Suwon District Court-2017-Gu Partnership-65907 ( November 08, 2017)

Cho-2017-China-0175 ( October 27, 2017)

Gift tax shall be levied on unlisted stocks that are accrued from acquisition at a low price by transfer from a non-specially related person without justifiable grounds.

It is difficult to view that the transfer of the shares of this case was normal from the viewpoint of a reasonable economic person, and there is no justifiable reason in terms of transaction practice.

Article 35 of the Inheritance Tax and Gift Tax Act

2017Nu85353 Revocation of Disposition of Imposition of Gift Tax

Hu○ ○

○ Head of tax office

Suwon District Court Decision 2017Guhap65907 Decided November 8, 2017

May 29, 2018

June 26, 2018

1. The plaintiff's appeal is dismissed.

2. The costs of appeal shall be borne by the Plaintiff.

The judgment of the first instance shall be revoked. The defendant's disposition of imposition of KRW 180,310,200 (including additional tax of KRW 45,790,505) to the plaintiff on November 8, 2016 shall be revoked.

1. Details of the disposition;

This Court's explanation is the same as the corresponding part of the reasoning of the judgment of the court of first instance. Thus, it is accepted by Article 8 (2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act.

2. Whether the disposition is lawful;

A. The plaintiff's assertion

Considering the characteristics of ready-mixed industry’s sensitive to the construction market and the fact that the ○○○ Confection leases land and major facilities and operates its business, the instant shares cannot be said to have value equivalent to the value assessed by the Defendant as a supplementary assessment method under the former Inheritance Tax and Gift Tax Act.

Unlisted shares tend to be traded among land owners. In order to avoid the establishment of special relationship between ○ Cement and ○ Cement as stipulated in Article 12-2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 26922, Jan. 22, 2016; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”), Kim○ transferred the shares of this case to the land owner in order to avoid the occurrence of special relationship between ○ Cement Co., Ltd. (hereinafter “○ Cement”).

The Plaintiff and ○○○ is an unrelated person under the former Inheritance Tax and Gift Tax Act, and there were reasonable grounds for believing the transaction price of the instant shares at a normal price that properly reflects the objective exchange value, or there were objective grounds for not deeming the acquisition of shares from a reasonable economic standpoint.

Therefore, the instant taxation disposition, which was conducted on the premise that there was no justifiable reason for the transaction’s practice under Article 35(2) of the Inheritance Tax and Gift Tax Act for the transfer of shares, was unlawful.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

1) ○ cement is a listed company established around 1961 and its main business is cement manufacturing. A related party centered on ○○○○, etc. holds approximately 45% of the shares of 45% and holds approximately 98% of the shares of ○○ Industry Co., Ltd. (hereinafter “○○ Industry”). around 2008, ○○ Industry took over ○○○○○○-gu ○○○2dong-dong-dong-dong ○○○○○○ (hereinafter “○○ Industry”). Around 2008, 100% of the shares (10,000 shares) were established by leasing land, buildings, etc. and owned 10% of the shares thereof. The Plaintiff worked from ○ cement around 203 to 209 and from around 2009 to 2010 to ○○○ Industrial Co., Ltd. (hereinafter “○”).

2) As labor-management disputes arise in ○○ ready-mixed, such as a request for improvement of treatment by a local owner of ready-mixeds belonging to ○○○○○○ Con-mixed, the ○○ Industries provides for the prevention of impacts on other local business places, such as A factory, BB factory,CC factory, DD factory, EE factory, FF factory, and GG factory, the control relationship with the ○○ ready-mixed is to be resolved according to the Plaintiff’s proposal (However, the management support relationship, such as production and sale), and the Plaintiff, introduced on March 28, 201, pursuant to the Plaintiff’s proposal, ○○○, Kim △△△, Kim △, and 100 shares of the ○○ Con-mixed, which were transferred to 11,00 won per share, thereby holding only 29% of the shares of the ○○ Con-mixed by deducting the net asset value of the 100 billion won per share, 360 billion won per share, calculated based on the net asset value of the 20.

·Papnives (Operation of cement-producing collaborative companies): 3,000 jums

- The Gaim △△△△ (Operation of the cement transportation collaborative entity): 1,100 weeks

- Glaver○○ (Operation of ○ cement Cooperative after withdrawal from January 2009: 2,500 shares, while working as the head of the audit team, etc. in ○○ cement from February 2003: 2,50 shares.

·Plaintiffs: 500 weeks

3) Around October 2013, Kim △△△△, around October 2013, the Plaintiff requested the Plaintiff to intervene in the purchase of 1,100 shares of ○○ ready-mixed owned by himself, and upon the Plaintiff’s introduction, on December 3, 2013, the Plaintiff transferred the said 1,100 shares to 30,000 won per share to the instant △△△△ (Operation of the cement Production Cooperative) on December 3, 2013.

On the other hand, the Director of the △△△△△ Director: (a) considered the transfer of the said shares to the △△△△△△△△△, as a low-price transfer under Article 35(2) of the former Inheritance Tax and Gift Tax Act; and (b) imposed the gift tax of KRW 7,753,566 on the △△△△△△△△; and (c) accepted the vindication that the △△△△△△△△

4) On March 2015, 2015, Kim ○○ closed down the instant ○ Cement subcontractor, which was operated around February 2015, and then requested the Plaintiff to intervene in the purchase of 2,500 shares of ○○ Cement owned by ○○○○ upon request from the Plaintiff. On March 19, 2015, 1,000 shares among them were transferred to the instant △△△△△△△, which was introduced by the Plaintiff, to the Plaintiff, and the remaining 1,50 shares of 1,50 shares per share to the Plaintiff at KRW 35,000 on March 20, 2015.

5) The alternative status of ○○ ready-mixed’s financial statements from the business year 201 to which the International Financial Reporting Standards (K-IFS) applies, such as sales and net income, profits per share, appraised value per share, and dividend amount, etc., are as follows (On the other hand, ○○ ready-mixed distributes 15,000 won per share in the business year 2009, and 21,000 won per share in the business year 2010, respectively).

[Indication of List]

[Ground of recognition] Facts without dispute, entries in Gap 1 through 5, 8 through 12, 14, 17, 24, 27 through 30, 33, 34, 5, 6, 13 through 15 (including additional numbers) and the purport of the whole pleadings

D. Determination

1) Whether the transfer of value at a remarkably lower price than the market price is applicable

A) Article 35 of the former Inheritance Tax and Gift Tax Act provides that the amount equivalent to the difference between the price and the market price shall be considered as the value of donated property without justifiable grounds for the transaction’s practice between persons who are not related parties. Therefore, in determining the legality of imposing gift tax, first of all, whether the transfer value is the value significantly lower than the market price should be examined.

Article 60(1) and (3) of the former Inheritance Tax and Gift Tax Act provides that the value of donated property shall be calculated on the basis of the market price as of the date of donation, and where it is difficult to calculate the market price, it shall be calculated on the basis of the value appraised by the supplementary evaluation methods under Articles 61 through 65, taking into account the type, scale, transaction circumstances, etc. of the relevant property. Meanwhile, Article 60(2) of the Inheritance Tax and Gift Tax Act provides that "the market price under Article 60(1) of the same Act shall be the value which is generally recognized as normal in the case of free transaction between many and unspecified persons, and shall include the amount which is recognized as the market price under the conditions as prescribed by Presidential Decree, such as the expropriation and public sale price, and the appraisal price, etc." The main sentence of Article 49(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax

Therefore, even in a case of unlisted stocks with low market value, where there is a transactional fact, the value of the stocks shall be deemed the market value and the stock value shall not be assessed based on the supplementary evaluation method stipulated in the Inheritance Tax and Gift Tax Act. However, since the market value means the objective exchange price formed through a general and normal transaction, in order to recognize such transactional situation as the market value, the circumstances that can be seen as properly reflecting the objective exchange value at the time of transfer should be acknowledged (see, e.g., Supreme Court Decision 2010Du26988, Apr. 26, 2012).

B) However, examining the following circumstances recognized by the above facts and evidence in light of the above legal principles, 35,00 won per share transfer value of the shares of this case cannot be deemed as the market price as the objective exchange price formed through a general and normal transaction. In this case, as stipulated in Article 60(2) of the former Inheritance Tax and Gift Tax Act and Article 49(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, there cannot be any values that can be recognized as the market price, such as the sales price within 6 months before and after the transfer date of the shares of this case (3 months in the case of gift property) within the evaluation period of the shares of this case. As such, the imposition of gift tax on the shares of this case can be reasonably calculated based on the supplementary evaluation method under Articles 60(3) and 63(1)1 (c) of the former Inheritance Tax and Gift Tax Act and Article 54(1) and (2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act. On the other hand, the value (667, 266 won per share) calculated by supplementary evaluation method can be objectively reflected.

① The original ○○ ready-mixed shares had 100% or more of the shares of ○○○ Industries. Based on the Plaintiff’s proposal, 71% of the shares were distributed to the Plaintiff and ○○ cement Cooperative Operators, the parent company of the ○○ industry, on March 28, 2011. This appears to have been achieved not for transfer of management rights or investment, but for the purpose of external adjustment of control relationship for the resolution of labor-management disputes, but for those who have a close economic relationship with ○○ cement and ○○ Industries, as a transferee of shares. Accordingly, despite the fact that the shares of ○○○ Congested were transferred at least 50% of the shares of the above transfer, the transfer value was not much added to 10% (this does not seem to have lost substantial management rights on the part of ○○ Industries), the exchange of 11,000 won at the above transfer value and 10% of the net asset value at 10% of the above net asset value at 10% of the above net asset value at 20% of the above.

② On December 3, 2013, 2013, Kim △△△△△△ transferred 1,100 shares of ○○ Congested at KRW 30,00 per share to the instant △△△△△△△△△△△△. The Plaintiff’s introduction appears to have not made any objective evaluation procedures in calculating the transfer value, and even in the situation where the sales amount of ○○ cement cement and net income, etc. are rapidly increasing, the transfer was made at an amount substantially short of KRW 469,852 per share appraised in the business year 2013 of the above Table (at that time, the market price was not assessed solely on the net asset value since it had been more than three years since the opening of the ○○ Congested Business). The transfer value of 30,000 won on December 3, 2013 cannot be said to be an objective exchange price formed by the general and ordinary transaction.

③ 위 표에서 본 바와 같이 ○○레미콘의 매출액, 당기순이익 등은 매년 큰 폭으로 증가하였고(2015 사업연도에 당기순이익이 일시 감소한 것은 아스콘사업부 분리 과정에서의 비용 때문이지 ○○레미콘의 사업 자체가 나빠졌기 때문은 아니다), ○○레미콘 주식의 1주당 평가액도 큰 폭으로 상승하였으며, 매년 배당 역시 상당한 금액으로 이루어지면서 꾸준히 증가하였다. 이처럼 ○○레미콘 주식은 비상장주식이긴 하지만 1주당 이익이 지속적, 안정적으로 상승하고 배당성향이 매우 높은 우량주라고 할 수 있다(일례로 원고나 김○○이 당초 ○○레미콘 주식을 인수한 가액인 1주당 11,000원을 기준으로 할 경우 단지 1〜2년의 배당액만으로도 인수대금을 모두 회수할 수 있을 정도였다).

④ The transfer of the instant shares was conducted without any objective assessment procedure on the value of the shares. In the business year 2014, ○○ ready-mixed 2014, the interest and appraised value per share have ever increased again, and such trend was left in the business year 2015, and the dividend amount per share also increased considerably compared to the business year 2013. The transfer value of the instant shares was determined to the extent that the transfer transaction would increase 5,00 won at will on the basis of the objective corporate value per share per share per se, without considering any particular factors.

C) Article 35(3) of the former Inheritance Tax and Gift Tax Act provides that "The scope of a significantly low or high price is determined by Presidential Decree in the application of Article 35(2) of the same Act, and Article 26(5) of the Enforcement Decree of the same Act provides that "if the market price of the acquired property differs by not less than 30/10 of the market price, it refers to the price calculated by subtracting the price from the market price of the acquired property."

As seen earlier, the market price of the instant shares shall be KRW 667,266 per share assessed by the Defendant according to the supplementary assessment method stipulated in the former Inheritance Tax and Gift Tax Act. As such, the Plaintiff acquired the instant shares in KRW 35,00 per share, which is merely about 5% of the said value, which constitutes a price significantly lower than the market price under Article 35 (2) of the former Inheritance Tax and Gift Tax Act.

(ii) the existence of justifiable reasons for transaction practice;

A) The legislative purport of Article 35(2) of the former Inheritance Tax and Gift Tax Act is to: (a) in a case where profit equivalent to the difference between the price and the market price is actually transferred without compensation by means of manipulating the transaction price for the benefit of the transacting partner, to cope with an abnormal donation and to promote fair taxation by imposing gift tax on the benefit of the trading partner. However, since the transaction between the unrelated parties does not coincide with each other; (b) it is reasonable to deem that the difference was donated to the trading partner solely on the basis that there is a difference between the price and the market price; (c) accordingly, Article 35(2) of the former Inheritance Tax and Gift Tax Act added the taxation requirement of “for the transaction between the unrelated parties, there is no justifiable reason in light of the transaction practice” (see, e.g., Supreme Court Decision 201Du25138, supra., Supreme Court Decision 201Du325138, supra. 205).

However, if the tax authority is a reasonable economic person, it may prove that there is no justifiable reason in light of the transaction practice by submitting the objective circumstance, etc. that the person liable for duty payment would not have traded under such transaction conditions in the situation at the time of the transaction. If such circumstance is proved to a considerable extent, it is necessary to prove that there are special circumstances that make it easy for the person liable for duty payment to submit specific materials concerning the transaction details, reasons for determining the transaction conditions, etc. in light of the difficulty of proof or the concept of fairness to reverse the aforementioned evidence (see, e.g., Supreme Court Decision 2013Du24495, Feb. 12, 2015).

B) Examining the following circumstances recognized by the above facts and evidence in light of the aforementioned legal principles, even if Kim○○ transferred the instant shares to avoid the existence of a special relationship between ○○ Cement and ○○ Cons in Article 12-2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, it is difficult to view that the transfer of the instant shares at a remarkably low price per share was normal from a reasonable economic person’s perspective, and thus, the transfer transaction of the instant shares did not have justifiable grounds for the transactional practice.

① As seen earlier, KRW 35,00 per share, which is the transfer value of the instant shares, is merely about KRW 667,266 per share, which is the appraised value of the above supplementary evaluation method recognized as the market price under the former Inheritance Tax and Gift Tax Act. Moreover, the instant shares account for 15% of the shares of ○○○ Congested, and the Plaintiff’s share increase from 5% to 20% as a result of the acquisition, etc., are not entirely reflected in the transfer value, etc. (the transfer value was uniformly set at KRW 35,00 per share, along with the 1,00 shares transferred to △△△△△△△△△△△△△△△△△△△△△△△△△△△△△△△△△, and the transfer value was set at KRW 3

② The transaction of ○○ ready-mixed stocks seems to have been limited only between the persons with close economic trust and cooperation relationship as seen above. Furthermore, the transaction of ○○ ready-mixed stocks, which was made after the ○○ Industries, holding 100% of ○○ ready-mixed stocks, distributed on the Plaintiff’s proposal, a representative director, to the Plaintiff and the ○○ cement cooperator operator, was made in the form of introducing another ○○ cement cooperator operator, etc. upon the Plaintiff’s request by the holder of the stocks to the outside of the purchaser. This is suggesting the possibility that the transaction of ○○ ready-mixed stocks was made under the de facto control of ○ cement or ○ industry.

③ Even though there is an individual circumstance that ○○○ has taken the audit of ○ cement upon the transfer of the instant shares, the act of transferring the instant shares to a person who has a close trust and cooperation relationship with ○ cement and ○○ Industry at a very low price does not justify the economic feasibility of the act of transferring the instant shares to a person.

④ Meanwhile, the Plaintiff asserts to the effect that Kim ○ does not have any reason to transfer a certain benefit to the Plaintiff free of charge. However, in a case where the donation is deemed as constructive or presumed as stipulated in Article 35(2) of the former Inheritance Tax and Gift Tax Act, it does not necessarily require the transaction party to recognize or desire to transfer the gift free of charge, and thus, the circumstance that there was no awareness or desire to do so does not constitute grounds for exempting the application of the donation by transfer at a low price.

⑤ Although there were various objective circumstances that cannot be seen as normal from a reasonable economic standpoint with respect to the instant stock transaction, the Plaintiff did not properly explain the details of the transaction, the transaction terms, and the reasons why the transaction price should have been determined as such.

3) Sub-determination

Therefore, there is no error in the taxation disposition of this case as asserted by the plaintiff.

3. Conclusion

Therefore, the judgment of the court of first instance dismissing the plaintiff's claim is legitimate, and the plaintiff's appeal is dismissed as it is without merit.

[Attachment]

Related Acts and subordinate statutes

(1) The former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015)

Article 35 (Donation, etc. of Profits from Transfer at Low or High Price)

(1) For any of the following persons, an amount equivalent to the difference between the price and the market price at the time the relevant property is acquired or transferred, which is equivalent to profits prescribed by Presidential Decree, shall be deemed the value of donated property:

1. Where a person takes over property from a third person at a price lower than the market price, the transferee of such property;

(2) In applying paragraph (1), where property is acquired or transferred between persons who are not specially related persons prescribed by Presidential Decree, without justifiable grounds, by transfer or transfer of property at a price significantly lower than the market price or at a price significantly higher than the market price in light of transaction practices, the amount equivalent to profits prescribed by Presidential Decree shall be presumed to have been donated to the person who has acquired such profits, as

(3) In applying paragraph (2), the scope of significantly low or high values shall be prescribed by Presidential Decree.

Article 60 (Principles, etc. of Appraisal)

(1) The value of property on which inheritance tax or gift tax is levied under this Act shall be the market value as of the date the inheritance commences or the date of donation (hereinafter referred to as the "date of appraisal"). In such cases, the value (excluding cases falling under Article 63 (2)) appraised by the method of appraisal stipulated under Article 63 (1) 1 (a) and (b) shall be deemed the market

(2) The market price referred to in paragraph (1) shall be the price generally recognized as a transaction between many and unspecified persons, including the expropriation price, public sale price, appraisal price, and others recognized as the market price, as prescribed by Presidential Decree.

(3) Where it is difficult to compute the market price in applying paragraph (1), the value appraised by any method prescribed in Articles 61 through 65 in consideration of the type, scale, transaction status, etc. of the relevant property shall be deemed the market

Article 63 (Evaluation of Securities, etc.)

(1) Securities, etc. shall be appraised by any of the following methods:

1. Appraisal of stocks and investment shares:

(a) The average amount of stocks and equity shares of a stock-listed corporation traded in the securities market under the Financial Investment Services and Capital Markets Act, which are prescribed by Presidential Decree, shall be the average amount of the last daily exchange prices (not based upon whether there is a transaction record) published two months before and after the evaluation base date: Provided, That in calculating the average amount, in cases where it is inappropriate to make the average amount due to reasons such as capital increase or merger, etc. occur within two months before and after the evaluation base date, the average amount of the periods calculated, as prescribed by Presidential Decree, between the two months before and after the evaluation base date;

(b) item (a) shall apply mutatis mutandis to the stocks and equity shares prescribed by Presidential Decree among the stocks and equity shares of a stock-listed corporation under the Financial Investment Services and Capital Markets Act and prescribed by Presidential Decree;

(c) Stocks and equity shares other than those under item (b), which are not listed in the Exchange, shall be appraised by the methods prescribed by Presidential Decree, in consideration of the assets, profits, etc.

(1) Enforcement Decree of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 26922, Jan. 22, 2016)

Article 12-2 (Scope of Specially Related Persons)

(1) "Related person prescribed by Presidential Decree" in the proviso to Article 16 (2) of the Act means a person who has any of the following relations with the principal. In such cases, the principal shall be deemed a related person of a related person pursuant to the latter part of Article 2 (20) of the Framework Act on National Taxes with the exception of each item:

2. Any person, other than an employee (including any employee of a corporation controlled through investment; hereinafter the same shall apply) or employee, who maintains his livelihood with his own property;

6. A corporation which invests 30/100 or more of the total number of stocks issued or total amount of money invested (hereinafter referred to as "total number of stocks issued, etc.") jointly by the principal, persons under subparagraphs 1 through 5, or persons under subparagraphs 1 through 5

Article 26 (Calculation Method, etc. of Profits Arising from Transfer of Low Price or High Price)

(1) "The lower price" in Article 35 (1) 1 of the Act means the price where the value (referring to the price assessed under Articles 60 through 66 of the Act; hereafter in this Article and Article 31, the same shall apply) calculated by subtracting the price from the market price (referring to the price assessed under Articles 60 through 66 of the Act; hereafter in this Article and Article 31, the same shall apply) of the property acquired by transfer is at least 30 percent of the market price or the difference is at least

(5) For the purpose of Article 35 (2) of the Act, the term "value of the property acquired by transfer (excluding that under each subparagraph of paragraph (1)) is remarkably low means the value calculated by subtracting the price therefor from the market value of the property acquired by transfer is 30/100 or more of the market value,

(7) "Profit prescribed by Presidential Decree" in Article 35 (2) of the Act means the amount calculated by subtracting 300 million won, respectively, from the difference between the price calculated pursuant to paragraphs (5) and (6) and the market price.

Article 49 (General Principles, etc. of Appraisal)

(1) The amount recognized as the market price, such as the expropriation price, public sale price, appraisal price, etc. under Article 60 (2) of the Act, as prescribed by Presidential Decree, shall be six months before or after the evaluation base date (three months in cases of donated property.

Where there is a sale, appraisal, expropriation, auction (referring to an auction under the Civil Execution Act; hereafter the same shall apply in this paragraph) or public auction (hereafter referred to as "sale, etc." in this paragraph) during a period of less than the evaluation period in this paragraph, it means the value confirmed by any of the following cases (hereinafter referred to as "sale, etc."):

1. The transaction amount, if any, of the relevant property;

Article 54 (Appraisal of Unlisted Stocks)

(1) Stocks and equity shares not listed in an Exchange under Article 63 (1) 1 (c) of the Act (hereafter in this Article and Article 56-2, referred to as "non-listed stocks") shall be the weighted average value of the net asset value per share in the ratio of 3 to 2 of each of the following formula (hereinafter referred to as "net profit and loss value") and the net asset value per share: Provided, That in cases of a corporation in excess of real estate (referring to a corporation falling under Article 158 (1) 1 (a) of the Enforcement Decree of the Income Tax Act) 1 (referring to a corporation falling under Article 158 (1) 1

The value per share = The weighted average amount of net profits and losses for the latest three years per share ¡Àthe rate determined and publicly announced by the Minister of Strategy and Finance in consideration of the yield of distribution of corporate bonds with three-year maturity guaranteed by a financial company, etc. (hereinafter referred to as the "net profit and loss

(2) The net asset value per share under paragraph (1) shall be the value appraised by the following formula:

The value per share = the net asset value of the corporation ± the net asset value of the corporation ± (hereinafter referred to as the “net asset value”).

(4) In any of the following cases, notwithstanding paragraph (1), the net asset value under paragraph (2) shall apply:

2. Stocks, etc. of a corporation prior to the commencement of business, a corporation less than three years after the commencement of business, or a corporation under temporary closure or permanent closure.

Finally.