Ora Co., Ltd. (Law Firm Cheong, Attorneys Park Jong-hwan et al., Counsel for defendant-appellant)

The director of the tax office

October 15, 2010

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposition of corporate tax of KRW 606,658,240 against the Plaintiff on November 11, 2008 shall be revoked.

1. Details of the disposition;

A. On September 23, 1985, the Plaintiff, a corporation producing basic chemical products, etc. (the following trade name at the time of the establishment of the fexexex was the same chemical substance), established the degussa Huls and 50:50 shares in order to produce catalysts for the purification of automobile exhausters, as part of the business diversification, and established the degussa Huls and 50:50 shares (hereinafter “contrins”).

B. Dexex set up KRW 1,00,000 and KRW 3,381,682,152 in accordance with the provisions of Articles 4 and 9 of the former Restriction of Special Taxation Act (amended by Act No. 6538 of Dec. 29, 2001) in the business year 199 and 2001, pursuant to the provisions of Articles 9 and 9 of the former Restriction of Special Taxation Act (amended by Act No. 6538 of Dec. 29, 2001). The amount of the above reserve set up and returned pursuant to the former Restriction of Special Taxation Act is as follows.

Reserve funds for research and human resources development included in the main sentence of this Act, 1999 4,381,682,382,152,681,682,682,152,200,000,000 1,000,000,560,717 460,717333,3333, 79379,894,050,05050, 460,7173333,3333,3793,894,0050,0604, 66366636,666366,667,6466,66366,667,6466,6667,206, 606, 608, 606, 608, 606, 6086, 666365666

C. In order to raise funds necessary to enter the solar industry in the future, the Plaintiff transferred 441,860 shares out of the dex shares owned by the Plaintiff around 2005 (hereinafter “instant shares”) to 48,000 won per share in total as affiliated companies of the same solar chemical group as the Plaintiff, which correspond to the specially related parties under the Corporate Tax Act (hereinafter “Talopium”).

D. However, the Seoul Regional Tax Office: (a) calculated the market price of the instant shares, a non-listed stock, based on the supplementary assessment methods prescribed by the former Inheritance Tax and Enforcement Decree of the Income Tax Act; (b) deemed that the Plaintiff transferred the instant shares at a low price to Samguri, who is a person with a special relationship, at a low price; and (c) notified the Defendant of the amount of corporate tax for the business year 2005, to correct the corporate tax for the business year, by calculating the difference between the value actually transferred by applying the provision on the denial of wrongful calculation under the Corporate Tax Act (=22,841,540,840,840-21,209,280,000).

E. Accordingly, on November 11, 2008, the Defendant rendered a disposition imposing corporate tax of KRW 606,658,240 on the Plaintiff for the business year 2005 (hereinafter “instant disposition”).

[Ground for Recognition: Facts without dispute, Gap evidence Nos. 1, 3, 4, 5, 7, 8, Gap evidence No. 2-1, 2, Eul evidence No. 1-1, and the purport of the whole pleadings]

2. Whether the disposition is lawful;

A. The plaintiff's assertion

(1) Article 56(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended on December 31, 1999), which provides for the supplementary evaluation method of the market price of unlisted stocks, provides that “in this case, where the allowances or reserves included in deductible expenses are temporarily returned in the calculation of income for each business year in accordance with the provisions of tax-related Acts, where the reserves or reserves are temporarily returned, the amount distributed in proportion to the income for each business year that will be returned on the basis of the year of return shall be added to the income for each business year,” thereby newly adding the same provision (hereinafter referred to as the “new provision”), the reserves under the Restriction of Special Taxation Act for the purpose of deferred taxation

(2) The Defendant’s assessment of the market price per share of the instant shares at KRW 51,694, resulting in a difference between KRW 48,00,00, which is the Plaintiff’s appraised value, is due to the Defendant’s net value increase in the value of the instant shares by deeming that the Defendant’s assessment of the market price of the instant shares was carried out in the three business years prior to the transfer of the instant shares (3,048,348,819, which is the aggregate of the research and human resources development reserves and the investment reserves for small and medium enterprises in 199 and 201 (=793,894,04,040,040 in 202 + KRW 793,894,050 in 203 + 1,460,560,719 in 204) to have been carried out in the income for the pertinent business year when calculating the market value of the instant shares.

(3) However, according to the provisions of this case, if the reserve fund is established only for a specific business year and the stocks are assessed based on the income of the returned business year, if the stock is assessed based on the income of the reserve fund under the provisions of this case, the income of the business year is assessed to a higher level than the actual stock value. On the contrary, if the reserve fund is based on the income of the business year in which the reserve fund is established, the income of the business year is reduced due to the inclusion of the reserve fund in the calculation of losses under the provisions of this case, and the stock value is assessed to a lower price. Thus, the stock value is not reflected in the stock value because the stock appraisal party can arbitrarily set up the reserve fund or adjust the stock value by failing to do so.

(4) In this regard, the provision of this case is contrary to the principle of no taxation without law as stipulated by the Constitution, and thus is null and void. The market price of the Plaintiff’s stocks, which was calculated by failing to apply the invalid provision to indicate the real value of stocks in the pertinent business year’s income, is legitimate, and thus, it cannot be deemed an unfair act as stipulated in Article 52 of the Corporate Tax Act, and thus, the disposition of this case based on the market price of stocks calculated by the method stipulated in the provisions of this case should be revoked.

(b) Related statutes;

The entry in the attached Form is as specified in the relevant statutes.

C. Determination

(1) The market price under Article 52 (2) of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005) which was in force at the time of the transaction of the stock in this case refers to an objective exchange value formed through a general and normal transaction, and this includes an appraised value in an objective and reasonable manner. While adopting the market price principle, the concept of the market price alone does not clarify the scope of the market price, it delegates matters necessary for the market price calculation, etc. under the Enforcement Decree. Accordingly, Article 89 (2) 2 of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 1925 of Dec. 31, 2005) provides for the provision of Article 63 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8139 of Dec. 30, 2006; hereinafter referred to as the "former Enforcement Decree") that is evaluated by the application of Article 63 of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 360136 of the same Act).

(2) According to the supplementary evaluation method of unlisted stocks under the former Enforcement Decree of the Act, the market value of unlisted stocks shall, in principle, be weighted average of net profit and loss per share for the preceding three years and net asset value per share for the preceding three years (Article 54(1) of the former Enforcement Decree of the Act). Here, the weighted average of net profit and loss per share for the preceding three years as of the time of evaluation shall be the weighted average of net profit and loss per share for the preceding three years, but the net profit and loss per recent three years shall be calculated by adding the amount under Article 56(3)1 of the former Enforcement Decree of the Corporate Tax Act to the amount calculated by subtracting the amount under Article 56(3)2 of the former Enforcement Decree of the Corporate Tax Act from the amount calculated by deducting the amount under Article 56(3)2 of the former Enforcement Decree of the Corporate Tax Act from the amount calculated by adding the amount under Article 56(3) of the former Enforcement Decree of the same Act to the gross income for the pertinent business year (Article 56(1) and (3) of the former Enforcement Decree of the Corporate Tax Act).

The purport of the provision of this case is to further specify and rationalize the provision to be returned in proportion to the originally returned year, even in cases where the reserve funds are temporarily returned for the reason of suspension of use, etc. and are temporarily returned to prevent distortion of the value of stocks that may arise in the event of lump-sum inclusion in the amount of gross income, and it cannot be deemed that the reserve funds under the Restriction of Special Taxation Act, which were not added to or added to business income in calculating the market value of unlisted stocks, began to be added only to the new provision

(3) Nevertheless, the Plaintiff’s assertion that the increase or decrease of reserve funds for each business year exceeds the delegation scope of the parent law is still meaningful because it distort the assessment of the net profit and loss of the stocks (the subject of the discussion is only the provision of this case that sets the net profit and loss amount to be transferred to each business year’s income under Article 14 of the former Enforcement Decree of the Corporate Tax Act). The issue is whether the transaction took place in separate motive, such as the transfer of the company’s control or division between the internal investors, and whether the transaction is freely formed through competition in the open market, and the determination of the market price is very difficult because it has the characteristics of changing the value from time to time. Thus, it is difficult to determine the value of the non-listed stocks by an objective and reasonable method if there is no objective exchange value of the non-listed stocks, and the value of the non-listed stocks should be calculated by adding the value of the assets, profit and loss value, the method of calculating the profit and loss amount to be derived from an objective and rational method of calculating the market price.

3. Conclusion

Therefore, the plaintiff's claim is decided as per the Disposition because of the lack of reason.

[Attachment-Related Acts and subordinate statutes omitted]

Judges Kim Hong-do (Presiding Judge)