Whether the capital reduction marginal profit of the instant shares constitutes domestic source income

Therefore, Article 93 subparagraph 2 of the Corporate Tax Act provides that "the gains from the reduction of capital of the stock of this case from the domestic corporation" is "the dividend income under Article 17 (1) of the Income Tax Act that is paid by the domestic corporation."

Corporate Law No. 93

Suwon District Court 2017Guhap60995 Corporate Tax Detailed and Claim for Revocation of Disposition

AA

BB Director of the Tax Office

July 26, 2017

September 13, 2017

1. The plaintiff's claim is dismissed.

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

1. Details of the disposition;

A. Approval of a restructuring plan for the Plaintiff parent company (D)

(1) On February 22, 1989, the Plaintiff was established in the form of a stock company for the purpose of manufacturing automobile parts. On October 1, 2009, the Plaintiff’s investor changed its organization to a limited liability company (Evidence A). At the time of the said change of organization, the Plaintiff’s investor was composed of 51% of the investment shares (hereinafter “the shares in this case”) of the U.S. Deelwa, Inc., and E with 49% of the U.S. Deelwa, Inc., the parent company, and CC and E were subsidiaries of DaD (hereinafter “Dete”) which are the U.S. corporations, the parent company, and its subsidiaries (hereinafter “the above subsidiaries”). On October 8, 2005, the Plaintiff filed an application with the U.S. court for the approval of the Plaintiff’s comprehensive purchase of the shares in this case and its subsidiaries (hereinafter “the 3rd Group”).

B. F’s acquisition of the instant share, and application for non-taxation and exemption from corporate tax

1) On August 17, 2009,CC established FF, a Luxembourg, holding 100% of the shares, and transferred 51% of the shares of this case to FF on October 2, 2009 in the form of donation, and EE also transferred 49% of the shares of this case in the form of donation to FF (a total transaction in the form of donation No. 5 and 6; hereinafter referred to as “the first transaction in this case”).

2) The instant buyers established GG, a special company for restructuring purposes to acquire the assets of DD subsidiaries. On October 6, 2009,CC transferred 100% of FF shares to GG for price (hereinafter “instant 2 transaction”).

3) On October 16, 2009, F filed an application for non-taxation and exemption from corporate tax with respect to the Defendant on the ground that the instant equity income, which was transferred in the form of donation fromCC and EE as the instant transaction, is the revenue income that can only be exercised in Luxembourg, under Article 21 subparagraph 1 of the Convention between the Government of the Republic of Korea and the Government of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (hereinafter “Korea-Luxembourg Tax Treaty”), which is “the country not subject to the gift tax on the revenue accruing from the transfer of the instant equity income,” and accordingly, FF did not have the gift tax imposed on the revenue accruing from the transfer of the instant equity income from the Defendant and the tax authorities of Luxembourg.

C. The defendant's disposition of imposing corporate tax (Withholding)

1) The Plaintiff, on October 1, 2010, paid KRW 72 billion to FF holding 100% of the Plaintiff’s equity (hereinafter “the paid reduction”) as follows. The Plaintiff, on September 8, 2012, paid KRW 34 billion to FF by implementing the paid reduction of capital (hereinafter “the paid reduction of capital”) (hereinafter “the sum of the paid reduction of capital”), and the sum of the paid reduction of capital of this case plus KRW 105 billion is referred to as “the paid reduction of capital.”

2) After conducting a consolidated investigation, such as corporate tax, with respect to the Plaintiff, the director of the Central Regional Tax Office of Jungbu Regional Tax Office calculated the amount of corporate tax on constructive dividend for the instant capital reduction of FF on the premise that FF did not acquire the instant shares through donation fromCC and EE, and notified the Plaintiff of the notice of tax withholding disposition at KRW 7,989,80,686 on June 15, 2015. On July 17, 2015, the Plaintiff filed a request for pre-assessment review on the said notice, and the Commissioner of the National Tax Service rendered a re-assessment decision as to the said request on September 25, 2015 on the ground that FF’s acquisition price of the instant shares was stated as USD 9,970,355 on the report (Evidence 13) on capital gains on transfer/loss loss submitted by D Group to the U.S. National Tax Service (Evidence 13).

3) The Defendant conducted a reinvestigation, including corporate tax, etc., with respect to the Plaintiff, determined that FF’s acquisition price for all of the instant shares USD 9,970,35. The amount of corporate tax for the instant capital reduction was calculated. On March 2, 2016, the Defendant calculated the amount of corporate tax for the portion of corporate tax for the business year 2010 (collection portion) with the principal tax of KRW 5,891,626,820, and additional tax of KRW 689,162,680, and the amount of corporate tax for the business year 2012 (collection portion) with the principal tax of KRW 2,818,480, and additional tax of KRW 381,830,480 (No. 9-1,3, and hereinafter referred to as “instant disposition”). The amount of tax is calculated based on the premise that the FF’s acquisition price for the entire shares in the instant tax base is USD 9,970,50, and 1314,217.

4) On January 22, 2016, the Plaintiff filed an appeal with the Tax Tribunal seeking revocation of the portion of corporate tax reverted to the business year 2010 from the instant disposition, and on May 17, 2016, the Plaintiff filed an appeal seeking revocation of the portion of corporate tax reverted to the business year 2012 from the above disposition. The Tax Tribunal dismissed all the Plaintiff’s appeals on November 7, 2016 (Evidence 10) (Evidence 10).

Facts having no dispute over recognition, Gap's evidence 1, 2, Gap's evidence 3-1, 2, Gap's evidence 4-7, Gap's evidence 9-1 through 3, Gap's evidence 10, Eul's evidence 1 through 3, the purport of the whole pleadings, and the purport of the whole pleadings.

2. The assertion and judgment

A. The plaintiff's assertion

The Defendant’s determination of the first transaction of this case as a commercial transaction and the disposition of this case to the Plaintiff is unlawful by mismisunderstanding the following facts and applying the relevant laws and regulations.

1) As indicated in the share transfer agreement (Evidence No. 5 and 6) with respect to each of the instant shares concluded between the F and F,CC, and EE, F donated all of the said shares fromCC and EE. In the report on gains on transfer/loss (Evidence No. 13) submitted by the U.S. National Tax Service by the Netherlands and EE, the portion of the transfer price of the instant shares was erroneously stated as USD 9,970,355, and the said transfer price was modified to KRW 0,00 according to the corrective report (Evidence No. 14-1 and 2 of the evidence No. 14-2) filed by the Netherlands and EE on May 27, 2016.

2) Article 93 subparag. 2 of the former Corporate Tax Act and Article 17(1)3 and Article 17(2)1 of the former Income Tax Act (amended by Act No. 11146, Jan. 1, 2012; hereinafter “former Income Tax Act”) provide for the income subject to corporate tax as corporate tax due to investment decrease. However, the Income Tax Act does not provide for the “the method of calculating the acquisition value of donated shares, etc. necessary for calculating the “Fictitious dividend due to capital reduction”. In such cases, Article 41(1)3 of the former Corporate Tax Act and Article 72(1)6 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010; Presidential Decree No. 25194, Feb. 21, 2014); thus, the FF capital income should be calculated as the acquisition value at the market price at the time of acquisition.

3) Meanwhile, FF’s gains equivalent to the total amount of the instant shares exempted from taxation pursuant to Article 21 of the Korea-Luxembourg Tax Treaty are subject to exemption from taxation ultimately. In calculating the constructive dividend income due to the capital reduction for the instant value, if the acquisition value is not deemed the market price of stocks (investment) at the time of acquisition, and if deemed as zero won, it would result in imposing double corporate tax on the stocks (investment) which had already been subject to gift tax, thereby violating the purport of Article 21 of the Korea-Luxembourg Tax Treaty.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

1) Determination as to whether F was donated the entire equity in this case to F without compensation

A) According to the evidence No. 3-2, evidence No. 5, evidence No. 6, evidence No. 13, evidence No. 14-1, and evidence No. 14-2, "this case's comprehensive disposal agreement, annexed documents No. 2, "F andCC," and "D's correction report on gains from transfer/loss from transfer or loss submitted to the U.S. National Tax Service on May 27, 2016", it can be acknowledged that "No. 1 transaction of this case is named as gift (or free transfer)". However, according to the evidence No. 5 of this case's comprehensive disposal agreement between the purchaser of this case and the purchaser of this case on July 30, 209, "No. 2" signed a disposal agreement with the purchaser of this case's shares No. 60% of the total sale of assets owned by the DaF and No. 5 of this case's share transfer from the purchaser of this case's 10% of this case's total sale of assets held by the purchaser of this case No. 6. 20.

(1) The instant blanket disposition agreement includes the following:

The Agreement on Comprehensive Disposition of this case

3.3Assigning the MF purchase price (referring to the proceeds from the sale of DNA group assets to be assumed by the MF Group) and the purchase price (referring to the proceeds from the sale of the shares, etc. of this case to be assumed by the buyers of this case).

The total sum of the purchase prices, including the MM purchase price and compliance purchase price, and other related matters, taking into account the obligations each accepted by MM andcom, shall be allocated to the assets acquired by MM, MM sale securities, the assets acquired bycom, and compliance sale securities. The allocation shall be decided upon by the agreement of D, M andcom buyers within an appropriate period (within 90 days after the date of conclusion of the contract at the latest). The sellers and buyers permitted under the law comply with the above allocation agreement for all tax-related purposes, and shall not raise any objection even if the details of the duty return are contrary to the above allocation agreement.

Furthermore, the buyer and the seller shall submit the U.S. National Tax Service form 8594 according to the above allocation agreement. The buyer and the seller should make commercial efforts to ensure that the above allocation agreement can be complied with in the legal proceedings, such as their respective audit and similar procedures or appeals.

(2) Annex 2 (Schedul 2) of the instant blanket Disposition Convention: (a) “CC established FF, a Luxembourg corporation, holding 100% of the shares, in the Luxembourg prior to the implementation of the said Comprehensive Disposition Convention; (b) transfers the shares of the D groups, including the shares in this case, to F; (c) among them, four Korean subsidiaries, including the Plaintiff, etc., transfer the shares in the D Group to F; and (d) the instant buyers establish a special purpose company (GG) to acquire the shares of D subsidiaries; and (d) the transfer of the shares in this case, etc. under the instant Comprehensive Disposition Convention includes “100%) by means of transferring the FF shares (10%) owned by CC to GG.”

B) In full view of the following circumstances revealed by the above facts and the above facts, under the premise thatCC and EE are actually receiving USD 9,970,355 from the buyers of GG or this case, it is reasonable to view that it and EE have received USD 9,970,355 in full from the form of "donation" (the first transaction in this case), and F has been established byCC for the purpose of transferring "D Group assets including this case's shares" collectively, and have been transferred from the D Group to GG as they were transferred (the second transaction in this case), and ultimately, it is reasonable to view that it and E received USD 9,970,355 in full from the actual transaction in this case by transferring the entire shares in this case to FF through the first and second transaction in this case.

(1) The instant universal disposition agreement contains a contract under which Dffiliated affiliated companies holding assets subject to sale, includingCC and EE, participate as a party (seller) to the said universal disposition agreement and transfer the assets held by the said affiliated companies including the instant shares (hereinafter “instant assets”) to the purchaser, etc. of the instant case en bloc (Article 9, 142 of the evidence No. 3-1), and the content of the said universal disposition agreement includes that “D Group transfers the instant assets to the seller of the instant case by the method of phased implementation of the instant 1 and 2 transactions.”

(2) Pursuant to the instant blanket Disposition Convention, the instant transaction is a transaction that was conducted in preparation for the overall transfer of the instant assets (the transfer of assets owned by many DD affiliated companies to FF, a special purpose company) and the instant transaction is a final performance of the instant comprehensive disposition agreement (the transfer of 100% of the issued stocks owned by the instant assets to the seller). As such, the instant transaction ought to be deemed to be a “one transaction in which DD group transfers the instant assets to the seller in accordance with the instant comprehensive disposition agreement.”

(3) The parties to the instant General Disposition Convention agreed to allocate the total purchase price of the instant assets for each item of asset subject to sale through subsequent agreements at the time of the conclusion of the said Convention (Article 3.3 of the said General Disposition Convention). Accordingly, the amount agreed to allocate the entire shares of the instant case to USD 9,970,355 (hereinafter referred to as “instant allocation”). The said parties’ agreement on the said allocation amount is CC and EE, a seller of the instant shares under the said General Disposition Convention.

In the future, there is an agreement on the "sale price of the shares to be received from the buyers of this case".

(4) The instant blanket Disposition Convention was conducted as a part of the restructuring pursuant to the D Group’s petition for bankruptcy protection. Since the instant allocation amount was allocated to creditors and shareholders ofCC and EE who held the instant shares at the time of the conclusion of the said Comprehensive Disposition Convention, it would be the actual receipt of the instant allocation amount with the instant share transfer proceeds through the first and second transactions.

(5) In addition, the term “donation” under tax law is an act of transferring tangible, intangible, or profits, etc. to another person without compensation by direct or indirect means (see Article 2 subparag. 6 of the Inheritance Tax and Gift Tax Act). It is premised on the premise that the donor’s property is reduced to the degree of donated property and the donee’s property increases to the same amount as the donated property. At the time of the first transaction in this case,CC was one shareholder who owns 100% of the FF issued shares. Therefore, even ifCC transferred the shares of this case to FF without compensation for 51% of the shares of this case, it is merely a kind of investment in its subsidiary (the increase to the amount of FF’s shares transferred to the FF’s shares) and does not constitute donation.

C) The Plaintiff’s assertion based on the premise thatCC and EE donated the instant shares to F and acquired them free of charge by F is without merit without further review.

2) Determination as to the legitimacy of the instant disposition

A) Article 93 subparag. 2 of the former Corporate Tax Act provides that "dividend income under Article 17(1) of the Income Tax Act, which is paid by a domestic corporation, shall be one of the domestic source income of a foreign corporation." Article 17(1)3 and 17(2)1 of the Income Tax Act provides that "money and other property acquired by a stockholder due to the retirement of stocks or reduction of capital, or money and other property acquired by an employee or investor due to retirement, withdrawal, or reduction of investment, shall be deemed as income in excess of the amount used by the stockholder, employee, or investor to acquire the stocks or investment." Article 98(1)3 of the former Corporate Tax Act provides that "domestic source income under Article 93 subparag. 2 of the former Corporate Tax Act for a foreign corporation, which is the domestic source income under Article 93 subparag. 2 of the same Act and is not actually related to the domestic place of business or belongs to the domestic place of business, shall withhold 20/100 of the amount paid, and pay it to the tax office having jurisdiction over the place of tax payment by the 10th day following month."

Meanwhile, Article 10 subparagraph 2 (a) of the Korea-Luxembourg Tax Treaty provides that "the dividends paid by a corporation which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in accordance with the law of the Contracting State in which the corporation paying the dividends is a resident. However, if the beneficial owner is a corporation (excluding partnership) which directly owns at least 25 percent of the capital stock of the corporation paying dividends, the amount of the tax imposed shall not exceed 10 percent of the total amount of dividends."

B) In the instant case, on August 17, 2009, the Health Board and FF acquired the entire shares of the instant case fromCC and EE through the instant first transaction. The Plaintiff paid FF with the price of KRW 105 billion for the instant capital reduction through the instant capital reduction as recognized in 1. B.C. The amount paid by FF for the acquisition of the instant shares through the instant first transaction (US$ 9,970,35) is recognized in 1. According to the foregoing recognition, FF, who received the price for the instant capital reduction from the Plaintiff, is obligated to pay the Plaintiff’s corporate tax for the total amount of KRW 10,000 from the price for the instant capital reduction ($ 9,970,35) under Article 98(1)3 of the former Corporate Tax Act, Article 17(1)3, and Article 17(2)1 of the Income Tax Act, which exceeds the Plaintiff’s total acquisition price for the instant capital reduction ($ 10,000).

3. Conclusion

Since all of the plaintiff's claims are without merit, each of them is dismissed, and it is so decided as per Disposition.