Whether lending and lending stocks transferred by a share lending contract are included in the “stocks owned by the stockholders, etc. as of the base date” under Article 157(4)2 of the former Enforcement Decree of the Income Tax Act (negative)

In full view of the legislative purport and language of Article 157 (4) 2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17032 of Dec. 29, 2000), and the concept of "ownership" under the above provision, unless there are special provisions in Article 94 subparagraph 4 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000), it is in conformity with the principle of strict interpretation that requires legal stability and no taxation without law to interpret the same as civil law, barring special circumstances. A lender shall transfer the ownership of shares during a lending period and allow the borrower to use them and the borrower shall return shares of the same kind and kind of shares at the end of a lending period to the lender, and it is not reasonable to deem that the lending shares transferred to the borrower pursuant to the so-called "share lending contract" under the above provision does not include the rights of the lender to be returned from the lender at any time during the lending period and lending period. This does not affect the lender's right to early loan or loan.

Article 94 subparag. 4 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000), Article 157(4)2, (5)1(c), and 2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17032 of Dec. 29, 2000)

Plaintiff (Law Firm Chuncheon, Attorneys Cho Young-soo et al., Counsel for the plaintiff-appellant)

Head of Yongsan Tax Office

Seoul High Court Decision 2006Nu23533 decided April 25, 2007

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

The grounds of appeal are examined.

Article 94 (4) 4 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 2000) provides that "income accrued from the transfer of stocks not listed on the Korea Stock Exchange, which are prescribed by Presidential Decree, shall be taxable income." According to delegation, Article 157 (5) 2 and 1 (c) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17032 of Dec. 29, 2000) provides that "stocks that are transferred by major shareholders, etc. of a corporation other than a stock-listed corporation through the Association brokerage market are transferred through the Association," while Article 157 (4) 2 (c) of the same Act provides that "any of the above "large shareholders, etc." shall be one of the cases falling under "large shareholders, etc." and "one shareholder and other stockholders in cases where the market price of the relevant corporation owned by one stockholder and other stockholders as of the end (base date) of the immediately preceding business year to which the transfer date belongs is at least one billion won."

In full view of the legislative purport and text of the provision of this case, and the concept of "ownership" under the provision of this case, unless there are special provisions in the former Income Tax Act, interpreting the same as civil law, barring special circumstances, it conforms to the legal stability and the principle of strict interpretation that requires no taxation without the law. In full view of the following, it is reasonable to view that the lender shall transfer the ownership of shares to the borrower during the lending period and allow the borrower to use them, and the borrower shall return the same and same shares to the lender at the end of the lending period, and that the lending and borrowing shares transferred to the borrower pursuant to the so-called "share lending contract" is not included in the "stocks of the relevant corporation owned by the shareholder, etc. as of the base date" under the provision of this case, and even if the borrower has the right to receive early refund of the lending shares from the lender or the dividend, etc. accruing from the lending and borrowing shares during the lending period, this does not affect the interpretation of the above provision merely because it is a obligatory right

According to the evidence duly admitted by the court below, the plaintiff transferred 50,233 shares issued by new CD technology (hereinafter "new CD technology") through the Association brokerage market on December 31, 200. The defendant deemed that the plaintiff constitutes a major shareholder of new CD technology as of December 31, 1999, and thus imposed capital gains tax of 497,735,740 won on the plaintiff. Meanwhile, on September 16, 1999, the plaintiff entered into a loan agreement with the plaintiff on 10,000 shares of new CD technology (hereinafter "loan shares") and delivered shares to the borrower on September 20, 199 and lent shares to the plaintiff during the loan period of 10,00 shares to the same kind of shares with the loan agreement of this case (hereinafter "the loan agreement of this case"). The loan agreement of this case between the plaintiff and the plaintiff on September 20, 199 and the transfer and borrowing agreement of this case on September 29, 209.

Examining these facts in light of the legal principles as seen earlier, the lending and borrowing shares of this case were transferred by a share lending contract to ELD which is the borrower on September 20, 199, and as of December 31, 199, the income accrued from the right to dispose of and disposition of the shares was reverted to ELD which is the borrower, and thus, in determining whether the Plaintiff is a new CD technology major shareholder as of December 31, 199 as stipulated in the provisions of this case, the lending shares of this case cannot be included in the Plaintiff’s shares.

Nevertheless, the court below held that the Plaintiff constitutes a new CD technology major shareholder as provided in the provisions of this case by including the total market value of new CD-technology shares in the total market value of the loan shares as of December 31, 1999, on the ground that the Plaintiff terminated the loan agreement of this case at any time and can exercise voting rights by receiving a return of the loan shares of this case, and the dividend, etc. accrued during the loan period can be returned from EL securities. The court below held that the Plaintiff constitutes a new CD-related major shareholder as provided in the provisions of this case by including the total market value of the loan shares of this case in the total market value of new CD-related shares currently owned on December 31, 199. The court below erred in the misapprehension of legal principles

Therefore, 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 on the bench.

Justices Yang Sung-tae (Presiding Justice)