The purpose of Article 14(3) of the Framework Act on National Taxes that provides that a tax shall be imposed by deeming it as a continuous act or transaction according to the economic substance where the tax has been unjustly reduced through two or more acts or transactions / Whether a taxpayer may be subject to taxation pursuant to Article 14(3) of the Framework Act on National Taxes solely on the basis of the results after a variety of transactions are conducted (negative)

The purpose of Article 14(3) of the Framework Act on National Taxes lies in: (a) denying the form of transactions in various stages to cope with an act of tax avoidance which unfairly reduces taxes by bypassing or transforminging the act or transaction subject to taxation; and (b) allowing taxpayers to impose taxes by deeming the same as a single act or transaction subject to taxation depending on the substance; and (c) promoting tax equity by prescribing one of the forms of application of the substance over form principle. However, the taxpayer may choose one of the various legal relationships in order to achieve the same economic purpose when engaging in economic activities; (d) barring any special circumstance, the tax authority may respect the legal relationship chosen by the parties; and (e) the outcome of the transaction after performing various stages of transactions shall not be subject to taxation by readily concluding that the substance is a single act or transaction only after the transaction.

Article 14(3) of the Framework Act on National Taxes

Supreme Court Decision 92Nu1155 delivered on December 8, 1992 (Gong1993Sang, 482) Supreme Court Decision 2000Du963 Delivered on August 21, 2001

TNNS Korea (Attorneys Kim Su-soo et al., Counsel for the defendant-appellant-appellee)

Director of the District Office

Seoul High Court Decision 2017Nu35822 decided July 25, 2017

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 14(3) of the Framework Act on National Taxes provides that “In cases where it is recognized that the benefit of this Act or other tax-related Acts is to be unduly obtained by means of an indirect method via a third party, or through two or more acts or transactions, it shall be deemed that the parties have directly made a transaction or that an act or transaction has been conducted in succession, and thus, this Act or other tax-related Acts shall apply.”

The purpose of Article 14(3) of the Framework Act on National Taxes is to deny the various stages of transactions in order to cope with the act of unfairly reducing tax by bypassing or transforminging the act or transaction subject to taxation, and to impose tax by deeming it as a single act or transaction subject to taxation according to the substance. Thus, the purpose of this Article is to promote fair taxation by prescribing one of the forms of application of the substance over form principle. However, the taxpayer may choose one of the various legal relationships in order to achieve the same economic purpose when conducting economic activities, and the tax authority shall respect the legal relationship chosen by the parties (see Supreme Court Decision 2000Du963, Aug. 21, 2001). Since the result of various stages of transactions may intervene not only in compensating for risks, such as losses, but also in external factors or acts after performing such transactions, it shall not be readily concluded that the result of such transactions is a single act or transaction subject to taxation by readily concluding it as a single act or transaction.

In addition, the court shall decide whether the assertion of facts is true in accordance with logical and empirical rules on the basis of the ideology of social justice and equity with free evaluation of evidence taking into account the overall purport of pleadings and the result of examination of evidence. The facts duly confirmed by the court of final appeal that the court below did not exceed the bounds of the principle of free evaluation of evidence (Article 8(2) of the Administrative Litigation Act, Articles 202 and 432 of the Civil Procedure Act)

2. The lower court determined to the following purport, citing the reasoning of the first instance judgment and adding some reasons thereto.

A. The ENT Group (TNT), a multinational air transport company located in the Netherlands, [the final parent company, as TNN Expres N.V., which is the Netherlands corporation, hereinafter “the final parent company of this case”), was a domestic affiliate of the Plaintiff, and the Plaintiff, as an affiliated company in the lower judgment, acquired the entire shares of the instant parent company’s shares issued by TNTF B.V., an affiliated company of the TNF, ENFFF, and the redemption of the foregoing financial institution’s loans (hereinafter collectively referred to as “instant transaction”).

B. The parent company of this case and the UN Ethmpis are financial companies or intermediary holding companies in the group carrying out its own business with an independent entity, and merely are the subsidiaries of the final parent company of this case in the transaction of this case, and thus it is difficult to deny its substance or form under tax law.

C. The Plaintiff is deemed to have improved the financial structure with funds raised through capital increase with capital increase through the instant transaction while running an air transportation business. In full view of the circumstances where it is difficult to deem that the instant parent company was not a creditor of the said business debt, thereby making it impossible to convert into equity and causing losses to the instant transaction, the Plaintiff’s economic substance is an intermediate act difficult to have its own meaning for the purpose of evading tax burden pursuant to the proviso to Article 17(1)1 of the former Corporate Tax Act (amended by Act No. 11128, Dec. 31, 201).

D. In addition, there is also a lack of evidence to prove that the Plaintiff has appropriated the obligation for the purpose of evading corporate tax for a long period of time.

E. Ultimately, the Defendant’s disposition that held the instant transaction derived from “the act of converting the Plaintiff’s claim (debt) into equity investment” and its economic substance with the same economic substance and the purpose of evading tax burden is unlawful.

3. The allegation in the grounds of appeal disputing the determination of the lower court on the fact-finding is merely an error of the selection of evidence and the determination of the value of evidence belonging to the free trial of the fact-finding court. In addition, even if examining the reasoning of the lower judgment in light of the aforementioned legal principles and the evidence duly admitted, the lower court did not err by failing to exhaust all necessary deliberations or by misapprehending the legal principles on Article 14(3) of the Framework Act on National Taxes, contrary to what is alleged in the grounds of appeal.

The Supreme Court precedents cited in the grounds of final appeal are different from this case, and thus are inappropriate to be invoked in this case.

4. Therefore, the appeal is 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 Sang-ok (Presiding Justice)