Whether preemptive rights are included in “stocks, etc.” under Article 94 subparag. 3 of the former Income Tax Act and Article 157(4) of the Enforcement Decree of the same Act (negative)

In the ordinary course of the issuance of new shares, a shareholder’s preemptive right refers to a shareholder’s right to receive a preferential allotment of new shares in proportion to the number of shares held in the past and can be transferred independently from shares. The preemptive right to bonds with warrants is granted to a company to issue bonds and acquire stocks incidental thereto, and is not based on the shareholder’s right. Therefore, the preemptive right cannot be deemed the same as the shares representing the rights as a shareholder legally and economically. Therefore, it cannot be deemed that the “stocks, etc.” as stipulated in Article 94 subparag. 3 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000) and Article 157(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 16664 of Dec. 31, 199) includes “stocks, etc.”

Article 94 Subparag. 3 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000) (see current Article 94(1)3), Article 157(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 16664 of Dec. 31, 199)

Plaintiff 1 and two others (Attorneys Hwang Jong-sung et al., Counsel for the plaintiff-appellant)

The director of the tax office of distribution (Law Firm Doll, Attorneys Gyeong-gi et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2006Nu16559 decided January 25, 2007

All appeals are dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

Article 94 subparag. 3 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000; hereinafter referred to as the “former Act”) and Article 157(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 16664 of Dec. 31, 199; hereinafter referred to as the “former Enforcement Decree”) stipulate that income generated from the transfer of 1/100 or more of the total amount of stocks or equity shares of a stock listed corporation (hereinafter referred to as “stocks, etc.”) shall be subject to capital gains tax, while Article 94 subparag. 4 of the former Act and Article 157(5) of the former Enforcement Decree provide that income generated from the transfer of 1/100 or more of the total amount of stocks, etc. of the relevant corporation shall be subject to capital gains tax.

In light of the principle of no taxation without law, the requirements for taxation, non-taxation, or tax exemption, and the interpretation of tax laws shall be interpreted in accordance with the text of the law unless there are special circumstances, and it shall not be extensively interpreted or analogically interpreted without reasonable grounds (see Supreme Court Decision 92Nu18603, Feb. 22, 1994). Since the Income Tax Act selects the so-called listing method, the kinds of capital gains other than those provided for in the Income Tax Act shall be excluded from taxation (see Supreme Court Decision 86Nu331, Dec. 13, 198).

In full view of the language and text of the above provisions and the amendment process as well as the relevant provisions of the Commercial Act and the Securities and Exchange Act, the court below is just in holding that the preemptive right of shareholders is not included in the "stocks, etc." as stipulated in Article 94 subparagraph 3 of the former Act, Article 157 (4) of the former Enforcement Decree of the former Enforcement Decree, since the preemptive right of shareholders in the ordinary course of the issuance of new shares refers to the right to preferentially acquire new shares in proportion to the number of shares held by shareholders, and can be transferred independently from the shares and shares. The preemptive right of bonds with warrants is not granted based on shareholders' rights on the ground that the company issued the bonds and granted the right to underwrite shares. Thus, it is difficult to view that the preemptive right of shareholders is the same as the shares representing the rights of shareholders in legal and economic aspect. Thus, there is no error in the misapprehension of legal principles as to the nature of the preemptive right or the interpretation of Article 94 subparagraph 3 of the former Enforcement Decree and Article 157 (4) of the former Enforcement Decree.

Therefore, all appeals are 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 on the bench.

Justices Park Ill-sook (Presiding Justice)