The criteria for determining “specially related persons” under Article 52(1) of the former Corporate Tax Act and Article 87(1) of the Enforcement Decree of the former Corporate Tax Act, and where a corporation liable for tax payment constitutes a shareholder of another corporation that is a counterparty, whether another corporation constitutes “specially related persons” under Article 87(1)2 of the former Enforcement Decree of the Corporate Tax Act (negative)

Article 52(1) of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005); Article 87(1)2 of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 17457 of Dec. 31, 2001)

Supreme Court en banc Decision 2008Du150 Decided July 21, 201 (Gong2011Ha, 1813)

Han Cement Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for the plaintiff-appellant)

Head of the District Tax Office

Seoul High Court Decision 2009Nu30471 decided December 16, 2010

The judgment below is reversed and the case is remanded to Seoul High Court.

Judgment ex officio is made.

1. Article 52(1) of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter “the Act”) provides, “Where it is deemed that the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office has unjustly reduced the tax burden on the corporation’s income due to the act of a domestic corporation or transactions with a person with a special relationship as prescribed by the Presidential Decree (hereinafter “specially related person”), he may calculate the corporation’s income for each business year regardless of the act or calculation of the corporation’s income (hereinafter “Calculation”)”. Article 87(1) of the former Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 17457, Dec. 31, 2001; hereinafter “Enforcement Decree”) provides, “a person with a special relationship as prescribed by the Presidential Decree” in Article 52(1) of the Act refers to a person with a relationship under one of the following subparagraphs with a corporation and a minor shareholder (excluding the shareholder):

As above, Article 52(1) of the Act provides for the calculation of a transaction with a person liable for tax payment or income amount arising therefrom as the object of the wrongful calculation avoidance, and delegates the scope of a person with a special relationship to the Presidential Decree. As such, Article 87(1) of the Enforcement Decree provides that a person with a special relationship falling under any of the subparagraphs of the same paragraph with a person liable for tax payment is a person with a special relationship. Thus, the person with a relationship falling under any of the above subparagraphs should be deemed as a person with a special relationship based on the person liable for tax payment. On the contrary, deeming that a person liable for tax payment falls under a person with a special relationship falling under any of the above subparagraphs, in cases where a person liable for tax payment based on the other party who made a transaction with a person liable for tax payment, is not permissible against the language and text of the above Article (see Supreme Court en banc Decision 2008Du150, Jul. 21, 201). Therefore, it cannot be deemed that a corporation falls under a “specially related person” under Article 87(1).

2. According to the reasoning of the judgment below and the evidence duly admitted by the court below, the plaintiff acquired 28 billion won of new shares (5,000 won per share) by independently participating in the Korea-Japan Information and Communications Co., Ltd. (hereinafter “Korea-Japan Information and Communications”), a subsidiary holding 100% of the total outstanding shares on June 21, 2001, and acquiring 9.5 billion won of new shares (5,000 won per share) by 9.5 billion won per share (hereinafter “Korea-Japan Information and Communications”), and by taking over the difference between the acquisition price and the acquisition price of new shares (5,000 won per share) in deductible expenses by taking account of the difference between the acquisition price of new shares and the Plaintiff’s acquisition price of 1.9 billion won per share as of October 8, 2001, the amount equivalent to the difference between the acquisition price of new shares and the acquisition price of 200 billion won per share (hereinafter “this case’s new shares”) under the premise that the plaintiff’s acquisition price of the above 1.

Examining these facts in light of the legal principles and provisions as seen earlier, insofar as there is no proof as to the fact that Han-il Information and Communications and KTTex constitutes the Plaintiff’s shareholder or constitutes another specially related person, the mere fact that the Plaintiff was the Plaintiff’s shareholder does not constitute “specially related person” under Article 87(1)2 of the Enforcement Decree, and thus, the Defendant’s imposition of corporate tax on a different premise is entirely unlawful.

3. Nevertheless, the lower court determined otherwise, on the premise that the Defendant’s act constitutes the Plaintiff’s specially related person under Article 87(1)2 of the Enforcement Decree of the Korea-Japan Information and Communications Technology Act, based on the premise that the Defendant’s act was lawful, that only the portion exceeding the reasonable tax amount out of the disposition imposing corporate tax was unlawful on the ground that the Defendant erroneously assessed the market price of the new shares issued by KNT in calculating the difference between the market price and the value of the new shares. In so doing, the lower court erred by misapprehending the legal doctrine on the scope of specially related persons under Article 52(1) of the Act and Article 87(1)2 of the Enforcement Decree

4. Therefore, without further proceeding to decide on the grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.

Justices Kim Shin (Presiding Justice)