stocks that can acquire control over the corporation itself, which owns the said real estate. Therefore, it cannot be denied that the Plaintiff et al., etc., took an unreasonable form or appearance, solely on the ground that the Plaintiff et al.’s dynnnnb transferred stocks and transferred the instant sales right to the instant transaction at the same time for the purpose of transferring the instant sales right to the Plaintiff, etc., solely based on the fact that it was conducted for the purpose of transferring the sales right to the Plaintiff, etc.

B. The premium of this case’s sales right can be traded in accordance with the form of transaction by reflecting the value of the shares held by the Plaintiff, etc. as the property value of the shares, and it is difficult to view that the shares were de facto value of the shares from the time it was acquired by the Plaintiff, etc. from the time it was acquired by the Plaintiff, etc., and since the issue amount of this case’s sales right is the same as the premium value of the instant sales right, it cannot be said that the economic effect of this case’s sales right actually belonged to the D&A.

C. In addition, the Plaintiff et al. received a proposal for sale of the instant sales right from the Crdone before establishing the Cdyone, and there is no specific circumstance to deem that at the time the Plaintiff et al. transferred the instant sales right to the Cdyone, and there was a need to undertake the development project of the instant land. Considering the fact that the instant issues were actually paid directly from Cdyone to the Plaintiff et al., it is difficult to deem that the instant transaction was reconsumed into one transaction that only acquired the instant sales right from Cdyone, and that the instant issues amount was returned to the Plaintiff et al., and thus, it is difficult to deem that the instant issues amount came out of the Plaintiff et al.

D. Rather, in the event that the instant transaction, as the instant transaction, was conducted by the Plaintiff et al. at the same time with the transfer of shares, and the transfer of the instant sales right by the Plaintiff et al., there may be cases where the Plaintiff et al. has the same substance of the instant sales right as the transfer of the instant sales right to the Ckystar because the various stages of transactions conducted by the Plaintiff et al. were merely a means to achieve the purpose of tax avoidance from the beginning. However, there is no change to the effect that the instant issue amount does not belong to the Ckystar.

4. Nevertheless, solely on the grounds indicated in its reasoning, the lower court rejected the Plaintiffs’ claim seeking revocation of the instant disposition on a different premise, deeming that the instant issue amount received by the Plaintiff, etc. as the share transfer proceeds constituted a premium for the instant sales right that ought to be attributed to the Worldn&A in economic substance. In so determining, the lower court erred by misapprehending the legal doctrine on the principle of substantial taxation, thereby failing to exhaust all necessary deliberations. The allegation contained in the grounds of appeal on this point is

5. Therefore, 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 Ko Young-han (Presiding Justice)