Seoul High Court Decision 201Na1448 decided May 1, 201

Head of Geumcheon Tax Office

September 18, 2015

1. Of the instant lawsuit, the part of the Defendant’s conjunctive claim seeking the revocation of the tax payment notice of KRW 908,836,250, which was filed against the Plaintiff on November 12, 2013, shall be dismissed, respectively.

2. The Defendant’s disposition of imposition of KRW 52,348,968 against the Plaintiff on November 12, 2013 is revoked.

3. The plaintiff's primary claim is dismissed.

4. 9/10 of the costs of lawsuit shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

On the other hand, on July 10, 2013, the Defendant confirmed that the notice of change in the amount of income and the notice of change in the amount of income of KRW 6,491,887,500 that the income earner against the Plaintiff was Nonparty 1, and the disposition of imposition of KRW 961,185,218 (including additional tax) imposed against the Plaintiff on November 12, 2013 is null and void respectively. Preliminaryly, the notice of change in the amount of income and the disposition of imposition of dividend income tax are revoked.

1. Details of the disposition;

A. A share sales contract between ME and the non-party 1, and the acquisition of shares by non-party 1

1) On April 23, 2010, the Plaintiff concluded a share sales contract (hereinafter “the sales contract of this case”) to purchase 50,600 shares of the show 50,000 shares (hereinafter “the show 50,600 shares”) with the Non-Party 1, a major shareholder of the show string Co., Ltd. (hereinafter “satis”) on December 29, 2005, which is a corporation ME Co., Ltd. (hereinafter “ME”) and the Non-Party 1, a non-listed corporation.

2) On December 29, 2005, ME paid 7.3 billion won as down payment and intermediate payment (hereinafter “the instant advance”) pursuant to the instant sales contract to Nonparty 1, and set up a pledge right on the stock of the show list as a security for the instant advance payment, and agreed to pay the balance of 1,302,000,000 won to pay the balance after adjusting the amount according to the degree of interest delivery from 2006 to 2009.

3) On the other hand, according to the resolution of the board of directors and the extraordinary general meeting of shareholders of Eul on December 29, 2005, the non-party 1 participated in the capital increase of Eul on December 29, 2005 to acquire the 1,294,320 new shares of Eul (hereinafter “the instant shares”) in total of KRW 7,299,964,800 per share (5,640 per share) and Eul created a pledge on the 1,100,172 shares of Eul in preparation for the reduction of the sales price or termination of the contract of this case.

B. Cancellation of the instant sales contract

1) After the conclusion of the instant sales contract, Nonparty 1 terminated the agreement on April 17, 2006 on the instant sales contract at Nonparty 1’s request due to shocks management difficulties, etc., and Nonparty 1, upon the said agreement termination, set up a pledge on the remainder of 1,100,148 shares of Eul, which were offered as security to Eul on December 29, 2005, in addition to the 1,100,172 shares of Eul, which were offered as security, in order to secure the performance of the obligation to return the instant advance payment owed to Eul upon the termination of the said agreement.

2) After the termination of the instant sales contract, ME cancelled the pledge on the instant shock stocks at the request of Nonparty 1, and converted the instant advance payment into the outstanding amount on the account book.

C. Attachment and transfer of the instant M&T shares

1) On June 12, 2009, the head of Sungdong Tax Office notified M&T of the attachment of the instant shares in order to collect Nonparty 1’s total tax amount of KRW 206,379,970 from M&T in total.

2) Since then, on March 17, 2010, the Plaintiff, which was merged with M, sold the instant shares to Nonparty 2 for KRW 1,022,512,80,00 in total, the Plaintiff paid KRW 214,20,300 (including additional dues) in lieu of Nonparty 1’s tax amount in arrears, and on December 31, 2010, sold the instant shares for KRW 7,514,20,30, the sum of the instant advance payment and Nonparty 1’s tax amount in arrears for KRW 1,02,512,512,687,500, which deducted the disposal price of the instant shares from KRW 6,491,687,50, which was deducted from the disposal price of the instant shares for KRW 1,02,512,80,00 in total, at the time of tax adjustment for bad debts, but did not dispose of the shares in excess of the total amount of KRW 6,49,687,500.

D. Defendant’s taxation disposition and Plaintiff’s objection

1) On June 25, 2013, the Defendant issued a notice of taxation (hereinafter “pre-announcement of taxation”) to the Plaintiff on June 25, 2013, pursuant to the Audit and Cadastral Records of the Director of the Gwangju Regional Tax Office that KRW 6,491,687,50, which was not recovered until March 17, 2010 when the special relationship was extinguished, should be disposed of as dividends to Nonparty 1, and disposed of the above KRW 6,491,687,50 as dividends to Nonparty 1, and issued the notice of the change in the amount of income (hereinafter “the notice of the change in the amount of income”) to the Plaintiff on July 10, 2013. On November 12, 2013, the Plaintiff did not pay the withholding income tax in accordance with the notice of the change in the amount of income (including additional payment for the Plaintiff).

2) On July 22, 2013, the Plaintiff filed a request for pre-assessment review with the Director of the Seoul Regional Tax Office on July 22, 2013, but the Director of the Seoul Regional Tax Office rendered a non-adopted decision on September 12, 2013, and thereafter filed an appeal with the Tax Tribunal on February 13, 2014, but the Tax Tribunal dismissed the Plaintiff’s request on November 19, 2014.

3) Meanwhile, on August 28, 2015, the Defendant, in the instant lawsuit, corrected the amount of additional tax paid in 99,719,870 won in total from KRW 90,883,625 to KRW 52,348,968 (hereinafter referred to as “instant tax payment notice”) by reducing the amount of additional tax paid in 90,883,625 won (including additional tax paid in arrears, KRW 52,348,968).

[Ground of Recognition] Facts without dispute, Gap evidence Nos. 1, 2, 6 through 15, 18 through 20, Eul evidence Nos. 1, 2, 4, 5, 11, 14, 15 (including each number), and the purport of the whole pleadings

2. The plaintiff's assertion

(a) The primary claim

On June 25, 2013, the Defendant notified the Plaintiff of the instant pre-announcement of taxation, and notified the change of the income amount on July 10, 2013, which was before the Plaintiff rendered a decision on the Plaintiff’s request for pre-assessment review. This is null and void since it deprived of the Plaintiff’s opportunity for remedy of rights guaranteed by the Framework Act on National Taxes because its defect is material and clear, and as long as the instant notice of change of income amount becomes null and void, the instant notice of tax payment is null and void.

(b) Preliminary claim

1) Even if the instant notice of change in income amount and the instant notice of change in income amount are not serious and clear, all of the instant notice of change in income amount and the instant notice of tax payment should be revoked on the grounds of substantive illegality as follows. However, the Plaintiff did not go through the pre-trial procedure for the instant notice of change in income amount by creating confusion as to the method of appeal due to the Defendant’s prior notice of taxation, notice of request for pre-assessment review, notice of decision on request for pre-assessment review, and notice of pre-assessment review. The instant notice of change in income amount and the instant notice of tax payment, which are identical with the instant notice of tax change, are given the opportunity for the National Tax Service and the Tax Tribunal to proceed with the pre-announcement of taxation and the instant notice

2) The substantial grounds for illegality

A) On the other hand, the plaintiff (the plaintiff) borrowed 1's own shares from the name of the non-party 1 to avoid legal restrictions on the acquisition of treasury shares, and paid the stock price to the non-party 1 until he resells it to the third party. The plaintiff returned the stock price to the non-party 1 on April 17, 2006 due to the termination of the contract of this case. The exchange contract between the plaintiff and the non-party 1 was de facto liquidated by setting a pledge on the whole of the shares of this case. Further, the advance payment of this case is merely a statement that the plaintiff transferred 1's own shares to the non-party 1 to the non-party 2 for the purpose of paying the stock price of this case, and it is merely a statement that the difference between the non-party 1 and the non-party 1 should not be seen as the sale price of the shares of this case to the non-party 2 excluding the difference in the amount of the stock price of this case.

B) Preliminaryly, even if the difference in the sale of this case and the amount of the instant substitute tax payment constitute the provisional payment, Nonparty 1 provided a security by establishing a pledge right to the instant advance payment at the time of termination of the agreement on the sales contract of this case, and Nonparty 1 provided an unrecoverable claim because it constitutes an unrecoverable claim, and thus, the difference in the sale of this case and the amount of the instant substitute tax payment should be excluded from the gross income.

3. Relevant statutes;

It is as shown in the attached Form.

4. Judgment on the main claim

With respect to the notice of the change in the income amount of this case and the validity of the notice of the tax notice of this case, as seen earlier, the Defendant notified the Plaintiff of the prior notice of taxation of this case, and then notified the Plaintiff of the change in the income amount of this case before making a request for

However, the pre-assessment review system, separate from the ex post facto remedy system after the taxation disposition, has been prepared to enhance the effectiveness of the protection of rights by reflecting the taxpayer's claims in the pre-assessment phase, but it does not constitute an essential premise for the taxation disposition, such as tax exemption, if the exclusion period of the tax imposition is imminent (see Supreme Court Decision 2010Du19713, Oct. 11, 2012). Even if the Plaintiff did not obtain the opportunity to request the pre-assessment review, there are procedures to object to the notice of change of income amount and the notice of tax payment through the procedures for filing an objection, appeal, administrative litigation, etc. as prescribed by the law as the ex post facto remedy procedure. In light of the fact that the Plaintiff filed a lawsuit in this case with the Tax Tribunal after receiving a request for the cancellation of the tax notice, the Plaintiff cannot be deemed to have rendered the Plaintiff an opportunity to request the pre-assessment review by giving the notice of change of income amount before the tax notice of this case was rendered.

Therefore, this part of the Plaintiff’s assertion is without merit, and the Plaintiff’s assertion that the notice of change in the amount of income does not constitute a tax liability on the premise that the notice of change in the amount of income of this case is null and void is not reasonable.

5. Determination as to whether the conjunctive claim part among the instant lawsuit is legitimate

A. Whether the revocation claim is legitimate with respect to the notice of change in the income amount of this case

1) As a defense prior to the merits, the Defendant asserts that the Plaintiff did not comply with the procedure of appeal, etc. regarding the notice of change in the amount of income in the instant case, and that the revocation claim is unlawful as it did not go through the procedure of the previous trial.

2) Under Articles 56(2) and 68(1) of the Framework Act on National Taxes, an administrative litigation against a disposition of national taxes may not be filed without going through a request for evaluation or adjudgment under the Framework Act on National Taxes and a decision thereon, notwithstanding the provisions of the main sentence of Article 18(1), Article 18(2) and Article 18(3) of the Administrative Litigation Act. A request for evaluation or adjudgment shall be filed within 90 days from the date (where a notice of disposition is received, the date of its receipt) on which the relevant disposition is known. Unlike the discretionary principle of administrative appeals applicable to a general administrative litigation, an administrative litigation seeking a cancellation of a disposition of national taxes shall be subject to the necessary transfer principle which must undergo a request for evaluation or adjudgment under the Framework Act on National Taxes. However, in a tax administration, two or more administrative dispositions are conducted in the course of a phased and developmental process, and are related to each other, if the tax authority changes the disposition subject to the said disposition during the proceeding, and if several persons are liable for the same duty by the same administrative disposition, they should be deemed to have been given 10 years and 20 years prior to the Supreme Court.

3) Meanwhile, in a case where the tax authority’s disposition of income and the notice of change in the amount of income is given, the tax withholding agent is deemed to have paid the relevant amount to the person to whom the income as stated in the notice was given on the date of receipt of the notice of change in amount of income, and at the same time the liability to pay the income tax withheld at that time is established. Thus, the notice of change in amount of income is an act of the taxing authority that directly affects the corporate tax liability, which is subject to appeal litigation (Supreme Court en banc Decision 2002Du1878 Decided April 20, 206), and there is no dispute between the parties that the plaintiff did not undergo the examination or

4) As to this, the plaintiff, even though the defendant made the plaintiff's request for pre-assessment review before the decision was made, did not inform the plaintiff of the problem of the method of appeal and did not provide the plaintiff with an opportunity to choose the method of appeal as to the notice of change of income amount in the pre-assessment review. In making the notification of the request for pre-assessment review, the plaintiff was confused with the mark stating "the notice of decision on objection" or "the notice of the result of objection" as to the notice of objection, and the above pre-assessment review decision states that "if the contents of the request were not adopted later, a request for objection, or a request for review, etc., may be filed within 90 days from the date of receipt of the subsequent notice of tax payment." The plaintiff did not go through the procedure guidance of the defendant for objection to the notice of change of income amount in accordance with the above procedure guidance. Thus, the plaintiff asserts that there is a justifiable reason for failing to meet the legitimate requirements for the lawsuit

However, Article 18(1) of the Administrative Litigation Act provides that "a lawsuit for cancellation may be instituted without undergoing an administrative appeal against the disposition concerned pursuant to the provisions of other Acts and subordinate statutes: Provided, That this shall not apply where there is a provision that a lawsuit for cancellation cannot be instituted without undergoing an adjudication for administrative appeal against the disposition concerned." Paragraph (2) provides that "in cases falling under the proviso of paragraph (1), a lawsuit for cancellation may be instituted without undergoing an adjudication for administrative appeal, if there is any reason falling under any of the following subparagraphs," and subparagraph 4 provides that "when other justifiable reasons exist." According to subparagraph 20, the Seoul Regional Tax Office notifies the plaintiff of the written decision on the claim for pre-assessment review, the title of the notice may be stated as "decision for objection", and the sign may not be seen as being related to the period for raising an objection. However, even if the title of the notice is stated as above, it is difficult to see that the plaintiff merely stated the change in the written decision in the pre-assessment review as his agent before the Seoul Regional Tax Office's notice of objection."

Ultimately, the grounds alleged by the Plaintiff alone cannot be deemed to have justifiable grounds for failure to go through the entire trial proceedings with respect to the notice of change in the amount of income. Furthermore, even if there exists justifiable grounds as alleged by the Plaintiff, or the instant notice of change in income does not need to go through the separate trial proceedings, the Framework Act on National Taxes does not have any provision regarding the case in the separate lawsuit period, and thus, the Plaintiff has to file a lawsuit seeking revocation of the notice of change in income amount within 90 days from the date on which he/she became aware of the disposition pursuant to Article 20(1) of the Administrative Litigation Act. However, there is no dispute between the parties that the notice of change in income amount was served on the Plaintiff on July 12, 2013, and it is evident that the instant lawsuit was filed on February 10, 2015 after the lapse of 90

Therefore, the preliminary claim seeking the cancellation of the notice of change in the income amount of this case among the lawsuit of this case is unlawful as it was filed after the lapse of the filing period without going through the procedure of the previous trial.

B. Whether the part of the claim on the revocation of the instant duty payment notice is lawful

Ex officio, we examine whether the part concerning the revocation claim against the duty payment notice of this case is lawful.

As seen earlier, where the tax authority’s disposition of income and the notice of change in the amount of income is given, the obligation to pay withholding income tax becomes final and conclusive on the date of receipt of the notice of change in the amount of income and the notice of change is subject to appeal litigation. Even if the tax authority issued a notice of tax payment as a withholding agent’s failure to perform the obligation to pay withholding income tax, it is merely a collection disposition ordering the performance of the tax obligation that has already been granted as to the principal tax, and it cannot be deemed a taxation subject to revocation lawsuit (see, e.g., Supreme Court Decisions 94Nu910, Feb. 3, 1995; 2003Du8180, Sept. 3, 2004; 2003Du8180, Sept. 3, 2004). In addition, even if there is a defect in the notice of change in the amount of income which is a prior disposition, the tax authority’s disposition of income and the notice of change in the amount of income tax are not succeeded to a final and void.

With respect to the instant case, there is no ground for invalidation as a matter of course on July 10, 2013, and the Defendant notified the Plaintiff of the payment of withholding income tax of KRW 908,836,250 and KRW 90,883,625 (amended by reduction of KRW 52,348,968) on November 12, 2013, when the Plaintiff did not pay withholding income tax after notifying the Plaintiff of the change in the amount of income in this case. As seen earlier, the principal tax payment notice of the dividend income tax in this case merely urged the payment of the amount of income determined by the notice of change in the amount of income in this case, and thus, it cannot be deemed a taxation disposition subject to appeal, and therefore, the part of the claim for revocation of the tax payment notice of KRW 908,836,250 among the dividend income tax in this case is unlawful.

However, in the case of the instant notice of tax payment for additional additional tax on 52,348,968 won (hereinafter “additional tax imposition and notice”), since the amount of dividend income not paid pursuant to Article 47-4(1)1 of the former Framework Act on National Taxes (amended by Act No. 12848, Dec. 23, 2014) is determined and notified as to the amount of tax for additional tax on additional tax for additional tax payment, it constitutes a taxation subject to revocation litigation, and therefore, the lawsuit seeking revocation of this portion is lawful.

6. Whether the imposition and collection of additional tax is lawful.

A. In this case, the issue of whether additional tax imposed and collected is legitimate shall be determined by the Defendant’s disposal of KRW 6,491,687,500 (hereinafter “the outstanding amount”) as dividends to Nonparty 1, as well as whether it would be legitimate to notify the Plaintiff of the change in the amount of income in this case and to impose the dividend income tax accordingly. Thus, the Defendant’s disposal of KRW 6,491,687,50 (hereinafter “the outstanding amount”) shall be deemed lawful as to the legality of the notice of change in the amount of income in this case’s transfer from the sum of KRW 7,514,200,300 in the advance payment in this case and the amount of tax in this case.

B. According to Articles 15, 28(1)4 (b), and 67 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010); Articles 11, 87, and 106 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 22687, Mar. 2, 201) provide that if the amount included in the calculation of the corporate tax base is clearly leaked out of the company, the amount of provisional payments (provisional payments) loaned to the specially related persons, such as shareholders, etc. without connection with the corporation’s business, shall be included in the gross income, and if it is obvious that the amount included in the calculation of the corporate tax base is distributed out of the company, the person to whom such amount belongs shall be disposed of as “distribution” to the person to whom such amount reverts, regardless of the name of the corporation.

C. In this regard, the Plaintiff asserts that, regardless of whether before or after the cancellation of the agreement on the instant sales contract, Nonparty 1 merely was a nominal shareholder of the instant BE shares, the Defendant deemed that the outstanding amount was leaked out of the company and paid to Nonparty 1, and that the Defendant’s notice of change in the amount of income and notice of tax payment was unlawful.

1) The issue of whether Nonparty 1 constitutes a real shareholder of the instant BE before and after the rescission of the agreement on the instant sales contract is a matter of interpretation of the legal act between the Plaintiff and Nonparty 1, which should be determined based on the substance of the transaction and the intent of the parties concerned. However, in light of the substance over form principle, the determination of the taxation fact which serves as the basis for applying the specific tax-related Acts should be based on the overall process of the transaction, such as the content and form of the pertinent contract, regardless of the title of the account, the content and form of the pertinent contract, the circumstances leading up to the conclusion of the contract, the method of payment, and the progress of the transaction (see Supreme Court Decisions 190Nu10384, Jul. 27, 1993; 2008Du19628, Oct. 28, 2010, etc.).

2) First of all, with regard to whether Nonparty 1 was the actual shareholders of the instant shares before the conclusion of the contract, the Plaintiff’s acquisition of the instant shares by borrowing Nonparty 1’s name in order to avoid legal restrictions on the issuance of the Plaintiff’s own shares, and subsequently, maintained Nonparty 1’s name until the resale of the shares to Nonparty 1. However, in light of the purport of each of the statements indicated in subparagraphs 5 through 8 (including various numbers), the Plaintiff intended to take over the shock, a film production and distribution method, for the expansion of the Plaintiff’s business, by acquiring the shares from Nonparty 1 holding 50.6% of the total share purchase price of the instant shares from Nonparty 1, the Plaintiff acquired the shares from Nonparty 1 holding an annual shock of the instant shares from Nonparty 1 to Nonparty 1 holding an annual shock of the instant shares, and the Plaintiff did not have any substantial effect on the acquisition price of the shares from Nonparty 1’s new shares issued by Nonparty 1 to Nonparty 1 by issuing the new shares to Nonparty 1. The Plaintiff’s appraisal value of the shares after the purchase price of the instant shares.

3) Next, the following facts are considered to have been comprehensively taken into account the Plaintiff’s rights to purchase and sell shares after the conclusion of the contract, and the Plaintiff’s purchase and sale of shares after Nonparty 1’s agreement, and the Plaintiff’s purchase and sale of shares after Nonparty 1’s purchase and the Plaintiff’s purchase of shares after Nonparty 1’s purchase and sale of shares after Nonparty 1’s purchase and sale of shares after Nonparty 1’s agreement. However, the Plaintiff’s purchase and sale of shares after Nonparty 1’s purchase and sale of shares after Nonparty 1’s purchase and sale of shares could not be seen as having been in fact acquired shares after Nonparty 1’s purchase and sale of shares under the name of Nonparty 1’s purchase and sale agreement, and the Plaintiff could not be seen as having been in possession of shares after Nonparty 1’s purchase and sale agreement to Nonparty 1’s purchase and sale of shares after Nonparty 1’s purchase and sale of shares after Nonparty 1’s purchase and sale of shares under the name of Nonparty 1’s purchase and sale agreement.

4) Therefore, unlike this, the notice of change in the amount of income of this case issued by treating the outstanding amount as the loan or provisional payment paid to a person with a special relationship and disposing of it as a dividend to Nonparty 1 is unlawful, and the additional tax imposition and collection notice on the ground that the Plaintiff did not pay the dividend income tax accordingly should also be revoked illegally (as long as the assessment and collection of the additional tax is revoked by accepting the Plaintiff’s primary assertion as to the practical illegality reason and cancelling the additional tax imposition and collection notice, the Plaintiff’s preliminary assertion

7. Conclusion

The plaintiff's primary claim is dismissed as it is without merit. Among the lawsuit in this case, the part of the plaintiff's conjunctive claim against the plaintiff for the cancellation of the tax payment notice of KRW 908,836,250 as the principal income tax of the dividend income tax of KRW 908,836,250 as of November 12, 2013 is dismissed as it is unlawful. Among the plaintiff's conjunctive claim, the part of the plaintiff's conjunctive claim seeking revocation of the disposition of imposition of KRW 52,348,968 as of November 12, 2013 against the plaintiff is justified, and it is so decided

[Attachment]

Judges Kim Byung-soo (Presiding Judge) et al.;