Seoul High Court Decision 200Na1448 delivered on August 1, 200

Head of Yongsan Tax Office (Government Law Firm Corporation, Attorneys Lee Jae-in et al., Counsel for the plaintiff-appellant)

April 13, 2012

1. The Defendant’s disposition of imposition of corporate tax of KRW 1,179,368,610 on June 1, 2009 against the Plaintiff on June 30, 2004 shall be 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. As of July 2, 2003, the Plaintiff held 150,040 shares of Vivien International Inc. (hereinafter referred to as "VI") located in the United States Detewa State (hereinafter referred to as "VI"), and the remaining 20,000 shares (11.8% shares) were held by the South Young Industries Co., Ltd. (hereinafter referred to as "Nam Young Industries"), which is the Plaintiff's specially related party under the Corporate Tax Act. V, on July 3, 2003, only 131,040 shares out of the shares owned by the Plaintiff were reduced to USD 50 per share (hereinafter referred to as "the instant capital reduction"), and V's shares share ratio due to capital reduction at a cost, are as follows:

Plaintiff 150,040,040 8.2 131,040 19,000 the Southern Industries 48.7,000 20,000 the aggregate of 170,040,040 170,000 170,040.39,040.0 39,000,000

B. On June 18, 2003, V, immediately before the instant compensatory reduction, was a subsidiary holding 100% equity interest, and was merged with the Concetotosss Texti (hereinafter “CT”) (hereinafter “instant merger”), and the net loss for the three years prior to the merger of CT was US$ 247,530 (200), US$ 379,183.94 (201), US$ 543,15.84 (202).

C. The director of the Seoul Regional Tax Office conducted a corporate tax investigation with respect to the plaintiff. Since VI and CT are not legally merged, it is not possible to reflect the net profit and loss value of VI at the time of stock valuation, and therefore, if V’s net profit and loss per share is assessed solely by the net profit and loss value of VI at the time of the tax reduction for value, the value per share would be US$ 83.51. In addition, when V’s stock valuation, the plaintiff made a decision to dispose of the amount of 2,675,468,735 won per share of the Plaintiff’s stock owned by the Plaintiff as a result of the reduction of the amount of 50 US dollars at the time of stock valuation by adding up the net profit and loss value per share of VI to the remaining industry ($ 83.51 per share valuation - USD 50 per share valuation value) 】 131,040 per share valuation x 1,188.1 (exchange rate) x 601,2061.29.

D. On September 1, 2009, the Plaintiff appealed and requested a trial on September 1, 2009, and the Tax Tribunal dismissed the request on March 30, 201.

【Ground for recognition】 The fact that there has been no dispute, entry of Gap's 1 through 6, the purport of whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

In light of the following circumstances, the instant merger constitutes a legal or de facto merger, and thus, it is necessary to reflect the losses of CT in evaluating the shares of VI after the merger. If the sum of net profit and loss values for the three years prior to the merger between VI and CT is aggregated, the value per share of VI shares would be USD 57.68. Therefore, the instant capital reduction, which is similar thereto, does not fall under the case where the Plaintiff’s tax burden is unfairly reduced due to transactions with a specially related party, so the instant disposition of this case must be revoked unfairly.

1) VI completed a resolution of the board of directors to merge with CT on June 16, 2003, and received a notarized act.

2) The Plaintiff’s statement of audit report on consolidated financial statements for the business year ending on June 30, 2004 stated that the investment assets of CT with CT have decreased due to the merger between CT and VI.

3) VI entered the difference between the value of the assets succeeded from CT and the value of the subscribed value of VI in the earned surplus account, while conducting accounting of the instant merger in accordance with the Share Distribution Act.

4) Since VI owned 100% of the CT shares, it also accords with the economic substance to reflect the deficits of VI in stock assessment.

5) The U.S. A.S. corporation law recognizes de facto mergers. Thus, the merger plan should be deemed to take effect upon the resolution of the board of directors or the approval of the general meeting of shareholders.

6) 원고는 2009. 3. 9. 델라웨어주 법인부에 2003. 6. 18.이 합병일로 기재되어 있는 합병계약서를 제출하였는데, 이에 대하여 델라웨어주 법인부는 “for accounting purpose only”라는 문구를 부가하여 위 문서의 접수를 허락하였는바, 델라웨어주 법률에 의하더라도 VI와 CT는 적법한 합병을 한 것에 해당한다.

B. Defendant’s assertion

델라웨어주 회사법 제252조에서는 회사와 회사의 합병시에는 합병계약서를 체결하도록 규정하고 있고, 같은 법 제103조에서는 작성된 합병계약서를 국무장관에게 제출하여야 하며 그 제출일로부터 제출된 문서의 효력이 발생한다고 규정하고 있다. 그런데 원고는 이 사건 합병 당시에는 델라웨어주 법인부에 합병계약서를 제출하지 아니하다가 원고에 대한 세무조사가 종결된 이후인 2009. 3. 9.에 이르러 합병계약서를 제출하였고, 델라웨어주 법인부는 “for accounting purpose only”라는 문구를 부가하여 VI와 CT의 합병계약서를 접수하였다. 따라서 이 사건 유상감자 당시 VI와 CT는 적법하게 합병한 상태가 아니므로 조세법률주의의 원칙에 따라 VI의 주식가치 산정시 CT의 결손금을 반영하여서는 안 된다. 그러므로 VI의 순손익가치만으로 다시 주식의 가액을 정한 후 이 사건 유상감자대가와의 차액만큼을 특수관계자간의 거래로 인한 부당행위계산으로 보아 법인세를 과세한 이 사건 처분은 적법하다.

C. Relevant statutes

It is as shown in the attached Table related statutes.

(d) Facts of recognition;

1) On July 19, 1995, the Plaintiff acquired 30% of the shares of VI ($ 5.53 per share) from among the shares of VI, and subsequently acquired 20.05% ($ 55.53 per share), and 49.95% of the remaining 49.95% ($ 15 per share) on September 1995, and owned 100% of the shares of VI. Since the management of V has deteriorated, the remaining industry acquired new shares of VI and owned 18.18% ($ 50 per share) from V to acquire additional capital increase, and thereafter continued capital increase, the Plaintiff finally owned 8.24% of the total amount ($ 6,17,500, USD 500, USD 1060, USD 10010, USD 100600, USD 1006.

2) While the Plaintiff did not seem to have a clear business performance from the time of acquisition of VI’s stocks, the Plaintiff began to incur a net loss in the year 2000 and 201, and accrued operating income in the year 2002. As a result of the improvement in the management of VI, the Plaintiff determined to recover the investment amount to VI as a result of the rise in the stock assessment value, and promoted the reduction of the paid-in capital in the instant case.

3) Meanwhile, VI was the parent company holding 100% of the CT’s share. As the financial crisis of CT deepens, I would arrange CT by combining CT. On June 16, 2003, the board of directors was held on June 16, 2003 while all the directors were present to make a resolution of the board of directors with the following contents, and was notarized on June 20, 2003.

DoT is completely dissolved and liquidated as it is merged with VI.

Belgium acquires the assets of the CT and leaves the liabilities as specified in the account book.

After the merger of the Do Governor, VI succeeds to all assets and liabilities of the CT.

The merger shall be completed by June 30, 2003.

4) On June 18, 2003, V entered the financial statements into a merger with CT as of June 18, 2003, and entered the accounts related to the CT in accordance with the Equity Holdings Act (the increase of V’s assets, the decrease of VI’s investment stocks, and the offset of V’s loans to V with respect to CT). At this time, V dealt with the difference between the book value of the assets and liabilities succeeded from CT as earned surplus (the adjustment of retained earnings).

In the table (units: US$4,086,894.37 Loans 1,450,937.83 ( Cash Assets, Inventory Assets, Land, Buildings, Machinery, etc.) Investment Stocks 4,948,948,84.55 6,39,8801 Total 6,399,782.38 6,399,782.38

5) Also, while filing a tax return with the U.S. National Tax Service, VI reports to reduce the investment assets of CT and increase the assets of VI as the assets acquired from CT, and received the depreciation costs, etc. of the assets as its deductible expenses.

6) The Plaintiff also deemed that the CT ceased to exist after the merger between VI and CT in the course of accounting of the investment assets in the related company in accordance with the equity law, and entered the decrease in the investment assets in CT and the increase in the investment assets in V with respect to the relevant company.

7) VI는 원고에 대한 세무조사가 종료된 후인 2009. 3. 9. VI와 CT의 합병계약서를 델라웨어주 국무장관에게 제출하였는데, 국무장관은 이를 접수하면서 “회계상의 목적에 한정하여(for accounting purpose only)”라는 문구를 부가하는 조건으로 합병 유효일을 2003. 6. 18.로 소급하여 인정하도록 하였다.

【Ground for recognition】 The fact that there has been no dispute, Gap's 5, 7, 8, 9, 11, 12, 19, Gap's 20-1 and 20-2, and the purport of the whole pleadings

E. Determination

1) In order to determine whether taxes were unjustly reduced due to capital transactions with a person with a special relationship under the Corporate Tax Act (Article 52(1) of the Corporate Tax Act and Article 88(1)9 of the Enforcement Decree of the same Act), the determination must first be made on the basis of sound social norms and commercial practice of the relevant transaction and the prices applied or deemed as applicable to a normal transaction between persons without a special relationship (hereinafter “market price”) (Article 52(2) of the Corporate Tax Act). In this case, in calculating the market price, the method of calculating the market price is to be made on the basis of the average net asset value or net asset value of the non-listed corporation for three years prior to the time of assessing the market price of the stocks of the non-listed corporation (Article 89(1) and (2) of the Enforcement Decree of the Corporate Tax Act; Article 52(3)4 of the Inheritance Tax and Gift Tax Act.

Meanwhile, the merger of companies means that two or more companies are combined with one another. If the merger takes place, the personality of the merged corporation is extinguished and both the tangible and intangible assets, liabilities, and capital of the merged corporation is succeeded to the merged corporation. Thus, if the evaluation of the merged corporation’s stocks is conducted after the merger, the economic performance of the merged corporation should be reflected in the evaluation of the merged corporation’s stocks after the merger. When the defendant evaluates the stocks of the merged corporation for which three years have not passed since the merger took place, it shall be interpreted that the merger corporation and the merged corporation’s net profit and loss should be added to the total amount of stocks issued after the merger and calculated by dividing them into total number of stocks issued after the merger (the National Tax Service, the date on which 46014-10352, October 24, 2001).

2) Therefore, in order to determine whether the instant capital reduction was a case where the tax burden was unjustly reduced, it is necessary to examine whether the weighted average value of net profit and loss should be calculated by adding up the net profit and loss amount of VI and CT as it was deemed that VI did not merge with CT, and whether VI should be calculated by averaging only the net profit and loss amount of VI without reflecting the net profit and loss amount of CT for the three years prior to the capital reduction, or not, or ② as VI and CT were lawfully merged, it is necessary to examine whether the weighted average value should be calculated by adding up the net profit and loss amount of VI and CT.

3) In light of the following circumstances, in order to determine whether the price of the capital reduction at the time of the instant capital reduction made after the instant merger is subject to the avoidance of wrongful calculation, VI and CT are merged. Therefore, when calculating the assessed value of the shares at the time of the instant capital reduction for consideration, VI and CT should be added up the net amount of profits and losses for three years before the capital reduction for consideration, and the weighted average of them should be made. Accordingly, the Defendant’s disposition made on a different premise cannot avoid revocation due to an unlawful act.

A) Since VI is a parent company with 100% of CT, it is constituted and effective as VI and VI are merged only with the preparation and submission of a certified copy of the merger resolution and the absorption certificate of the VI board of directors, the parent company, in lieu of the preparation of the merger agreement, pursuant to Article 253 of the U.S. Detewa State Company Act. Accordingly, VI opened the board of directors on June 16, 2003 to merge with CT and VI, complete liquidation of CT, and V completed the resolution of the board of directors to comprehensively succeed to all assets and liabilities of CT, and was notarized on June 20, 2003.

나) 다만 같은 법 제103조에 따라 합병계약서나 이에 갈음하는 이사회 합병결의서 및 흡수합병증명서 등을 주무장관에게 제출하고 주무장관이 그 제출사실을 확인해 준 때에 비로소 그 문서가 목적하는 법률행위의 대외적 효력이 발생하게 된다. VI는 2009. 3. 9.에 이르러 델라웨어주 국무장관에게 VI와 CT의 합병계약서를 제출하고 회계상의 목적에 한정하여(for accounting purpose only) 합병 유효일을 2003. 6. 18.로 하는 조건으로 그 제출을 승인받았으므로 적어도 회계상으로는 2003. 6. 18.자로 VI와 CT가 합병한 것으로 보아야 할 것이다.

C) On the premise that V had been the same personality as CT due to the instant merger, it appropriated the assets and liabilities of CT as its own account and treated the difference as the earned surplus account. The loan to CT and the loan to CT were offset and disposed of as the extinguishment of CT shares in the investment assets account, and based on such financial situation, the U.S. Tax Report was completed for the fiscal year of the instant merger with the U.S. National Tax Service. The Plaintiff also confirmed that CT and VI were merged with the financial statements prepared after the instant merger and entered into a tax return for the fiscal year of the instant merger with the U.S. National Tax Service. The Plaintiff, upon the confirmation of the merger between CT and VI in the financial statements prepared after the instant merger, entered into the reduction of

D) In the event of the instant capital reduction, the Plaintiff’s shareholders, a listed company, were pressured to enforce management’s responsibility as the investment in the Plaintiff Company did not achieve any outcome. On the other hand, in the case of the other unlisted company, the listed company, and in the case of the other unlisted company, the U.S., even though the reservation was made, it appears that the U.S. was made in consideration of the fact that the Plaintiff’s intent to evade tax through the instant capital reduction was considered as a dividend and that there was an excessive tax assessment. However, there is no reason to deem that the Plaintiff had intended to evade tax through the instant capital reduction.

3. Conclusion

If so, the plaintiff's claim shall be accepted for the reasons and it is so decided as per Disposition.

[Attachment]

Judges Cho Jong-hee (Presiding Judge)