Rararara Asian International 1 Lex et al. (Law Firm Sejong, Attorneys Yellow-man et al., Counsel for the plaintiff-appellant)

Sejong Tax Office (Law Firm Squa, Attorneys Kim Tae-tae et al., Counsel for the plaintiff-appellant)

April 15, 2010

Seoul Administrative Court Decision 2008Guhap16889 Decided June 26, 2009

1. All appeals filed by the plaintiffs are dismissed.

2. The costs of appeal are assessed against the Plaintiffs.

The first instance judgment is revoked. The Defendant’s imposition of KRW 7,638,984,440 of the corporate tax against Plaintiff Liberal International IEL (hereinafter “Plaintiff 1”) on December 18, 2006 and the imposition of KRW 2,672,391,460 of the corporate tax against Plaintiff Liberal International II ELE (hereinafter “Plaintiff 2”) shall be revoked, respectively.

1. Quotation of judgment of the first instance;

The reasoning of the judgment of the court is as follows, except for the addition of the following judgments with respect to the matters alleged in the court of first instance, and the plaintiffs' arguments in the court of first instance, and therefore, they are cited in accordance with Article 8 (2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act.

[Completioned Parts]

Part 23 of the judgment of the first instance court "(excluding income under the provisions of Article 94 of the Income Tax Act (excluding income under the provisions of paragraph (1) 3 of the same Article)" shall be changed to "7. Income under the provisions of Article 94 of the Income Tax Act (excluding income under the provisions of paragraph (1) 3 of the same Article) which is prescribed by the Presidential Decree".

[Supplementary Parts]

A. The plaintiffs' assertion

According to the substance over form principle, even if the subject of the instant transfer income is deemed the Plaintiffs, the imposition of corporate tax of Plaintiff 2,672,391,460 on the following grounds is unlawful.

(1) Article 93 subparag. 7 of the former Corporate Tax Act, which the Defendant uses as a taxation requirement, provides that the income prescribed by the Presidential Decree, which is capital gains provided for in Article 94 of the former Income Tax Act (amended by Act No. 7120 of Jan. 29, 2004 and enforced January 30, 2005), shall be the domestic source income of a foreign corporation. In this case, the capital gains that can be determined by the Presidential Decree, within the scope of the “capital gains under Article 94 of the former Income Tax Act” in accordance with the language and text of the said Article, should be determined.

(2) Accordingly, domestic source income of a foreign corporation shall be limited to cases where the requirements for asset ratio under Article 94 (1) 4 (c) of the former Income Tax Act and Article 158 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005), ① The ratio of total assets value of the corporation under Article 94 (1) 1 and 2 of the former Income Tax Act (the ratio of total assets value of the corporation in question to total assets of the corporation is 50/100 or more), ② The ratio of stockholding ratio (the ratio of one shareholder and other shareholders to total stocks of the corporation in question is 50/100 or more), ③ the requirements for stock transfer ratio (the above ratio of total stocks of the corporation in question is ① the case where one shareholder and other shareholders of the corporation in question must transfer 50/100 or more of total stocks of the corporation to persons other than the shareholder and other shareholders) are all met.

(3) However, unlike the scope of foreign corporation’s domestic source income under Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act, unlike the scope of foreign corporation’s domestic source income under Article 94(1)4(c) of the former Income Tax Act and Article 158(1) of the former Enforcement Decree of the Income Tax Act, Article 132(10)2 of the former Enforcement Decree of the Income Tax Act provides that only the asset ratio requirement is satisfied, and the said requirement constitutes foreign corporation’s domestic source income without satisfying the requirements for shareholding ratio and share transfer ratio. The above provision should be interpreted not to stipulate exceptions under Article 158(1) of the former Enforcement Decree of the Income Tax Act, but to determine the asset ratio requirement on the basis of the starting date of the business year to which the transfer date belongs. If it is interpreted that Article 132(10)2 of the former Enforcement Decree of the Income Tax Act provides for the requirements for foreign corporation’s domestic source income in accordance with Article 1

(4) As such, Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act is null and void. As such, a foreign corporation’s domestic source income can be deemed to be a foreign corporation’s domestic source income only when meeting all of the asset ratio requirements, shareholding ratio requirements, and share transfer ratio requirements. However, the shares of Nohypt, which were acquired and transferred after the acquisition by Belgium II, are merely 26% of the total shares of Nohypt.

(5) Therefore, the Defendant’s imposition of corporate tax of KRW 2,672,391,460 against Plaintiff 2 as to the transfer of shares in Belgium Corporation II is unlawful.

B. Determination

(1) Details of the statutory provisions

(A) Under Article 93 subparagraph 7 of the former Corporate Tax Act, a foreign corporation’s domestic source income is determined as transfer income under Article 94 of the former Income Tax Act (excluding income under paragraph (1) 3 of the same Article), which is determined by the Presidential Decree. Article 132 (10) 2 of the former Enforcement Decree of the Corporate Tax Act provides that “The income prescribed by the Presidential Decree” under Article 93 subparagraph 7 of the former Corporate Tax Act means the income under Article 94 (1) 4 of the former Corporate Tax Act as of the first day of the business year to which the date of transfer belongs, notwithstanding Article 158 (1) of the Enforcement Decree of the Income Tax Act, “stocks, etc.” in the same subparagraph shall be deemed as the stocks or equity shares (excluding the stocks or equity shares listed or registered on the securities market) of the corporation whose total assets value under Article 94 (1) 1 and 2 of the Income Tax Act as of the first day of the

(B) Article 94(1) of the former Income Tax Act provides for the transfer of assets or rights, such as land subject to capital gains. Article 94(4)4(c) of the same Act provides that income accrued from the transfer of assets as prescribed by the Presidential Decree, considering the composition of shareholders of a corporation that issued stocks or investment certificates, etc., status of real estate holding, or type of business, etc. shall be capital gains. Article 158(1)1 of the former Enforcement Decree of the Income Tax Act provides that the ratio of the total amount of assets of the corporation concerned to the total amount of assets under Article 94(1)1 and 2 of the former Enforcement Decree of the Income Tax Act is 50/100 or more (requirements for asset ratio) of the corporation's total amount of stocks, etc. owned by one shareholder and other shareholders of the corporation concerned shall be 50/100 or more of the total amount of stocks, etc. owned by the corporation (requirements for stock ownership ratio) and the transfer of 50/100 or more of the total amount of stocks, etc.

(2) The history of amendment of the statute

(A) Since December 22, 1974, Article 93 subparag. 7 of the Corporate Tax Act continued without any particular change, "transfer income prescribed in the Income Tax Act" was amended by Act No. 6852 on Dec. 30, 2003 as "transfer income under Article 94 of the Income Tax Act (excluding income under Article 94(1)3 of the Income Tax Act)".

(B) In applying Article 55(1)7 of the Corporate Tax Act to the above provision as of December 31, 1997, where the Presidential Decree provides that "where the country in which the real estate is located can levy taxes on the transfer income of the corporation whose assets are mainly real estate in the tax treaty, the other assets under Article 94 subparagraph 5 of the Income Tax Act shall be the other assets under Article 94 subparagraph 1 and 2 of the Enforcement Decree of the Income Tax Act and Article 124-3(9) of the Enforcement Decree of the same Decree from among the total assets of the corporation as of the starting date of the business year to which the transfer date belongs, notwithstanding the provisions of Article 158 (1) of the same Act and Article 157 (5) 4 of the Enforcement Decree of the Income Tax Act, the total assets value of the corporation under Article 94 subparagraph 1 and 2 of the same Decree are 50/100 or more of the total assets value of the corporation (excluding those listed at the Korea Stock Exchange) or investment shares under Article 150 subparagraph 4 of the same Article 9 of the same Act.

(C) According to the statement in Eul evidence No. 27, the revised tax law materials published by the Ministry of Finance and Economy in 1998 provided that, even if an asset is mainly composed of real estate, at least 50% of the stocks shall be transferred to the oligopolistic shareholder in the Republic of Korea. However, in light of the fact that the tax treaty concluded with the United Kingdom, France, China, Canada, etc. provides that the transfer income of a corporation whose stocks are mainly composed of real estate shall be taxed in the country where the real estate is located, the scope of the taxation right granted by the tax treaty is reduced. Thus, the scope of the taxation right granted by the tax treaty is reduced in terms of the reduction of the domestic tax law, so it can be acknowledged that the non-resident is consistent with the taxation standards under the tax treaty by excluding the requirements for oligopolistic shareholder and transfer requirements for

(D) Comprehensively taking account of the overall purport of the argument in the amendment history of the above statutes, the above provisions were newly established in order to enable a foreign corporation to impose corporate tax if the capital gains of the foreign corporation subject to the application of the tax treaty satisfies the asset ratio requirement under the income tax law, the stock ratio requirement, and the stock transfer ratio requirement under the previous provisions alone, and the scope of the right to taxation granted by the tax treaty was reduced due to the lack of corporate tax. Accordingly, the above provisions were amended in order to enable a foreign corporation to impose corporate tax if the capital gains of the foreign corporation subject to the tax treaty meet the asset ratio requirement among the three requirements. The above three requirements were also amended in order to enable the foreign corporation to impose corporate tax if the capital gains of the foreign corporation subject to the tax treaty meet the asset ratio requirement under the tax treaty, as well as the capital gains of the foreign corporation subject to the tax treaty.

(E) The above provision was maintained without any change in its contents until it was amended by Act No. 9267 of Dec. 26, 2008 and included the relevant provisions of Presidential Decree. Accordingly, the Corporate Tax Act was amended on Dec. 30, 2003 to provide the legal basis for delegation with respect to the provisions of Presidential Decree.

(3) Whether Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act is null and void

(A) The amendment history and content of the above statutes cannot be deemed to be merely that the asset ratio requirement should be set on the basis of the beginning date of the business year to which the transfer date belongs under Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act. In addition, the interpretation of the tax law under the principle of no taxation without law shall be interpreted in accordance with the law, unless there are special circumstances, and it shall not be extensively interpreted or analogically interpreted without reasonable grounds. However, where there is a need to clarify its meaning through mutual interpretation between the laws and regulations, it shall be allowed to conduct the objective interpretation in consideration of legislative intent and purpose to the extent that it does not undermine legal stability and predictability oriented under the principle of no taxation without law (see, e.g., Supreme Court Decision 2007Du438, Feb. 15, 2008). In light of the legal principles, Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act delegated under Article 93 subparag. 7 of the former Corporate Tax Act shall be excluded in interpreting Article 15(1) of the former Enforcement Decree.

(B) Therefore, Article 132(10)2 of the former Enforcement Decree of the Corporate Tax Act cannot be deemed to have expanded the scope of taxation stipulated in the law without delegation by the law. Thus, the above provision is a valid provision that does not violate the principle of no taxation without law.

(4) Interpretation of statutes

(A) In light of the legislative history of the above, Article 132(10) of the former Enforcement Decree of the Corporate Tax Act provides that “any of the other assets referred to in Article 94(1)4 of the Income Tax Act shall, notwithstanding the provisions of Article 158(1) of the Enforcement Decree of the same Act, be a corporation’s stocks or equity shares (excluding stocks or equity shares listed or registered on the securities market, etc.) whose total amount of asset value referred to in Article 94(1)1 and 2 of the same Act is not less than 50/100 of the total amount of assets of the pertinent corporation as of the starting date of the business year to which the date of the transfer belongs, in applying the provisions of Article 94(1)4 of the same Act, among the other assets referred to in Article 93 subparag. 7 of the same Act.” In light of the contents of Article 132(10) of the former Enforcement Decree of the same Act, Article 132(10) of the former Enforcement Decree of the Corporate Tax Act shall be construed as the requirement of capital gains that is a foreign corporation’s.

(B) Therefore, where a corporation’s total assets as of the starting date of the business year in which the transfer date belongs, received income from the transfer of its stocks or equity shares in which the total assets under Article 94(1)1 and 2 of the former Income Tax Act, such as land, buildings, superficies, etc., are more than 50/100 of the total assets of the relevant corporation, it shall be subject to taxation as domestic source income under Article 93 subparag. 7 of the former Corporate Tax Act regardless of whether the requirements for stockholding ratio under Article 158

(5) Sub-committee

After all, although Plaintiff 2, a foreign corporation, obtained income as stipulated in Article 93 subparag. 7 of the former Corporate Tax Act by transferring the stocks of a set-off shop, most of which is the total assets, even though the investment shares of a set-off company are merely 26%, Plaintiff 2, a foreign corporation. Therefore, the disposition of this case under the above provision is lawful, and the plaintiffs’ assertion on a different premise is without merit.

2. Conclusion

Therefore, the judgment of the first instance court is justifiable, and all appeals by the plaintiffs are dismissed as it is without merit. It is so decided as per Disposition.

Judges Ko Young-han (Presiding Judge)