Seoul High Court-2016-Nu-76154 (Law No. 12, 2017)

Since it can be deemed that there was a business purpose for the issuance of bonds with warrants or the purchase of bonds with warrants, the disposition that deemed the exercise interest as gift is illegal.

It is difficult to conclude that a savings bank acquired bonds with warrants as an investor, and that a series of acts was used as a means to plan the stock price increase from the beginning and to distribute the plaintiff's excessive profits. Thus, the savings bank's disposition that deemed the exercise interest of preemptive rights as a donation is unlawful.

Article 40(1) of the Inheritance Tax and Gift Tax Act

Article 2(3) of the Inheritance Tax and Gift Tax Act

Supreme Court Decision 2017Du55268 Decided revocation of gift tax rectification

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○ Head of tax office

Seoul High Court Decision 2016Nu76154 Decided July 12, 2017

April 11, 2019

The appeal is dismissed.

The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2

A. Article 40(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11609, Jan. 1, 2013; hereinafter referred to as the "former Inheritance Tax and Gift Tax Act") provides that "in cases where any of the following profits is acquired by converting into or exchanging stocks with convertible bonds, bonds with warrant (referring to warrant certificates if they are separated) or other stocks, or by acquiring bonds entitled to take over stocks (hereinafter referred to as "convertible bonds, etc.") with the bonds entitled to take over the stocks, the amount equivalent to such profits shall be deemed the value of the property donated to the person who has acquired such profits." In subparagraph 2(b) of the same Article, "in cases where the largest shareholder of the corporation that issued convertible bonds, etc. or his/her specially related person, who is a shareholder, has acquired or acquired (including cases where he/she has acquired or acquired them from an underwriter under Article 9(12) of the Financial Investment Services and Capital Markets Act in proportion to the number of stocks owned by the corporation, the profits acquired by conversion amount exceeding the amount granted by the convertible bonds, etc."

B. Based on the adopted evidence, the lower court determined that, on July 14, 2010, the instant company issued bonds with warrants in the form of private placement, and that on the same day,CC Mutual Savings Bank (hereinafter “CC Mutual Savings Bank”) acquired bonds with warrants from the instant company and immediately sold the instant preemptive right separated from the said bonds to the Plaintiff, on the same day, and on the grounds that the Plaintiff cannot be deemed as the underwriter under Article 9(12) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”). Thus, the lower court determined that Article 40(1)2(b) of the former Inheritance Tax and Capital Markets Act cannot be deemed as the basis for imposing gift tax.

(1) There is no content thatCC mutual savings bank bears risks arising from the issuance of bonds with warrants, etc. in the instant contract to underwrite the instant bonds with warrants, andCC mutual savings bank has not received fees in return for the risk bearing.

(2) Since the instant company was faced with liquidity crisis at the time of issuance of the instant bonds with warrants, it seems thatCC Mutual Savings Bank was trying to secure profits through early sale rather than taking the risk of stock price decline by holding the instant preemptive right as it is.

(3) As such, in order to minimize the risks associated with the investment in the instant bonds with respect to the bonds with warrants,CC Mutual Savings Bank was immediately subject to investment in selling preemptive rights to the largest shareholder (e.g., the Plaintiff’s spouse) and two shareholders (the Plaintiff) on the date of the issuance of the said bonds, and the Plaintiff appears to have acquired the instant preemptive rights by accepting it.

(4) Ultimately,CC Mutual Savings Bank acquired the instant bonds with warrants as an investor who intends to obtain interest income and sales profit, and it is difficult to readily conclude that the Plaintiff had interest on the purpose of acquiring the instant preemptive right.

C. Examining the reasoning of the judgment below in light of the relevant legal principles and records, although some of the reasoning of the judgment below is not appropriate, the conclusion of the court below that the Plaintiff cannot be taxed on the ground of Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act is just and there is no error of law by misapprehending the legal principles as to Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act and Article 9(1

2. As to grounds of appeal Nos. 3 and 4

A. Article 2(1) of the former Inheritance Tax and Gift Tax Act provides that the gift tax shall be subject to the gift tax on another person’s gift. Article 2(3) of the former Inheritance Tax and Gift Tax Act provides that “Where it is deemed that the gift tax or gift tax has been unjustly reduced by means of an indirect method through a third party, or through two or more acts or transactions, it shall be deemed that the relevant party has directly traded, or by deeming that the relevant transaction is a single act or transaction in succession, regardless of the name, form, purpose, etc. of the relevant act or transaction, and that “Article 2(3) shall apply” as stated in paragraph (4) of the same Act.

Article 2(4) of the former Inheritance Tax and Gift Tax Act provides that gift tax shall be imposed by deeming it as a continuous act or transaction according to the economic substance in cases where it is deemed that an act or transaction subject to gift tax has been reduced unfairly through two or more acts or transactions. In order to achieve the effect of gift through a variety of stages of transactions bypassing or changing the transaction, and to cope with the act of tax evasion, it is possible to deny such various stages of transactions and impose tax on the substance by deeming it as a single act or transaction that is subject to gift tax. Thus, one of the forms of application of the substance over form principle is intended to promote fair taxation by prescribing one of the gift tax in terms of the form of application of the substance over form. Meanwhile, a taxpayer may choose one of the various legal relations in order to achieve the same economic purpose, and the tax authority shall respect the legal relationship chosen by the parties, barring any special circumstance, as well as may intervene in the outcome of various stages of transactions, and thus, it shall not be readily concluded that the gift tax is subject to gift tax (see, e.g., Supreme Court Decision 2015).

B. Article 42(1) of the former Inheritance Tax and Gift Tax Act provides that "if profits falling under any of the following subparagraphs, other than donations under Article 40, are profits above the standard prescribed by Presidential Decree, such profits shall be deemed the value of property donated to the person who has acquired such profits, and subparagraph 3 of Article 40 provides that "the profits acquired by a transaction which increases or decreases the capital of the corporation, such as the conversion, acquisition, exchange, etc. of stocks by convertible bonds, etc. under Article 40(1)" while Paragraph 3 of Article 42 provides that "no such profits shall apply to transactions between persons who are not related parties

The legislative purport of Article 42(1) of the former Inheritance Tax and Gift Tax Act, which requires a transaction partner to levy gift tax on the profits earned by the transaction partner when the transaction partner actually transfers profits from the acquisition and exercise of preemptive rights to the transaction partner free of charge through abnormal means, is to cope with and promote fair taxation. However, in the case of transactions between unrelated parties, it is a common and easy way to allow the transaction partner to gain gift by giving up opportunities for mutual benefits by which the interests conflict with each other. Thus, Article 42(3) of the former Inheritance Tax and Gift Tax Act provides that Article 42(1) of the former Inheritance Tax and Gift Tax Act does not apply in a case where the “justifiable cause exists in light of the transaction practice.” Therefore, even if the transaction partner gains profits from the acquisition and exercise of preemptive rights through transactions between unrelated parties, it is reasonable to deem that there are reasonable grounds to believe that the transaction partner has made a transaction by reflecting an objective exchange value appropriately, or that such transaction under such conditions was made from a reasonable economic point of view (see, e.g., Supreme Court Decision 2014(2).

C. Based on the following circumstances, the lower court determined that the series of acts from the issuance of the instant bonds with warrants to the exercise of the instant warrant certificates and the acquisition of new stocks were conducted in an abnormal manner to unjustly avoid or reduce the gift tax without any particular business purpose. Therefore, gift tax cannot be imposed by applying Article 2(4) of the former Inheritance Tax and Gift Tax Act, and furthermore, it cannot be deemed that there is no justifiable reason in light of trade practice from a reasonable economic person’s perspective, and thus, it cannot be deemed that there is no justifiable reason in light of trade practice. Therefore, the lower court

(1) The instant company borrowed the instant bonds with warrants on a large scale from multiple financial institutions prior to the issuance of the instant bonds with warrants, and on June 2010, the current debt was faced with liquidity crisis exceeding the current assets. The instant company issued the instant bonds with warrants in order to convert the short-term loans into long-term loans as part of the efforts to avoid such crisis situation, and issued the instant bonds with warrants with a view to converting the short-term loans into long-term loans. The interest rate on the said bonds was 4% per annum, and 6.5% per annum on maturity guarantee return, which is more favorable than the interest on the loans received by the instant company from other financial institutions. Accordingly, the issuance of the instant bonds with warrants by the instant

(2) The Plaintiff purchased the instant preemptive right immediately after the issuance of the instant bonds with warrants is expected to be difficult to sell the instant preemptive right separated from the financial situation of the company at the time of the purchase of the instant bonds with warrants to a third party.CC Mutual Savings Bank was able to recover early profits by causing the Plaintiff, a major shareholder of the instant company, to purchase the instant bonds with warrants, and the Plaintiff also could minimize business restrictions associated with the issuance of the instant bonds with warrant while raising operating funds for the instant company through such a method. In light of the foregoing, it cannot be deemed that there was no business purpose other than the tax avoidance purpose for the issuance of the instant bonds with warrants or the purchase of the instant preemptive rights with warrants.

(3) The exercising price of the instant preemptive right was objectively determined with the non-relatedCC Mutual Savings Bank in order to be calculated based on the weighted average share price for a certain period of time, including one month or one week. In addition, on the ground that the purchase price of the instant preemptive right was lower than the theoretical price publicly notified at the time of issuance, it is difficult to deem that the Plaintiff either issued the instant bonds with warrants or purchased the instant preemptive right for the purpose of evading gift tax without business purposes

(4) The Plaintiff gained profits from the acquisition and exercise of the instant preemptive right is a result of the Plaintiff’s heavy potential for stock price decline due to credit risk, etc. caused by the failure to perform the instant company’s business activities. The Plaintiff acquired the preemptive right to exercise at least one year after the date of its issuance, and there is insufficient ground to readily conclude that at the time of its exercise, the stock price increase of the instant company was sufficiently anticipated.

(5) Ultimately, it is difficult to view that the Plaintiff intended to obtain profits from the series of acts, such as the issuance of the instant bonds with warrants and the acquisition and exercise of the instant warrant rights, from the beginning. It is difficult to readily conclude that such a series of acts were used from the beginning as a means to plan the stock price increase of the instant company and to distribute the Plaintiff an excessive profit arising from the stock price increase.

D. Examining the reasoning of the judgment below in light of the aforementioned legal principles and records, such determination by the court below is justifiable. Contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on Articles 2(4), 40(1)2(b), and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act.

3. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.