[Judgment of the court below]

Head of Sungnam Tax Office

August 14, 2014

1. The Defendant’s imposition of gift tax of KRW 5,564,683,370 against the Plaintiff on February 6, 2013 is revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of the disposition;

(a) The circumstances leading up to the establishment of SPP;

1) On December 29, 2005, B&C was established on December 18, 2006, and its trade name was changed to S&C. On January 2, 2007, L&D Co., Ltd. (hereinafter “S&C”) with its head office as the master of A.I.D. on August 31, 2007. On March 30, 2009, B&C was merged into S&C Co., Ltd. (hereinafter “S&C”) with its head office as “S&C”), and it was converted into S&C (L&C), respectively, on August 31, 2007, and its trade name was changed to “S&D Co., Ltd.” (hereinafter “S&D”).

2) The Plaintiff, who was in office as the representative director of LAW, participated as the promoters of LAW and acquired 32,000 shares of KRW 5,600 (the share ratio 2%; hereinafter “instant shares”) to be issued at the time of its establishment. From December 8, 2005 to December 13, 2005, the Plaintiff received donation of KRW 160,000 from Nonparty 1, a controlling shareholder of LAW Co., Ltd, and paid the said shares investment fund.

3) The Plaintiff was appointed as the representative director at the time of its incorporation.

4) The shares of this case 32,00 shares were divided into face value of 500 won and increased without compensation, and were 410,018 shares at the end of 209. The shares of L&C were listed on the Korea Stock Exchange on January 28, 2010, within five years from the date of the Plaintiff’s acquisition of shares.

B. Imposition of gift tax by the Defendant

1) On November 1, 2011, the Defendant: (a) obtained profits in excess of the acquisition value as the Plaintiff’s shares acquired with the money donated by Nonparty 1 were listed; and (b) calculated the gift profits by deeming that the date of donation was April 28, 2010, which was the date of listing the shares of L&C from January 28, 201, as the date of listing the shares; (c) based on Article 41-3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Inheritance Tax Act”), the Defendant imposed KRW 3,424,435,230 as gift tax for the year 2010 based on Article 41-3 of the former Inheritance Tax and Gift Tax Act.

2) On January 3, 2012, the Plaintiff appealed and filed a tax appeal. On November 15, 2012, the Tax Tribunal rendered a decision to revoke the said disposition on the grounds that the Defendant’s imposition of gift tax by deeming the timing of donation was not December 31, 2005 but April 28, 2010, on the grounds that the period of donation was not December 31, 2005.

3) Accordingly, on December 31, 2005, the Defendant again assessed the value of listed stocks with the average of the last value of the exchange prices (29,007 won per week) of each two months before and after the relevant base date, based on the date of settlement as of April 28, 2010, which was the date of stock listing of S&S as of January 28, 2010, and issued a disposition imposing KRW 5,564,683,370 (hereinafter “instant disposition”) on February 6, 2013, including penalty tax, on the Plaintiff on February 6, 2013.

(5) The value of the gift tax 29,07 won 39,04 won 6,04 won 22,613 won 410,018 won 410,618 won 410,054 won 6,004 won 29,007 won 39,004 won 39,007 won 29,007 won 39,000 won

4) On April 8, 2013, the Plaintiff dissatisfied with the instant disposition and filed a request for tax adjudication on April 8, 2013, but did not receive a notice of decision within the period for decision-making within 90 days, the Plaintiff filed the instant lawsuit, and received a decision of dismissal from the Tax Tribunal on September 30, 2013 when the instant lawsuit was pending.

[Ground of recognition] Facts without dispute, Gap evidence 1 to 11, Eul evidence 1 to 12, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the parties' assertion

1) Summary of the Plaintiff’s assertion

A) Illegal in interpreting and applying the law

Article 41-3(1) of the Inheritance and Gift Tax Act applies only to cases where a person who has a special relationship with the largest shareholder or largest investor (hereinafter referred to as "major shareholder, etc.") who is entitled to use undisclosed information regarding the management, etc. of a company receives stocks, etc. (hereinafter referred to as "stocks or equity shares") from the largest shareholder, etc. or acquires stocks, etc. of the relevant corporation from a person other than the largest shareholder, etc. with property donated to the largest shareholder, etc. (hereinafter referred to as "second type") and such undisclosed information, largest shareholder, etc. or a person who is not specially related with the largest shareholder, etc. acquires stocks, etc. of the relevant corporation.

The Plaintiff acquired the instant shares by investing in a newly established corporation, not a newly established corporation, which is the money donated by Nonparty 1, who becomes the largest shareholder of the SP as the newly established corporation, and not a newly established corporation. Therefore, Article 41-3(1) of the Inheritance Tax and Gift Tax Act cannot be applied. The instant disposition that the Defendant imposed gift tax on the Plaintiff based on the said provision is unlawful.

B)the illegality in the calculation of the proceeds of donation;

As a matter of principle, the standard time for taxation on income is the time of the occurrence of income, the calculation of the “donation profits from stock listing” should be based on the date of listing. In principle, the valuation of property under the Inheritance Tax and Gift Tax Act is based on the market value. At the time of listing stocks, the public offering price at the time of listing is the most accurate stock price determined by reflecting the objective value of the specialized institution and the results of prediction of the demand of the majority of institutional investors. As such, the “donation profits from stock listing” should be based on the public offering price at the time of listing. Nevertheless, in calculating the value of listed stocks, Article 41-3(2) of the Inheritance Tax and Gift Tax Act provides that the calculation shall be based on the date three months after the date of listing the relevant stocks, etc., so it unfairly infringes

Therefore, it is illegal to impose gift tax on the basis of the consideration that the Defendant considers it as KRW 29,007, which is assessed as of the date on which three months elapsed from the date of listing stocks pursuant to Article 41-3(2) of the Inheritance Tax and Gift Tax Act, rather than KRW 15,700, a public offering price per share at the time of listing stocks, and calculates the gift tax.

2) Summary of the defendant's assertion

Since the Plaintiff’s acquisition of the instant shares with the investment funds donated by Nonparty 1 is identical to the donation of shares from the largest shareholder and economic substance, it constitutes a type ①, even if not, Article 41-3(6) of the Inheritance Tax and Gift Tax Act provides that Article 41-3(1) of the above Act shall apply to the acquisition or allocation of new shares. Ultimately, the Plaintiff’s acquisition of the instant shares with the investment funds donated by Nonparty 1 who becomes the largest shareholder constitutes a type ②.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination of illegality in the interpretation and application of the law

1) The Inheritance Tax and Gift Tax Act (amended by Act No. 6048, Dec. 28, 1999; Act No. 6048, Jan. 1, 2000) introduced the provisions of Article 41-3 (Presumption of Donation of Benefits Following Listing of Stocks or Equity Shares) in order to prevent an irregular inheritance and donation by imposing gift tax on the actual value of stocks appraised as of the three months after listing, in cases where the largest shareholder, etc., first of all, donated stocks or equity shares of the relevant corporation to a person with a special relationship prescribed by the Presidential Decree to obtain large profits from listing of stocks, etc. using undisclosed information, etc., and thereafter, listed large profits from listing were generated. Article 22(2) of the Inheritance Tax and Gift Tax Act provides that the largest shareholder, etc., who is deemed to be in a position to use information that could not be disclosed on the company’s management, etc., shall be deemed to have acquired new stocks, etc. from the person with a special relationship prescribed by the Presidential Decree or received new stocks, etc.

2) In full view of the above-mentioned legislative intent, circumstances leading up to the amendment, and the following facts recognized, gift tax cannot be levied on the Plaintiff’s acquisition of the instant shares by applying Article 41-3(1) of the Inheritance and Gift Tax Act.

A) In light of the language and text of Article 41-3(1) of the Inheritance and Gift Tax Act, Article 41-3(1) of the same Act applies only to cases where a person with a special relationship acquires stocks, etc. of the relevant corporation from a person other than the largest shareholder, etc., who received or directly acquired stocks, etc. of the relevant corporation from the largest shareholder, etc., as donated to the largest shareholder, etc., and, even according to Article 41-3(6) of the same

B) However, in the event of the incorporation of a corporation, the largest shareholder, etc. cannot exist in terms of the language and text of the corporation. As in the instant case, where the Plaintiff acquired the shares of a newly established corporation at KRW 160 million donated by Nonparty 1, who is only the person scheduled to be the largest shareholder, etc., as a result of the establishment of the corporation, there is no room for falling under Article 41-3(1)-1, 2, and Article 41-3(6) of the Inheritance and Gift Tax

C) Article 41-3(1) of the Inheritance and Gift Tax Act provides for cases where stocks, etc. are acquired or donated to the largest shareholder, etc. who is deemed to be in a position to use undisclosed information on the management, etc. of a company, and it is difficult to present that the case is undisclosed information on the management, etc. of a corporation to be newly established. In addition, the above provision provides for cases where the largest shareholder, etc. “specially related persons” acquires stocks or receives property from the corporation as an employee, etc. among the specially related persons, it is difficult to view that the relationship is in a position of employee, etc. at the time of acquisition

D) In light of the language, form, and history of Article 41-3(1) or (6) of the Inheritance and Gift Tax Act, it is more reasonable to deny the requirements for taxation, non-taxation, or tax reduction or exemption, and to interpret the tax laws and regulations extensively or analogically without reasonable grounds, barring any special circumstances. In light of the language, form, and history of Article 41-3(1) or (6) of the Inheritance and Gift Tax Act, it is reasonable to deem that the said provision is naturally applicable to the acquisition of shares by a newly established corporation, but it is more reasonable to regard that the acquisition of shares by a newly established corporation is excluded from those subject to the regulation, rather than merely because the said provision was not provided due to lack of expression. Considering such circumstances, it is reasonable to deem that the said provision is not permissible

3) Therefore, the instant disposition is unlawful without having to examine the remainder of the Plaintiff’s remaining arguments. Therefore, the Plaintiff’s assertion pointing this out is with merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is decided as per Disposition.

[Attachment]

Judges Kim Jong-chul (Presiding Judge)

1) However, the nominal owner who deposited a total of KRW 170 million, including the Plaintiff’s investment capital of KRW 160 million in the Plaintiff’s new bank account, is Nonparty 2.

Note 2) It is the amended law applicable to the instant case.