[1] Concept of depository receipts and differences in stock certificates

[2] Whether the “stock certificates” under Article 2(1)1 of the Securities Transaction Tax Act includes “stock certificates” (negative)

[3] Whether securities transaction tax may be imposed on depository receipts whose purpose of issuance and holding of stock certificates is similar to those of stock certificates, unlike common depository receipts (negative)

[1] When a company intends to issue stocks and raise funds abroad, the company’s issuance of stock certificates, like in Korea, shall be subject to inconvenience due to transaction customs between countries, legal system, and language differences. Thus, a separate certificate of depository receipts issued as a substitute for stock certificates for the purpose of removing them and enhancing circulation. The depository receipts are distinguishable from stock certificates, which are securities representing “stock”, which are directly rights under the Commercial Act, in that they are securities representing “original claim.”

[2] Article 2(1) of the Securities Transaction Tax Act provides for the definition of “share certificates,” which are subject to taxation under the Securities Transaction Tax Act. First, Article 2(1)2 provides that “share certificates, or depository receipts, issued by a foreign corporation,” and subparagraph 1 provides that “share certificates, established by the Commercial Act or any other Act,” so it is apparent that the “share certificates,” under subparagraph 1 does not include depository receipts, and second, if depository receipts are included in the “share certificates,” under subparagraph 2, it is not necessary to provide “share certificates,” and third, Article 2(4) of the same Act provides that “share certificates,” which are not subject to taxation, shall not be included in the “share certificates,” but shall not be included in the “share certificates,” which are not subject to taxation, in light of the legislative interpretation of the Commercial Act or the legislative interpretation of the Securities Transaction Tax Act, and shall not be included in the “share certificates,” which are not subject to the said provision.

[3] In the distribution tax such as securities transaction tax, it shall be strictly interpreted, and it shall not be determined whether to impose securities transaction tax by taking into account the economic result of the transaction, and it shall be formally identical to the transaction of securities depository receipts in accordance with the requirement for imposing securities transaction tax under Article 2 (1) 1 of the Securities Transaction Tax Act, even if the purpose of issuing and holding depository receipts is similar to the securities transaction tax in substance, in light of the fact that the possibility or legal stability of taxpayers would be harmed if the transaction of securities depository receipts is determined based on the internal intent or economic motive or purpose of the transaction parties, and that if the taxation is determined accordingly, the tax authority would allow the arbitrary exercise of taxation by the taxpayer. Furthermore, in the transaction of securities depository receipts as well as securities depository receipts, there is an unreasonable result in the determination of whether to impose securities transaction tax according to the internal intent or economic motive or purpose of the transaction parties.

[1] Article 2 (1) of the Securities Transaction Tax Act / [2] Article 2 (1) of the Securities Transaction Tax Act / [3] Article 2 (1) of the Securities Transaction Tax Act

Ct Bank Holdings Ltd. (Law Firm Rate, Attorneys So-young et al., Counsel for the plaintiff-appellant)

The director of the Nam-gu Tax Office (Law Firm Dongin, Attorneys Kim Jae-sik et al., Counsel for the plaintiff-appellant

April 26, 2007

1. The Defendant’s disposition imposing securities transaction tax of KRW 6,327,839,550 against the Plaintiff on November 8, 2005 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of disposition;

A. A. Around May 2004, the Plaintiff, a company established under the laws of the states of the United States of the Republic of Korea, purchased a depository receipts in the Korea-U.S. Bank (hereinafter “instant depository receipts”) from the JPF Doz., a company established under the Malaysian Republic of Korea (hereinafter “the instant depository receipts”) and paid the full purchase price.

B. On November 8, 2005, the Defendant: (a) considered that a depository receipts in the instant case fall under the share certificates that are subject to securities transaction tax under Article 2(1)1 of the Securities Transaction Tax Act; and (b) issued a disposition imposing securities transaction tax of KRW 5,752,58,410 and penalty tax of KRW 575,258,140 on the Plaintiff (hereinafter “instant disposition”).

[Ground for recognition] Unsatisfy

2. Whether the instant disposition is lawful

A. The parties' assertion

The Plaintiff asserted that the “stock depository receipts” under Article 2(1)1 of the Securities Transaction Tax Act are not included in the “stock certificates,” and that the instant depository receipts are not subject to the securities transaction tax. As such, the Defendant asserted that the instant depository receipts are not subject to the securities transaction tax, (1) 2 of Article 2 of the Securities Transaction Tax Act may be listed on the Korea Stock Exchange on May 1995; (2) as the securities depository receipts issued by a foreign corporation were newly established under the amended Act (Act No. 5156, Aug. 14, 1996) in order to ensure the tax equity between the stock certificates issued by a domestic corporation and the stocks issued by a foreign corporation, the Plaintiff asserts that the instant depository receipts were not subject to the “stock certificates” under Article 2(1)1 of the Securities Transaction Tax Act, and that the instant depository receipts were not subject to the “stock certificates” for the purpose of raising funds in a foreign securities market; and (3) the holders of the instant depository receipts were not subject to the allocation of new stock depository receipts and other than the instant depository receipts.

B. Relevant statutes

Securities Transaction Tax Act

Article 1 (Taxable Objects) Securities transaction tax shall be imposed on a transfer of stock certificates or equities (hereinafter referred to as "stock certificates, etc.") under this Act: Provided, That where the transfer of stock certificates, etc. falls under any of the following subparagraphs, securities transaction tax shall not be imposed:

1. Where share certificates, etc. listed on a foreign market (limited to such a market as determined by the Presidential Decree; hereafter referred to as “foreign securities market” in this Article) similar to the securities market and Association brokerage market under the Securities and Exchange Act are transferred;

Article 2 (Definitions)

(1) The term "share certificates" in this Act means any of the following certificates:

1. Stock certificates of a corporation established under the Commercial Act or special Acts;

2. Stock certificates or depository receipts listed or registered in the securities market, etc. issued by a foreign corporation.

(4) Stocks before the issuance of stock certificates, rights arising from underwriting of stocks, preemptive rights and investment certificates issued by a corporation established by special Acts shall be deemed stock certificates in the application of this Act.

Article 3 (Persons Liable for Tax Payment) Any person liable to pay securities transaction tax shall be as follows:

3. Where the share certificates, etc. are transferred except as provided in subparagraphs 1 and 2, the transferor: Provided, That where a nonresident or a foreign corporation not having a domestic business place in Korea transfers the share certificates, etc. not through a securities company, it shall be a transferee of the relevant share certificates, etc.

C. Facts of recognition

(1) The Korea-U.S. Bank is a corporation established on September 19, 1981 for the purpose of financial business.

(2) Article 9(1) of the Articles of the Korea-U.S. Bank’s articles of incorporation provides that “a shareholder of the Korea-U.S. Bank shall have the right to be allocated new shares in proportion to the number of shares he/she owns in issuing new shares.” Paragraph (2) of the same Article provides that a resolution of the board of directors may allocate new shares to a person other than a shareholder, notwithstanding the main sentence of Paragraph (1), where new shares are issued according to the overseas securities issuance regulations

(3) On November 15, 200, the Bank issued depository receipts of 65,400,000 lanes and depository receipts of 20,000 lanes on February 23, 2002. Of them, 74,226,857 U.S. depository receipts of this case were acquired and owned by JPFFF - the SPFF - the Plaintiff on May 2004.

(4) The depository receipts of this case indicate that “The certificate of the right to receive shares of Korea-U.S. Bank or the certificate of the right to receive shares of Korea-U.S. Bank shall be the GDR representing common shares with a face value of 5,000 won per share.”

(5) On September 9, 200, the FSC’s letter of approval for the acquisition of shares of the JPMo case-khovakikikisc in the name of the FSC stated that J.P.M.M. & Co., Ltd. shall hold 17.9% of the total number of outstanding voting shares of the KPMM&C in the contents of the application. The JPM-khovakisc shall exercise voting rights at the general meeting of the Korea-U.S. bank after the acquisition of the depository receipts of the Korea-U.S. bank, and exercise management rights by having Kim Byung-ju, Peterre, Thymthy Ryan outside directors of the Korea-U.S. bank.

(6) On the list of shareholders of the Korea-U.S. Bank, JPMo-C. (1) was registered as shareholders from the date on which the JPF-C. (2) acquired the instant depository receipts to the Plaintiff, to the date on which the JPF-C. (3) was transferred to the Plaintiff. After the Plaintiff acquired the instant depository receipts, the Plaintiff was registered as shareholders in the state on which the depository receipts were not converted to the original state, and the Plaintiff exercised management rights as the largest shareholder of the Korea-U.S.

(7) A domestic corporation’s issuance of stock depository receipts abroad was 33 domestic corporations including Samsung C&T Co., Ltd. on or around December 1990, but there was no case where Korea’s securities transaction tax was imposed on the transaction of stock depository receipts.

[Based on Recognition] In the absence of a dispute, Gap evidence 1, 7, 8-1, 2, Eul evidence 1, 2, 3, 5, 6, 7-1-4, 8, 9, 10-1, 2, 11, and 16, and the purport of the whole pleadings

(d) Markets:

(1) Legal relations of depository receipts

When a company intends to issue stocks and raise funds in a foreign country, it is subject to inconvenience due to trade customs between countries, legal system, and language differences, so that stock certificates are issued in lieu of stock certificates for the purpose of eliminating such inconvenience and enhancing distributionability. The stock certificates are distinguishable in that they are securities representing the “original claim” right, while stock certificates are securities representing the “stocks”, which are rights under the Commercial Act.

When a domestic corporation issues depository receipts abroad, the actual stock certificates shall be deposited in the Korea Securities Depository, and the depository receipts shall be issued through the foreign depository institution, and the forms of certificates, names and contents of the original stock certificates, the method of exercising shareholders' rights, the method of depositing certificates, the transfer, sale and settlement of certificates, the procedure of transferring, selling and removing certificates, the remittance of dividends, the capital increase procedure shall be determined in detail by concluding a deposit contract

(2) Determination as to whether the “stock certificates” under Article 2(1)1 of the Securities Transaction Tax Act includes “stock certificates”

① Article 2(1) of the Securities Transaction Tax Act provides that “share certificates or depository receipts” under the Securities Transaction Tax Act shall be deemed as “share certificates or depository receipts,” and subparagraph 1 provides that “share certificates shall not be included in the share certificates under subparagraph 1; ② If depository receipts are included in the share certificates as a matter of course because they are the same as the share certificates in substance, it is not necessary to provide “share certificates” under subparagraph 2 concurrently; ③ if shares are issued prior to the issuance of share certificates under Article 2(4) of the Securities Transaction Tax Act, rights due to the receipt of shares, preemptive rights, and subscription certificates issued by a corporation established under special Acts shall be deemed as share certificates in the application of this Act, and thus, the Defendant’s provision that “securities transaction tax shall not be included in the securities transaction tax,” and that such provision shall not be construed as a “share certificates or securities transaction tax” under Article 2(1)1 of the Securities Transaction Tax Act, and thus, shall not be construed as a “share certificates or securities transaction tax” under Article 2(2)1) of the same Act.

(3) Whether the substance of the depository receipts can be treated equally as stock certificates

The defendant asserts that the purpose of issuing and holding depository receipts of this case is different from normal depository receipts and similar to the stock certificates, and thus, it should be taxed as stock certificates. However, in the distribution tax such as securities transaction tax, it should be strictly interpreted, and it should not be determined as to whether to impose securities transaction tax (in the case of transfer of shares of a company which owns only real estate, the real estate is not subject to securities transaction tax because the transfer of such shares takes place). ② Determination of similarity of shares based on the intention or economic motive or purpose of the parties to the transaction as to the transaction of the same depository receipts is likely to undermine the expectation or legal stability of the taxpayer, ③ Determination of whether to impose securities transaction tax is similar to those of the parties to the transaction, ③ Determination of whether to issue new depository receipts of this case by the defendant's arbitrary exercise of the tax authority's right to impose tax on the new depository receipts of this case. ④ Determination of whether to impose securities transaction tax on the new depository receipts of this case can only be made out of the shareholders other than the new depository receipts of this case.

3. Conclusion

Therefore, the instant depository receipts are not included in the “share certificates” under Article 2(1)1 of the Securities Transaction Tax Act, and the imposition of securities transaction tax is not allowed on the ground that the instant depository receipts are similar to the share certificates. The instant depository receipts cannot be viewed differently solely on the fact that the Plaintiff, the holder of the instant depository receipts, is listed as shareholders in the shareholder registry of the Korea-U.S. Bank, or exercises management rights over the Korea-U.S. Bank. Therefore, the instant disposition is unlawful, and the Plaintiff’s claim seeking the revocation of the instant disposition is reasonable, and thus, it is so decided as per Disposition.

Judges Shin Dong-dong (Presiding Judge) Kim-ho