Revocation of Disposition Imposing Corporate Tax

In the instant case’s subscription for new shares, the forfeited stocks were generated and allocated to the Plaintiff, a third party, by applying the discount rate of 20%. The offering for new shares with the third party’s allocation method does not constitute an offering in violation of Article 5-18 of the Securities Issuance Regulations, which limits the discount rate to 10%.

Article 52 of the Corporate Tax Act, Article 88 (1) 8B of the Enforcement Decree of the Corporate Tax Act

Seoul Administrative Court-2016-Gu Partnership-76008 Revocation of Disposition of Corporate Tax Imposition

A. A. Stock Company

Head of the District Tax Office

May 18, 2017

June 15, 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 disposition of imposing corporate tax of KRW 00,000,000 (including additional tax of KRW 00,000,000) on the Plaintiff on January 4, 2010 shall be revoked.

1. Details of the disposition;

A. On May 26, 2010, the Plaintiff is a corporation established by investment of 100% by AAB related parties to BB (in the name of a corporation for convenience, hereinafter referred to as "stock company"). BB, which is a listed corporation, conducted capital increase with respect to 10 million common shares registered on May 6, 2010 (hereinafter referred to as "the instant capital increase with respect to 10 million common shares"), and the details thereof are as follows.

○ Method of issuing new shares: Allocation of forfeited shares to a third party after the allotment of shareholders;

○ The issue value of new shares: The issue value of the new shares shall be the value discounted by 20% per share (00,000 won per share) under Article 57 of the old Regulations on Issuance and Public Notice of Securities.

The method of allocating new shares: 20% of the new shares shall be preferentially allocated to the employee stock ownership association, and the remaining shares shall be allocated at the rate of 0.0% per share to the shareholders listed on the current register of shareholders on May 24, 201.

○ Method of Handling forfeited Stocks: Allocation by a third party;

C. From the capital increase with new shares in this case, the existing shareholders of BB renounced their right to receive new shares, thereby causing forfeited shares to 0,000,000 shares (including single shares). The Plaintiff acquired 0,000,000 shares (hereinafter “ forfeited shares”) from 00,000 won per share, and 145 executives and employees of BBCC services acquired the remaining forfeited shares.

D. The director of Busan Regional Tax Office, from June 8, 2010 to October 20, 2010, conducted the consolidated investigation of the corporate tax for BB between 201 and 2010 with respect to BB from June 8, 201 to October 20, 201, on the ground that BB allocated forfeited stocks to the Plaintiff at a price lower than the market price at the time of the instant offering of new stocks, thereby allocating the Plaintiff the profit of KRW 0,000,000, equivalent to the difference between the market price and the issue price, and notified the Plaintiff of the taxation data including the relevant amount in the Plaintiff’s gross income

E. Accordingly, on January 4, 2010, the Defendant notified the Plaintiff of the correction of the corporate tax of KRW 00,000,000 (including additional tax) for the business year 201 (hereinafter “instant disposition”).

F. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on March 3, 201, but the appeal was dismissed on July 21, 2010.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 5, Eul evidence No. 1 and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

BB committed an act of soliciting subscription for forfeited stocks in accordance with the method of solicitation stipulated in Article 9(7) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”) after issuing capital increase with consideration, so the Plaintiff’s acceptance of forfeited stocks of this case is not subject to corporate tax.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

Article 11 Subparag. 9 and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 2012, Feb. 2, 2012; hereinafter the same) provides that where a corporation issues new stocks at a price lower than the market price, if a shareholder renounces the right to receive the allotment of new stocks and receives a distribution of profits by other shareholders, etc. who are related parties to whom forfeited stocks are allocated, the distributed profits shall be deemed taxable income as corporate tax, and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act (hereinafter referred to as “instant provision”) excludes “where the waived new stocks are allocated by a public offering method under Article 9(7) of the Capital Markets Act” from the scope of “distribution” so that even if the new stocks are allocated at a price lower than the market price, the calculation of earnings shall not be made.

If a listed corporation issues new shares in accordance with the method of offering securities under the Capital Markets Act, the said provision must be publicly announced, and, in principle, the issue price should be determined at a price close to the share price formed in the securities market, etc. [Article 5-18 of the former Regulations on the Issuance and Public Disclosure, etc. of Securities (amended by Act No. 2012-3 of Jan. 3, 2012, hereinafter referred to as the “Rules on the Issuance of Securities”), etc.]; and it can be deemed that a certain amount of discount is inevitable to raise funds through capital increase in the securities market, etc.

However, there is no provision that limits the issue price of new shares issued at a price higher than the limit under Article 5-18 of the Securities Issuance Regulations. Accordingly, in a case where benefits equivalent to the difference between the market price and the issue price are allocated gratuitously to a third party, there is no reason to treat the same as the case where new shares are allocated by means of general public offering, etc. using a third party’s method of allocation. Accordingly, in such a case, the issue price of new shares issued at a price higher than the limit under Article 5-18 of the Securities Issuance Regulations should not be deemed as falling under “the method of offering securities subject to non-taxation or non-taxation” as stipulated in the instant comprehensive provision (see Supreme Court Decision 2014Du14976, May 17, 2017).

In the instant case, the issue price was determined by applying the discount rate of 20% to the forfeited share price, when the forfeited share price occurred, and then the third party was allocated to the Plaintiff, etc., who is the Plaintiff, etc.. In light of Article 5-18 of the Securities Issuance Regulations that limit the discount rate to 10%, it cannot be deemed to constitute an acquisition of forfeited share through an offering under the Securities and Exchange Act and subordinate statutes.

Therefore, the Plaintiff’s benefits derived from acquiring the forfeited stocks at low price as above are included in the gross income pursuant to Article 11 subparag. 9 and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act and subject to corporate tax. Therefore, the Plaintiff’s assertion is without merit.

D. Sub-committee

The instant disposition is lawful.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.