2017-Gu-3297 (2017.09.07)

In order to apply special taxation of gift tax on succession to a family business, a donor shall hold the relevant stocks for at least 10 years.

In order to apply special taxation of gift tax to succession to family business as stipulated in Article 30-6 (1) of the Restriction of Special Taxation Act, it is reasonable to view that a donor should hold the relevant stocks for at least 10 years according to the necessity of "maintenance of the integrity of small and medium enterprises".

Article 15 of the Restriction of Special Taxation Act (Special Taxation on Succession to Family Business)

Daegu District Court-2017-Gu Partnership-24365

○ ○

○ Head of tax office

November 09, 2018

December 05, 2018

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 KRW 117,105,450 (including additional taxes) on the Plaintiff on March 31, 2017 shall be revoked.

1. Details of the disposition;

A. Status of the parties

1) AAA (hereinafter referred to as “AAA prior to the merger”) was merged into AA metal on July 4, 2016, as a company engaged in the manufacture and sale of V, etc. AAA (hereinafter referred to as “AA prior to the merger”). Since July 15, 2016, the trade name of AA metal (hereinafter referred to as “AA after the merger”) was changed into “AA” (hereinafter referred to as “AA”, and “AAA” only when it is referred to as “after the merger”).

2) BB, the father of the Plaintiff, established AA prior to the merger on November 3, 1993, and operated the said AA as a representative director and a director thereafter, from March 31, 2009, respectively.

3) The Plaintiff, from March 31, 2009, is holding office as the representative director of AA prior to the merger, and operates it as the representative director of AA after the merger.

4) The Plaintiff’s mother, the Plaintiff’s mother, was registered as an auditor of the AA prior to the merger from March 15, 2000 to March 31, 2015.

B. Plaintiff’s gift tax return and payment

1) On April 30, 2012, BB donated shares 67,023 shares of AA (hereinafter “instant shares”) from CCC, its wife, and on May 1, 2012, BB donated shares 93,127 shares of AA and 67,023 shares donated to the Plaintiff on May 1, 2012, plus 160,150 shares of the instant shares donated to the Plaintiff.

2) On July 18, 2012, the Plaintiff reported and paid KRW 80,586,310 to the Defendant by applying special taxation on gift tax on succession to family business pursuant to Article 30-6(1) of the Restriction of Special Taxation Act (amended by Act No. 12173, Jan. 1, 2014; hereinafter the same).

C. Defendant’s correction notice of gift tax

On March 31, 2017, the Defendant issued a correction and notification of gift tax amounting to KRW 117,105,450 (including additional tax) to the Plaintiff on the ground that “the shares of this case do not constitute shares donated to the Plaintiff for the purpose of succession to the pertinent family business from the parents over 60 years of age who continuously run the pertinent family business for at least 10 consecutive years” (hereinafter “instant disposition”).

(d) Procedures of the previous trial; and

The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on June 29, 2017, but the appeal was dismissed on September 7, 2017.

Facts that there is no dispute over recognition, the purport of the whole pleading.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) The Defendant disposed of the instant shares on the ground of the following established rules of the Ministry of Strategy and Finance (hereinafter referred to as the “established rules of this case”) on the ground that the instant shares constitute “stocks donated by CCC, a spouse not operating a family business, and for which 10 years have not passed since they were donated by BB, a spouse not operating a family business.”

2) However, Article 30-6(1) of the Restriction of Special Taxation Act does not stipulate only the age of donee, ② the donor’s family business management period, ③ the purpose of stock donation, ④ the stock holding ratio, etc., as a requirement for the application of special taxation of gift tax on succession to family business.

3) In addition, since CCC had actively participated in a family business management since it had been employed as an auditor since the establishment of AA, it constitutes “stocks donated by the parents who continued to operate a family business for at least 10 consecutive years.”

4) Moreover, since the instant rule was enacted after the Plaintiff donated the instant shares from BB, applying the instant shares to the instant shares violates the principle of prohibition of retroactive taxation.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Organization of issues

1) According to Article 30-6(1) of the Restriction of Special Taxation Act and Article 27-6(1) of the Enforcement Decree thereof (amended by Presidential Decree No. 25211, Feb. 21, 2014; hereinafter the same shall apply), where a resident aged 18 or older succeeds to a family business pursuant to Article 27-6(1) of the Enforcement Decree of the Restriction of Special Taxation Act (referring to cases where the father or mother is dead at the time of donation, and where the father or mother is dead, within the ceiling of the taxable value of gift tax; hereinafter referred to as "stocks, etc.") from a parent aged 60 or older (including his father or mother at the time of donation) who continuously engages in the family business under Article 18(2)1 of the Inheritance Tax and Gift Tax Act for at least 10 years, the total amount of gift tax shall be 50 million won after deducting the largest amount of gift tax from the taxable value and the person who succeeds to the relevant family business from a person with special interest at the time of donation, etc.

According to Article 18(2)1 of the Inheritance Tax and Gift Tax Act (amended by Act No. 11609, Jan. 1, 2013; hereinafter the same shall apply) and Article 15(3) of the Enforcement Decree thereof (amended by Presidential Decree No. 24358, Feb. 15, 2013; hereinafter the same shall apply), “family business” means a small or medium enterprise prescribed by Presidential Decree (referring to a small or medium enterprise under Article 2(1) of the Enforcement Decree of the Restriction of Special Taxation Act (referring to a dispute between the parties as to the fact that AA constitutes a small or medium enterprise prescribed by relevant Acts and subordinate statutes) as of the end of the taxable year immediately preceding the commencement of inheritance; hereinafter the same shall apply) that no longer falls under a small or medium enterprise (excluding a company whose sales sales in the immediately preceding business year prior to the commencement of inheritance exceed 15 billion won; hereinafter the same shall apply).

2) In full view of the language, content, form, and system of the foregoing provision, it is clear that the requirements of applying special taxation of gift tax on succession to a family business include ① a donee is a resident aged 18 or older; ② a donor is a parent aged 60 or older who has been continuously engaged in a family business for at least 10 consecutive years; ③ a donor parent is a largest shareholder, etc. who has continuously been engaged in a special relationship for at least 10 consecutive years (see, e.g., Supreme Court Decision 2013Du17206, Mar. 13, 2014).

However, the defendant, in addition to these requirements, made the disposition of this case on the premise that "the donor shall hold the shares for at least 10 years" is necessary, but the plaintiff asserts to the effect that such requirements are not necessary.

3) If it is necessary for the donor to hold the pertinent shares for at least 10 years as the requirement for the application of special taxation of gift tax on the inheritance of family business as alleged by the Defendant, the instant shares do not constitute shares held by BB for at least 10 years, and thus, the instant disposition is legitimate regardless of whether CCC actually operates AA with BB.

4) Therefore, the issue of the instant case is whether the donor should hold the pertinent shares for at least ten years in order to apply the special taxation of gift tax on the succession to family business as stipulated in Article 30-6(1) of the Restriction of Special Taxation Act.

D. Determination on the issues

In order to apply special taxation of gift tax on succession to a family business pursuant to Article 30-6 (1) of the Restriction of Special Taxation Act, a donor shall hold the relevant stocks for at least ten years. The reasons are as follows:

1) The purpose of the donation through family business succession or family business succession system is to provide tax support to the donation and inheritance of certain family business in order to maintain the continuity of small and medium enterprises and to promote economic vitality. Even in a prior sense, the family business referred to in family business succession or family business succession refers to the "family business within the house taken over as a substitute."

Therefore, in order to succeed to a family business, it is necessary to succeed to the status of the pertinent family business as an operator of the pertinent family business and to succeed to shares in excess of a certain ratio (50/100) that is essential to substantially own the pertinent family business, and further, the donor who intends to succeed to the pertinent family business should continue to hold shares for the period of running the pertinent family business.

Because private enterprises subject to the Income Tax Act are land, buildings, machinery, etc. used directly for family business and property for business at the same time as the company's assets are subject to family business succession, it is not necessary to separately set the limit of stocks or shares or the holding period in addition to succeeding such property for family business succession.

However, in the case of a corporation subject to the Corporate Tax Act, since the ownership structure of the corporation is determined by shares or equities, it is because the limit of shares or equities necessary to transfer the ownership of the corporation and its holding period should be determined in advance for family business succession.

In Supreme Court Decision 2013Du17026 Decided March 13, 2014, it can be understood in this context that the Supreme Court held that the parents, etc., who are the donor, continue to hold shares in excess of a certain percentage of shares, etc. when combined with shares, etc. of a person with a special relationship for at least ten years.

2) In addition, Article 30-6(1) of the Restriction of Special Taxation Act provides for the special taxation of gift tax on the gift of shares to their children, but the reason why the parents provide the special taxation of gift tax is that the "family business continuously operated for not less than 10 years by the donation of shares is succeeded to the child."

However, if it is interpreted that the gift tax exemption applies at any time regardless of the period of possession of the pertinent shares, such as the Plaintiff’s assertion, at any time, regardless of the period of possession of the said shares, the parents may give excessive tax preference to the gift of shares that do not contribute to the management or ownership of the family business for more than 10 consecutive years.

Furthermore, according to the plaintiff's assertion, it would lead to the conclusion that the special taxation of gift tax shall apply to the gift of shares acquired by the parent, who is the donor immediately preceding the date of donation.

This is not only to make the legislative intent of the special taxation of gift tax that the parents support the succession of the family business that they operated for more than 10 years, but also to abuse it as a means of tax avoidance.

3) According to the proviso of Article 30-6(1) of the Restriction of Special Taxation Act, the special taxation of gift tax does not apply to cases where “a donation is made from a donor or a largest shareholder at the time of succession to a family business after succession to a family business.”

The above proviso was newly established upon amendment of Article 30-6(1) of the Restriction of Special Taxation Act by Act No. 10406, Dec. 27, 2010. This appears to the effect that the special taxation of gift tax is applied only once to the case where there are several largest shareholders, etc., and only one donor donates shares of the donor.

Therefore, if BB first donated 93,127 shares of AA, excluding the shares of this case, to the Plaintiff and then CCC directly donated the shares of this case to the Plaintiff, the special taxation of gift tax is not applicable to the shares of this case in accordance with the above proviso.

Nevertheless, according to the Plaintiff’s assertion, where BB donated the instant shares from CCC immediately before the date of donation, and where BB donated the instant shares to the Plaintiff along with 93,127 shares owned by it and the instant shares, the special taxation of gift tax may be applied to the instant shares.

This is extremely unfair because it has a result of marizing the legislative intent of the above proviso.

4) The provisions of Article 30-6 of the Restriction of Special Taxation Act (amended by Act No. 8827 of Dec. 31, 2007) are newly established provisions and are as follows.

[Presentation. Grounds for Amendment]

○ Special taxation on gift tax on prior inheritance of stocks of small and medium enterprises

- In order to maintain the integrity of small and medium enterprises, tax support is necessary to enable founders to inherit their children in advance before their birth.

- Where parents aged 60 or older donate stocks to their children aged 18 or older for the purpose of succeeding to a small and medium enterprise operator for at least 10 years, gift tax shall be levied pursuant to the special tax rate of 10/100 after deducting 3 billion won from the limit of 3 billion won in the taxable value of the gift tax, but shall be settled at the time of inheritance at the time of

- It is expected that the advance inheritance of small and medium enterprises will be activated and contribute to the recovery of vitality of our economy.

2) On December 30, 2010, Article 15(3) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act was amended by Presidential Decree No. 22579 on December 30, 2010, and the proviso thereto stipulated, “Provided, That this does not include cases where inheritance commences due to death of a person who falls under the largest shareholder at the time of inheritance of a family business (excluding the heir who received inheritance of a family business) after inheritance of a family business pursuant to

As to the grounds for amendment of the above proviso, the government stated that "where the largest shareholder who is the deceased to whom the deduction for inheritance of a family is applied is multiple, it is necessary to clarify the requirements of the deceased, and it is clear that one of the largest shareholders is the deceased to whom the deduction for inheritance of a family is applied."

As such, considering the fact that the title of the above provision is "Special Taxation for Gift Tax on Succession to Family Business" and the purport of the new provision is to provide a tax support to a founder (a founder: a person who first set up a company and started a business) so that he/she can succeed to his/her child before his/her birth in order to maintain the continuity of the small and medium enterprises, the shares donated for succession to family business shall be the shares continuously owned by the donor during the period of his/her family business.

5) According to Article 30-6(2)2 of the Restriction of Special Taxation Act, a person who donated stocks, etc. does not succeed to the family business, or succeeds to the family business, within 10 years from the date of donation of stocks, etc.

Where the shares of donated stocks, etc. are reduced without justifiable grounds, gift tax shall be imposed on the value of such stocks, etc. in accordance with the Inheritance Tax and Gift Tax Act.

On the other hand, even if the family business succession is made through a donation of shares, the donee is compelling to continue to hold the shares for a period of ten years, which can be easily understood from the perspective of ‘maintenance of the integrity of the small and medium enterprise’ as seen above.

In the same context, the need to maintain the integrity of a small and medium enterprise is equally required even before a donation of stocks is made. Therefore, it is reasonable to deem that a donor should hold the relevant stocks for at least 10 years in order to apply special taxation of gift tax.

6) According to Article 61(1)12-7 of the Enforcement Rule of the Restriction of Special Taxation Act (amended by Ordinance of the Ministry of Strategy and Finance No. 300, Oct. 15, 2012), an application for special taxation of gift tax, such as stocks succeeding to family business, shall be in accordance with attached Form 11-7.

However, the "documents required" column in attached Form 11-7 provides that "2...., as of the donation date of a corporation succeeding to family business and one copy of the shareholders' status of the business year immediately preceding 10 years shall be submitted."

This can also be seen as a purpose to verify whether the donor continued to hold the pertinent shares for 10 years immediately before the date of donation.

7) The Ministry of Strategy and Finance and the National Tax Service clearly express their position that no special taxation of gift tax on inheritance deductions for family business and family business succession does not apply to shares donated by a donor from his spouse for which ten years have not passed since the donor was donated by his spouse as follows.

Property tax system and 385 (referring to the established rules in this case on May 14, 2014) of the Ministry of Strategy and Finance

○ With respect to stocks for which ten years have not passed since a person operating a family business under Article 18(2)1 of the Inheritance Tax and Gift Tax Act donated from a spouse who does not operate a family business, taxation on inheritance tax deduction for family business under Article 18(2) of the Inheritance Tax and Gift Tax Act and gift tax on succession to a family business under Article 30-6 of the Restriction of Special Taxation Act shall not apply.

director Inheritance Tax and Gift Tax-153 ( May 22, 2014)

○ With respect to shares donated by a spouse who does not operate a family business and for which ten years have not passed since the said spouse was donated, the deduction for inheritance of a family business pursuant to Article 18(2) of the Inheritance Tax and Gift Tax Act shall not apply.

director Inheritance Tax and Gift Tax-164 ( May 29, 2014)

The special taxation of gift tax on family business inheritance deduction or family business succession does not apply to the shares for which 10 years have not passed since a person who runs a family business was donated from a spouse who does not run a family business.

director’s statutory interpretation of the National Tax Service and 1443 ( October 1, 2015)

As regards the shares received from a spouse or child who has run a family business for at least ten years, the deduction for inheritance of a family business shall not apply to the shares for which ten years have not passed since such donation was made.

director’s statutory interpretation of the National Tax Service and 2293 ( December 28, 2016)

The deduction for inheritance of a family business does not apply to the shares acquired by a person operating ○ family business through capital increase with consideration and for which 10 years have not passed since the shares were acquired.

A) As to this, the Plaintiff asserts to the effect that applying the established rules of this case and the statutory interpretation by the National Tax Service to the donation of the instant shares violates the principle of prohibition of retroactive taxation.

B) The principle of retroactive taxation prohibition means that, in the event of the enactment or amendment of tax statutes, or any modification to the interpretation or guidelines of the tax authority for the interpretation or handling of the statutes, the pertinent statutes, etc. cannot be applied to the taxation requirement facts closed prior to the occurrence of the validity (see, e.g., Supreme Court Decision 2001Du10790, Mar. 26, 2004).

However, the statutory interpretation by the National Tax Service, including the established rules of this case, is nothing more than an interpretation different from the previous ones or an amendment to the existing guidelines, etc. after the gift of the stocks of this case, but merely an interpretation for the first time with regard to the cases in which the tax authorities

Therefore, this cannot be viewed as violating the principle of retroactive taxation prohibition.

E. The legality of the instant disposition

Ultimately, in order to apply special taxation of gift tax on succession to family business as stipulated in Article 30-6(1) of the Restriction of Special Taxation Act, donor should hold stocks for at least 10 years.

However, the instant shares do not constitute shares owned by BB for not less than 10 years, and the instant disposition is lawful regardless of whether CCC actually operates AA with BB.

3. Conclusion

Therefore, the plaintiff's claim is without merit, and it is so decided as per Disposition.