Seoul Administrative Court-2015-Gu Partnership-61580 ( October 29, 2015)

income retirement also constitutes a "stock retirement" under the Corporate Tax Act.

The retirement of profits falls under the "retirement of stocks" under the Corporate Tax Act, and in this case, the "amount exceeding the amount used for acquiring stocks" shall be deemed the constructive dividend.

2015Nu67474 Revocation of corporate tax collection disposition, etc.

00 Stock Company

00. Head of tax office

Seoul Administrative Court Decision 2015Guhap61580 decided October 29, 2015

September 21, 2016

October 5, 2016

1. Revocation of a judgment of the first instance;

2. The Defendant’s each disposition indicated in the attached Form 1 that the Defendant rendered against the Plaintiff is revoked. 3. All costs of the lawsuit are borne by the Defendant.

The same shall apply to the order.

1. The part citing the judgment of the court of first instance

A. The Plaintiff’s assertion is based on the grounds indicated by the court, i.e., the developments leading up to the instant disposition, 2. The Plaintiff’s assertion, and b. The relevant statutes are as follows: (a) the relevant part of the reasoning of the first instance judgment (as stated in the 2nd to 4nd to 4nd and 2nd). Therefore, it is cited in accordance with Article 8(2) of the Administrative Litigation Act, and Article 4

2. The judgment of this Court

A. The defendant's argument

1) According to the definition of dividend under the Convention between the Republic of Korea and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter referred to as the “Korea-Canadian Tax Convention”), the cost of retiring the stocks in question is deemed to be “income from stocks” among the provisions on the definition of dividend under the said Convention, and is deemed to be a real cash dividend only by having the appearance of the retirement of income in form, and thus constitutes “dividend under the Korea-Canadian Tax Convention.” Moreover, with respect to the retirement of the stocks in question, unlike the reduction of capital, Article 17(1)3 and Article 17(2)1 of the former Income Tax Act on Deemed dividend cannot be applied. Therefore, the cost of retiring the stocks in question cannot be deemed to fall under the dividend income under Article 17(1)1 or 7 of the former Income Tax Act, and cannot be deemed to be the deemed dividend under

2) Even if the price for the retirement of the shares in question is deemed as the constructive dividend under Article 17 (1) 3 of the former Income Tax Act, there is no change in the substance of the capital before and after the retirement of the shares in this case, and the remaining shares, such as the shareholding ratio, in the case of the retirement of the shares in question. Therefore, the amount of the constructive dividend income should be deducted from the amount of the income amount of the constructive dividend, the "amount required by the shareholder

B. Determination

1) The governing law to determine whether the constructive dividend is applicable

Article 10(3) of the Korea-Canadian Tax Convention defines dividends as "income from income or other rights that are not income or bonds from stocks, and that is treated equally as income from stocks and taxation by the law of the Contracting State, a resident, a corporation paying dividends."

However, with respect to ‘income from shares', special provisions in the Korea-Canadian Tax Convention

One definition is not provided, and the meaning of the language and text can not be clearly revealed in the context. In such a case, according to Article 3(2) of the Korea-Canadian Tax Convention, the term has the meaning prescribed in the domestic law of the Republic of Korea (see Supreme Court Decision 2014Du39784, Jun. 10, 2016). In addition, Article 10(3) of the Korea-Canadian Tax Convention states that “income which a corporation paying dividends is treated the same as income accruing from stocks under the laws of the Contracting State, which is a resident, is also deemed as dividends.” Thus, if deemed as dividend under the Income Tax Act of the Republic of Korea, the term constitutes dividends under the Korea-Canadian Tax Convention, and does not treat dividends and dividends differently under the Korea-Canadian Tax Convention.

In full view of these facts, whether the cost of the retirement of the shares at issue is a dividend or deemed dividend is a matter of determination in accordance with the domestic law of Korea, and the Korea-Canadian Tax Convention does not affect this, so the first defendant's argument on a different premise is without merit.

2) Whether the constructive dividend of the cost of retirement benefits constitutes “Fictitious dividend”

The principle of no taxation without law is a requirement for taxation, or a requirement for 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 widely interpreted or analogically interpreted without reasonable grounds.

Article 17 (2) 1 of the former Income Tax Act provides as one of fictitious dividends that "the value of money or other property acquired by a shareholder due to the retirement of shares or the reduction of capital, or the value of money or other property acquired by an employee or investor due to retirement, withdrawal, or reduction of investment, in excess of the amount required for the shareholder, employee, or investor to acquire the relevant shares or investment." With respect to the meaning of "retirement of shares or reduction of capital", the former Income Tax Act does not provide otherwise, while Article 343 (1) of the former Commercial Act on the retirement of shares (amended by Act No. 10600, Apr. 14, 201; hereinafter referred to as "former Commercial Act") provides that "stocks may be retired only in accordance with the provisions on reduction of capital." However, the same shall not apply to the retirement of shares with profits to be distributed to shareholders as prescribed by the articles of incorporation." Article 343-2 of the same Act provides for the retirement of profits by a general meeting resolution.

Therefore, even if the retirement of shares is not accompanied by the reduction of capital (probly reducing capital), it is clear in the language and text of the relevant provision that the former Commercial Act stipulates that the retirement of shares shall be one of the retirement of shares, and as long as Article 17(2)1 of the former Income Tax Act provides that “the retirement of shares or the reduction of capital” includes the retirement of shares under Article 17(2)1 of the former Income Tax Act. If the legislators intend to treat the same as cash dividends, not deemed dividends, the phrase “the retirement of shares” under Article 17(2)1 of the former Income Tax Act is unnecessary. The reason is that “the retirement of shares, other than the “the reduction of capital” under Article 17(2)1 of the former Income Tax Act does not mean that the retirement of shares, other than the “the retirement of shares,” under Article 17(2)1 of the former Income Tax Act, should be deemed as a statement that takes into account the retirement of shares. Generally, even if the retirement of shares and the reduction of capital would not be accompanied by the remaining amount of shares (the decrease of shares).

Ultimately, the amount of money paid in return for the retirement of shares by means of profit retirement shall be deemed to be subject to Article 17(2)1 of the former Income Tax Act on Deemed dividend. Therefore, the Defendant’s assertion that the price for the retirement of shares in question falls under the dividend income under Article 17(1)1 of the former Income Tax Act or similar thereto under Article 17(1)7 of the former Income Tax Act is without merit (and there is no evidence to acknowledge that there is no special circumstance that denies the validity of the retirement of shares in this case and directly distributes

3) Whether the acquisition value of the shares in question is deducted

Comprehensively taking account of the following grounds, it is reasonable to view that the portion exceeding the “amount required by the stock owner to acquire the relevant stocks” out of the cost of the retirement of the stocks in question as the income from fictitious dividend. The defendant’s assertion against this is without merit

① Article 17(2)1 of the former Income Tax Act provides that “The total amount of the cost of stock retirement shall not be deemed deemed deemed deemed deemed deemed dividend and the acquisition value of the stocks to be retired shall be deducted accordingly.” It is natural to interpret that the said provision shall be deducted from the acquisition value of the stocks to be retired in the event of profit retirement not accompanied by capital reduction. In the case of profit retirement, there is no special provision for other treatment.

(2) In the case of the retirement of profits, although the capital is not reduced, the net asset value of the company’s cash assets is reduced due to external outflow, and the shareholders lose the net asset value of the company’s stocks equal to those held by the company. Therefore, from the shareholder’s standpoint, it is difficult to view that there is no change in the substance of the stocks held before and after the retirement of profits. It is difficult to view that there is no change in the number of stocks held before and after the retirement

(3) Although the Defendant asserts that the economic substance of the retirement of profits is the same as the cash dividend, it is difficult to deem the same as the case of cash dividend that there is no extinction in that the shares owned by the shareholder are absolutely extinguished.

④ In the case of cash dividend, the acquisition value of stocks is not deducted, but when the stocks held by the stockholders are transferred after cash dividend, the acquisition value of the stocks held at the time of calculating gains from transfer would be deducted. Meanwhile, even if the acquisition value of the stocks retired at the time of profit retirement is deducted in the case of stock retirement, the acquisition value of the stocks extinguished when the stockholders transfer the remaining stocks held by the stockholders after the profit retirement would not be deducted. In other words, even if the acquisition value of the stocks retired at the time of profit retirement is deducted, it is merely the front time of the deduction compared to the cash dividend. Therefore, it cannot be readily concluded that the gains from the deduction of acquisition value are more tax evasion than the cash dividend. Rather, since there is no room to deduct the acquisition value of the stocks extinguished when the stocks held by the stockholders are transferred after the profit retirement, it would result in unreasonable

⑤ Considering Article 17(2)2 of the former Income Tax Act as “the value of stocks acquired by transferring a corporation’s surplus to capital,” the acquisition value is not deducted, but in the case of capital transfer of earned surplus, the shareholder newly receives new stocks free of charge (see Article 461 of the former Commercial Act). Therefore, it is difficult to consider the deduction of acquisition value.

3. Conclusion

The plaintiff's claim of this case is reasonable, and the judgment of the court of first instance is unfair in conclusion, so it is revoked, and all of the dispositions of this case shall be revoked.