Cho Jae-2017-China-173 (24 May 2017)

The base point of time for calculating the gains from donation due to capital reduction shall be the date of resolution of the general meeting of shareholders for capital reduction.

The base point of time for calculating the gains of donation due to capital reduction shall be the date of resolution of the board of directors for retirement, not the date of resolution of the board of directors for retirement of shares.

Inheritance Tax and Gift Tax Act Article 39-2 (Donation of Profits Following Reduction of Capital)

2017Guhap67194 Revocation of Disposition of Imposition of Gift Tax

○ ○

○ Head of tax office

March 22, 2018

April 26, 2018

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s disposition of imposing gift tax of KRW 307,426,710 (including additional tax) on the Plaintiff on September 6, 2016 shall be revoked.

1. Details of the disposition;

A. A. Around December 10, 1998, the Plaintiff established ○ Development Co., Ltd. (hereinafter referred to as “○○ Development”) by investing jointly with ○○ and ○○○○○○○○○○○. As a result, ○○ Development participated by executives and employees in the process of issuing capital increase on July 15, 200 and October 5, 2002 on two occasions, the share structure of ○○ Development was 31.8%, 00, 18.0%, 10.2%, 40%, and 40.0%, as listed below.

(Omission of List)

B. From March 1, 2002 to February 28, 2007, an empty ○○ was the vice president from March 1, 2002 to February 28, 2007, from March 1, 2007 to February 28, 2009, and from March 1, 2009 to adviser, and retired from the development of ○○ on February 28, 201.

C. On March 3, 2011, ○○ Development agreed to purchase KRW 54,250 per share of 36,000 shares held by ○○○ and KRW 54,250 per share, but agreed to pay the price and transfer of shares on two occasions (hereinafter “instant contract”).

D. Under the instant contract, ○○ Development paid KRW 976,50,000 as the price on March 14, 201 (i.e., KRW 54,250 per share x 18,000 per share) and received a transfer of 18,00 shares, and passed a resolution to retire the entire shares of 18,00 shares as its own shares on March 8, 2012. On March 15, 2012, ○○ Development made a resolution to pay KRW 976,50,000 as the price on March 15, 201, and paid KRW 18,00 as the remaining shares (hereinafter referred to as “instant shares”). On February 28, 2013, the resolution to retire the entire shares as its own shares (hereinafter referred to as “resolution”).

E. From February 15, 2016 to April 18, 2016, the director of the ○○ Regional Tax Office: (a) conducted an investigation of changes in stocks of ○○ Development, and conducted an investigation of changes in stocks from April 18, 2016; (b) deemed that the Plaintiff, a major shareholder, was distributed profits from the reduction of capital from ○○○, a person with a special relationship, by reducing the value of stocks at a price lower than that calculated according to the supplementary evaluation method; and (c) accordingly, deemed that the Plaintiff, a major shareholder, received profits from the reduction of capital from ○○, a person with a special relationship, and accordingly, calculated KRW 216,474,912, and KRW 1,256,79

F. Accordingly, on September 6, 2016, the Defendant notified the Plaintiff of KRW 55,246,364 of the gift tax on February 2012, and KRW 479,543,70 of the gift tax on February 2013 (hereinafter “instant disposition”).

G. On December 5, 2016, the Plaintiff filed an appeal seeking revocation of the instant disposition with the Tax Tribunal (the Plaintiff sought revocation of the disposition of gift tax other than the instant disposition on December 5, 2016, but the Plaintiff is also seeking revocation of the disposition of gift tax other than the instant disposition; hereinafter the same shall apply). While the said adjudication is in progress, the Defendant issued a corrective disposition to reduce the total amount of KRW 55,246,364, and KRW 172,116,990, out of KRW 479,543,70, the gift tax on February 5, 2013, on the ground of an error in calculation.

H. On May 24, 2017, the Tax Tribunal dismissed the Plaintiff’s appeal on the instant disposition.

[Reasons for Recognition] Facts without dispute, Gap evidence Nos. 1, 2, 4, 5, 12, Eul evidence Nos. 1 and 2 (including each number), the purport of the whole pleadings

2. The plaintiff's assertion

For the following reasons, the Plaintiff asserts that the instant disposition was unlawful based on the market price of stocks calculated according to the complementary evaluation method based on the resolution date of the instant general meeting of shareholders.

A. Pursuant to the Commercial Act, a company can retire its shares only by the board of directors after acquiring its own shares within the scope of distributable profits. The board of directors resolution in this case includes key elements, such as purchase price of shares required for reduction of capital under the Commercial Act. Therefore, the market price of the shares in this case should be calculated based on March 2012, which belongs to the date of the resolution of board of directors or the date of transfer

B. Even if the market price of the instant shares is calculated as of the date of resolution of the general meeting of shareholders, the price formed by ○○ Development and retired executives and employees for three months before and after the above resolution exists, and the above price reflects the objective exchange value of the instant shares as at the date of resolution of the general meeting of shareholders. Thus, the market price of the instant shares should be calculated based on the above price.

3. Relevant statutes;

It is as shown in the attached Form.

4. Determination

A. The point of time to calculate the market price of the instant shares

Article 39-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 1357, Dec. 15, 2015; hereinafter referred to as "Inheritance Tax and Gift Tax Act"); Article 39-2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 13557, Feb. 5, 2016; - The appraised value of one share paid at the time of stock retirement) ¡¿ total number of capital reduction ¡¿ shares after the capital reduction of a major shareholder 】 (the number of capital reduction shares issued by a major shareholder or his/her specially related person ± the total number of capital reduction ± the ratio after the capital reduction of a major shareholder ± Article 29-2(2) and (3) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act (hereinafter referred to as "Enforcement Decree of the Inheritance Tax and Gift Tax Act") provides that the gains acquired by a major shareholder who retires shares shall be calculated in the following manner: Provided, That the value obtained by subtracting the amount per share paid at the time of capital reduction should be calculated by at least 300 million won per capital reduction:

In this case, the issue is whether the disposition of this case is legitimate, calculated as of the date of resolution of the general meeting of shareholders of this case the "value per stock with capital reduction" (the value per stock of this case) among the above calculation formula.

The plaintiff asserts that the "date of resolution of a general meeting of shareholders for capital reduction" means the time when capital reduction becomes final and conclusive. In this case, it can be said that ○○ Development made a resolution by a resolution by a board of directors other than the resolution of a general meeting of shareholders because it acquired treasury shares within the scope of distributable profits and retires treasury shares, and that ○○ Development made a resolution by a resolution by a board of directors which shall acquire the shares of this case from 000 through 00 or the price for capital reduction shall be deemed to have been final and conclusive when shares are transferred by the above resolution.

However, in light of the following circumstances acknowledged by the aforementioned evidence and the purport of the entire pleadings, the base point for assessing the value of the instant shares ought to be the resolution date of the instant general meeting of shareholders. Therefore, the Plaintiff’s aforementioned assertion is rejected on a different premise.

(1) The "retirement of shares" means the act of a company which absolutely extinguishs specific shares during the existence of a company, which means the act of extinguishing shares acquired by the company within the scope of distributable profits. The act of acquiring shares of the company in the process of retiring such shares is accompanied by the act of acquiring shares of the company, but the act of retiring shares of the company and acquiring shares of the company for

② The Plaintiff’s assertion that ○○ Development should be the standard market price for the assessment of the value of shares in this case is the resolution of the board of directors or the subsequent acquisition of shares for the purpose of retirement. However, the above resolution of the board of directors or the acquisition of shares by the board of directors is merely an act to acquire treasury stocks subject to retirement, and it is merely an act to acquire treasury stocks, and thus, each act alone does not have legal effect due to the retirement of shares. Therefore, the specific time or object of retirement for the determination of compensation for the reduction of capital

③ Even if the retirement of shares can only be made by the board of directors through the retirement of treasury shares, as alleged by the Plaintiff, the act of ○○ Development causing the legal effect of the retirement of shares after the acquisition of treasury shares is due to the resolution of the general meeting of shareholders of this case. Therefore, the price for capital reduction may be determined by clarifying whether the shares were retired, the time and object of the said resolution.

B. Method of calculating the market price of the instant shares

In the case of unlisted stocks with low market value, where there is a transaction example, the relevant transaction value shall be deemed the market value and the stocks value shall not be assessed based on the supplementary assessment method stipulated in the Inheritance Tax and Gift Tax Act. However, since the market value means the objective exchange value formed through the general and ordinary transaction, in order to be recognized as the market value, the relevant transaction example is made in a general and normal manner and the objective exchange value at the time of the donation should be recognized (see, e.g., Supreme Court Decision 2010Du26988, Apr. 26, 2012).

In full view of the following circumstances recognized by the respective statements and arguments set forth in Articles 8 through 11, 13, 14, and 3 and 4, it is difficult to view that the Plaintiff’s disposition was made by means of transactions conducted in a general and normal manner, and it is reasonable to properly reflect the objective exchange value as of the date of resolution of the general meeting of shareholders. Therefore, the instant disposition that was made by calculating the value of the instant stocks according to the supplementary method of assessment of unlisted stocks under the Inheritance Tax and Gift Tax Act is lawful, and thus, the Plaintiff’s assertion that the said method of calculation is unlawful

① Examining the details of the transaction of ○○ Development’s shares during the three-month period before or after the resolution date of the instant general meeting of shareholders, ○○ Development transferred 1,417 shares to KRW 58,680 per share from the transferor Kim○○ on November 27, 2012, KRW 78,240 per share, KRW 1,492 shares from the transferor Kim○○○ on January 7, 2013, KRW 78,240 per share, and KRW 1,303 shares from the transferor ○○○ on June 21, 2013, KRW 1,303 shares per share from the transferor ○○○○ on June 21, 2013. Since each of the above transferor (○○○, ○○, ○○, and Yang○○, ○○) is also a retirement recipient of ○○ Development’s development and each of the above transfer values is also difficult to be deemed as the market price where transactions have been freely concluded between many and unspecified persons.

② On the other hand, the Defendant’s assessment value per share of the instant shares calculated by the supplementary assessment method under the Inheritance Tax and Gift Tax Act as of the resolution date of the instant general meeting of shareholders is KRW 121,564, which is determined to reflect the market price of the instant shares, taking into account both the net value per share and the net asset value per share at the time.

5. Conclusion

Thus, the plaintiff's claim is dismissed as it is without merit.

Relevant statutes

(1) The former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015)

Article 39-2 (Donation of Profits Following Reduction of Capital)

① 법인이 자본을 감소시키기 위하여 주식이나 지분을 소각(��却)할 때 일부 주주의 주식 또는 지분을 소각함으로써 그의 대통령령으로 정하는 특수관계인에 해당하는 대주주가 이익을 얻은 경우에는 그 이익에 상당하는 금액을 그 대주주의 증여재산가액으로 한다.

(2) In applying paragraph (1), the method of calculating profits shall be prescribed by Presidential Decree.

(1) Enforcement Decree of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 26960, Feb. 5, 2016)

Article 29-2 (Calculation Method, etc. of Profits Accruing from Reduction of Capital)

(1) "Related persons prescribed by Presidential Decree" in Article 39-2 (1) of the Act means a person who has relations falling under any subparagraph of Article 12-2 (1) with one stockholder, etc.

(2) The profits accruing from the reduction of capital pursuant to the provisions of Articles 39-2 (1) and 42 (1) 3 of the Act shall be as follows:

1. Where the value obtained by subtracting the amount per stock paid on retirement from the appraised value per stock of capital reduction is not less than 30/100 of the appraised value per stock of capital reduction, or the amount calculated by the following formula is not less than 30 million won, the relevant profits:

2. Where the appraised value per stock of which capital has been reduced is not more than face value (referring to the relevant consideration where the price paid for the retirement of stocks is not more than face value; hereafter in this subparagraph, the same shall apply), and where the price has been paid for the stocks in excess of such appraised value, the relevant profits (the amount per stock paid for the retirement of stocks - the appraised value per stock of which has been reduced, not less than 30/100 of the appraised value per stock of the reduced stocks, or the amount calculated by the following formula, is not less than 300 million won:

(3) The calculation of profits under paragraph (2) shall be based on the date on which a resolution of the general meeting of shareholders is passed for capital reduction.

/ Commercial Act

§ 343. Redemption of shares

(1) Shares may be retired only in accordance with the provisions on reduction of capital: Provided, That this shall not apply to the retirement of shares held by the company by a resolution of the board of directors.

Article 438 (Resolution for Reduction of Capital)

(1) In order to reduce capital, a resolution in accordance with Article 434 shall be required.

§ 434. Special resolution for amendment of articles of incorporation

A resolution under Article 433 (1) shall be adopted by the number of votes of not less than two thirds of the voting rights of stockholders present at the meeting and not less than one third of the total number of issued and outstanding shares.