In a case where Company A, upon issuing bonds with warrants, acquired the above bonds and transferred them to Company C on the same day; Company C divided the preemptive rights on the same day and sold them to Company C, which was the major shareholder of Company A; Company C, by exercising preemptive rights thereafter, filed a request for correction by asserting that the profits accrued from the conversion of stocks to the tax authority were returned and paid gift tax on the profits accrued to the conversion of stocks, but did not constitute subject to gift tax, but the tax authority rejected such request, the case affirming the judgment below that the Company B and C cannot be deemed to have acquired the above bonds or preemptive rights for the purpose of making an offer for sale or a solicitation for purchase against 50 individual investors; thus, the gift tax cannot be imposed pursuant to Article 40 (1) 2 Item (b) of the former Inheritance Tax and Gift Tax Act, and further, Article 40 (1) 3 of the same Act cannot be deemed as the grounds for imposing gift tax

Article 40(1)2(b) and 3 of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015); Article 9(12) of the Financial Investment Services and Capital Markets Act

Plaintiff (Law Firm Aion, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office

Seoul High Court Decision 2016Nu46504 decided June 16, 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 40(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax Act”) provides that “In cases where a person who is the largest shareholder of a corporation that has issued convertible bonds, etc. or his/her specially related person obtains benefits falling under any of the following subparagraphs by converting into or exchanging stocks with convertible bonds, bonds with warrant (referring to warrant certificates where preemptive rights are separated) or other stocks or by issuing bonds entitled to take over stocks (hereinafter “convertible bonds, etc.”) or by converting into or exchanging with stocks or accepting stocks under bonds with a right to take over stocks, an amount equivalent to such benefits shall be deemed the value of property donated to the person who has acquired such benefits.” subparagraph 2(b) provides that “In cases where the largest shareholder of the corporation that has issued convertible bonds, etc. or his/her specially related person, who has acquired stocks, etc. from the corporation and acquires them in excess of the number of stocks allocated under equal conditions in proportion to the number of stocks owned by the corporation, benefits acquired or acquired from the stocks (including stocks acquired profits acquired by conversion or acquired by transfer.”

2. In full view of the evidence duly admitted, the lower court determined that: (a) on June 30, 2008, the Plaintiff issued the instant bonds and the instant bonds issued on the same day; (b) the new securities company (hereinafter “new securities”) which purchased the instant bonds and transferred them to a small and medium enterprise, and (c) the Plaintiff was sold separately the instant preemptive right on the date of the issuance of the instant bonds; and (d) on the same day, the lower court determined that the new securities and the instant bonds cannot be deemed to have acquired the instant bonds or the instant preemptive right to new stocks with a view to soliciting an individual investor to make an offer for sale or purchase; and (b) on the grounds that the gift tax cannot be imposed pursuant to Article 40(1)2 Item (b) of the former Inheritance Tax Act and Article 40(1)30 of the former Inheritance Tax Act cannot be levied on the Plaintiff on the following grounds: (a) on the grounds that the new securities and the instant bonds cannot be deemed to have been sold separately on the date of issuance of the instant bonds.

(1) Since January 200, the Small and Medium Business Corporation promoted a small and medium enterprise’s asset-backed securitization support project in order to provide funds to small and medium enterprises with technology but difficult to raise funds through financial markets. Of them, regarding debentures owned by a new company in charge of the asset-backed securitization support project, the asset-backed securitization project was established on May 8, 2008 by the Asset-Backed Securitization Act.

(2) In a situation where it is difficult for Indian loan to finance, the company applied for the funding support project and was selected as the target company. Accordingly, the company concluded an underwriting agreement with respect to the new securities and the bonds of this case on June 30, 2008 and sold them en bloc to the new securities after issuing the bonds of this case.

(3) On June 30, 2008, the new securities acquired bonds with warrants, etc. issued by small and medium enterprises eligible for support projects, including Indianism, and transferred them to Liveering on the same day. The new securities issued asset-backed securities based on underlying assets, including the bonds in this case.

(4) Meanwhile, on June 30, 2008, the securitization of the instant preemptive right was sold separately from the instant bonds to the Plaintiff. This is because, since the credit rating of the Indian loan was lower at the time, the demand for warrant certificates issued by Indianate was anticipated to be limited and the demand for the warrant certificates was anticipated to have been demanded. The Doluri Asset Securitization may recover the investment profits early by having the Plaintiff, a major shareholder of Indianate, purchase the instant preemptive right as soon as possible, thereby minimizing the management restriction following the issuance of the instant warrant certificates, while securing the corporate operating funds.

(5) All of the various conditions on the instant preemptive right, including the initial exercise price of the instant preemptive right, were objectively determined between the Indiana and the new securities or lives securitization without a special relationship.

(6) Even if the Plaintiff obtained gains from the acquisition and exercise of the instant preemptive right, this is a result of the Plaintiff’s considerable period of time to avoid the decline of the price due to the depression’s business activities or credit risk, etc. Furthermore, it cannot be denied that the Plaintiff’s stock price increase due to the issuance of the instant bonds, KOSDAQ listing, and efforts to improve management, etc. In addition, it is difficult to readily conclude that at the time of the Plaintiff’s exercise of the instant preemptive right, the rise in the price of the Indianism was sufficiently anticipated at the time of the exercise of the instant preemptive right.

(7) It is difficult to deem that the Plaintiff intended to acquire profits from the acquisition of new shares of Indiana from the beginning through a series of acts such as the issuance of the instant bonds, the acquisition of the instant warrant certificates, and the exercise of preemptive rights.

(8) Ultimately, it cannot be readily concluded that the series of such series of acts as above was used as a means for the purpose of allocating excessive profits from the price increase to the Plaintiff, who is a major shareholder of Ethlonio, by promising the price increase from the beginning and for the purpose of allocating excessive profits from the price increase to the Plaintiff.

3. Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err in its judgment by misapprehending the legal doctrine on Article 40(1)2 Item (b) and Article 40(1)3 of the former Inheritance and Gift Tax Act, contrary to what is alleged in the grounds of appeal.

4. The Defendant’s appeal is dismissed as it is without merit, 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 Lee Dong-won (Presiding Justice)