Plaintiff (Law Firm Woo, Attorney Lee Jae-soo, Counsel for plaintiff-appellant)

Director of the tax office

May 26, 2017

Seoul Administrative Court Decision 2015Guhap70447 decided March 25, 2016

1.The judgment of the first instance, including the claims extended in the trial, shall be modified as follows:

A disposition rejecting correction of KRW 416,216,40, which the Defendant rendered to the Plaintiff on March 19, 2014, shall be revoked.

2. All costs of the lawsuit shall be borne by the defendant.

The decision is as follows (the plaintiff sought revocation of the part exceeding 48,163,849 won from the disposition of refusal of correction in the order of Paragraph (1) in the first instance, and the claim was expanded in the trial to seek revocation of the whole correction refusal disposition).

1. Details of the disposition;

This part of the judgment is identical to the corresponding part of the judgment of the court of first instance except for dismissal or deletion as follows. Thus, this part of the judgment is cited in accordance with Article 8(2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act.

○ 3 pages 2 and 3 shall delete “former Inheritance Tax Act”.

○ 3 side 8 side "17,465 won" shall be "17,465 won (the agreed event price at the time of acquisition was 17,496 won).

○ 3 pages 10 (hereinafter referred to as “the Inheritance and Gift Tax Act”) shall be deleted.

○ 3rd page 14 read “Inheritance Tax and Gift Tax Act” as “former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 2011; with respect to gift tax on September 5, 2012, before amended by Act No. 11609, Jan. 1, 2013; hereinafter collectively referred to as “former Inheritance Tax and Gift Tax Act”)”.

○○ three pages 17 " March 9, 2014" shall be read as " March 19, 2014."

2. Related statutes;

It is as shown in the attached Table related statutes.

3. Whether the instant disposition is lawful

(a) Facts of recognition;

1) The instant company invested approximately KRW 1.4 billion in order to enter the Bable PC project. The instant company formulated a plan to invest KRW 5.2 billion in 201, KRW 3.3 billion in 201, KRW 3.3 billion in 2012, KRW 2013, KRW 2300 billion in 2013, and KRW 2.4 billion in 2014. The instant company decided to issue the instant bonds with warrants at the board of directors on June 24, 2011, and announced the issuance thereof to the Korea Exchange on the same day (the content of the publication was a plan to sell the instant bonds with warrants under the title "matters concerning preemptive rights," and the expected sale date was stated as the “8,00,000,000 won in total,” the total sale amount of the warrant certificates with KRW 360,000 in total, KRW 360,00 in total, and the largest shareholder as at the time of sale, and the Plaintiff owned shares as the Plaintiff.

2) On July 5, 201, the instant company issued the instant bonds with warrants, and subsequently, on July 5, 201, published a public announcement that the patent right (hereinafter “the instant patent right”) in the name of “the method and device for recording the actual location of the division,” relating to “technology that can be easily found through Device where the GPS moves out of a certain scope of the subject matter of possession, children, etc.” was acquired on July 4, 201. On November 25, 2011, the instant company acquired the instant bonds with warrants at KRW 27 billion.

3) The share price of the instant company, which was KRW 17,650 as of June 7, 201, increased to KRW 32,000 in the second half of 2011. Meanwhile, the instant company acquired 12 additional patent rights between September 5, 2012, which was the date of exercise of the instant preemptive right after the date of publication of the instant patent, but did not disclose such additional patent rights.

4) As of September 5, 2012, the date of the exercise of the instant preemptive right, the Plaintiff owned 1,152,320 shares of the instant company as of September 5, 2012, and maintained the same number of shares as at December 31, 2014, and thereafter, KRW 1,391,363 shares by acquiring approximately 240,00 shares additionally, as of September 30, 2015.

5) On June 28, 2011, Nonparty 1, Nonparty 2, Nonparty 3, Nonparty 4, and Nonparty 5, who are directors of the instant company, acquired, respectively, the preemptive rights equivalent to KRW 1.6 billion from the deaf Capital among the preemptive rights to the instant bonds with warrants acquired by the Plaintiff on June 28, 201, and KRW 1.4 billion from the new Capital.

[Ground of recognition] Facts without dispute, Gap's 11 through 22, 24 through 28, 30 through 32, each entry of Eul's 1 through 4, and the purport of whole pleadings

(b) Whether a gift tax is subject to Article 40 (1) 1 (b) and 2 (b) of the former Inheritance and Gift Tax Act;

1) Article 40(1) of the former Inheritance and Gift Tax Act provides that "where any of the following profits is acquired by accepting, acquiring, or transferring bonds with warrant (referring to warrant certificates, if they are separated) (hereafter referred to as "convertible bonds, etc." in this Article), the profits earned by acquiring or acquiring convertible bonds, etc. shall be deemed the value of property donated to the person who has acquired such profits." Article 40(1)1 of the same Act provides that "the profits earned by acquiring or acquiring convertible bonds, etc. shall be the profits earned by acquiring or acquiring them, and where the largest shareholder of a corporation that issued convertible bonds, etc. or a person in a special relationship with him/her exceeds the number entitled to receive or acquiring them under equal conditions in proportion to the number of its stocks at a price lower than the market price, and where a person who is a shareholder has acquired or acquired them from an underwriter under Article 9(12) of the Financial Investment Services and Capital Markets Act; hereafter referred to as "acquisition, etc." in this paragraph.

In addition, Article 40(1) of the former Inheritance and Gift Tax Act provides that “where a person obtains any of the following profits by accepting .... stocks through convertible bonds, etc., the amount equivalent to such profits shall be deemed the value of donated property of the person who has acquired such profits.” Article 40(1)2 of the same Act provides that “The profits acquired by the largest shareholder of a corporation which has issued convertible bonds, etc. or his/her specially related person, who acquires stocks, etc. from the corporation in excess of the number entitled to receive the allocation under equal conditions in proportion to the number of stocks owned by the corporation, and the profits acquired by the shareholder, etc. from the corporation in excess of the converted value, etc. of the stocks

2) Meanwhile, Article 9(12) of the former Financial Investment Services and Capital Markets Act (amended by Act No. 11845, May 28, 2013; hereinafter “former Financial Investment Services and Capital Markets Act”) provides that “an underwriter” in this Act refers to a person who engages in an act falling under any subparagraph of paragraph (11) in the event of public offering, private placement, or sale of securities, and Article 9(11) of the same Act provides that “acquisition” means an act falling under any of the following subparagraphs while offering, private placement, or sale of securities to a third party; Article 9(12) of the former Financial Investment Services and Capital Markets Act (including “public offering of securities to acquire all or part of such securities to the Financial Services Commission”; Article 9(12) of the same Act provides that “public offering of securities is prohibited; Article 9(12) of the former Financial Investment Services and Capital Markets Act (including “public offering of securities”; Article 8(7) of the same Act provides that “public offering of new securities shall be solicited by the Financial Investment Services Commission.”

3) However, the legislative intent of imposing gift tax on a person with special interest in the largest shareholder of a corporation who has issued convertible bonds, etc. under Article 40(1)1 (b) and Article 40(1)2 (b) of the former Inheritance and Gift Tax Act is to take over or acquire convertible bonds, etc. from an underwriter under Article 9(12) of the former Financial Investment Services and Capital Markets Act without limit where he/she acquires or acquires them from the issuing corporation. In light of the legislative intent of the aforementioned provision, where a person with a special interest obtains or acquires convertible bonds, etc. from an underwriter of the corporation in the course of capital transaction, such as capital increase, or takes profits from such convertible bonds without consideration or at a very low cost, the same economic substance as the transfer of directly profits from the corporation concerned is identical so that gift tax can be imposed on such bonds, and thus, it is reasonable to view that the acquisition or acquisition of stocks, etc. from a third party without consideration as to whether to obtain authorization under Article 9(1)2 (b) of the former Capital Markets Act or the acquisition of stocks, etc.

4) The instant company issued the instant bonds with warrants in the form of private placement, and the scheduled sale date of the instant bonds with warrants was June 28, 201, which was the date of issuance of the instant bonds with warrants, and was publicly announced as the largest shareholder and a specially related person, and the fact that the Busan Capital and the New Capital sold the instant bonds with warrants to the Plaintiff on the date of acquisition of the instant bonds with warrants is as seen earlier.

However, the above facts alone are insufficient to recognize that the Bag Capital and Bag Capital acquired the instant bonds with warrants with the intent to acquire the instant warrant certificates to the Plaintiff, and there is no other evidence to acknowledge this otherwise.

Rather, in light of the following circumstances revealed in Gap evidence No. 3, which can be seen in addition to the purport of the oral argument, i.e., Capital and New Capital were not paid a commission for acquiring the instant bonds with warrants, and there is no content that Capital and New Capital will impose risks on the issuance of the bonds with warrants, etc. in the contract for underwriting the instant bonds with warrants, and the part part of the contract for underwriting the instant bonds with warrants that "the acquisition of this contract means the acquisition of the rights to bonds issued under this contract, and does not mean the acquisition of the bonds under Article 9 (11) of the Capital Markets Act." In order to minimize risks associated with the investment in the instant bonds with warrants, it is reasonable to view that Capital and New Capital are not the acquisition of the new bonds with warrants, but the acquisition of the profits from the instant bonds with warrants under the status of the investor's largest shareholder and related parties on the day of issuance of the warrant bonds with warrants included in the instant bonds with warrants, and the plaintiff was merely the acquisition of the profits from the transfer of the instant bonds with warrants.

Therefore, it is not permissible to interpret the "acquisition, etc." under Article 40 (1) of the former Inheritance and Gift Tax Act as it does not correspond to the "acquisitionr" under Article 40 (1) of the former Inheritance and Gift Tax Act. Thus, it cannot be viewed as a basis provision for imposing gift tax (On the other hand, the defendant argues that since it is substantially interpreted the "acquisition, etc." under Article 40 (1) of the former Inheritance and Gift Tax Act, it cannot be viewed as limited to the acquisition of bonds with warrants, etc. from an underwriter under the former Capital and Gift Tax Act. However, interpreting the "acquisition, etc." under Article 40 (1) of the former Inheritance and Gift Tax Act as alleged by the defendant is in violation of the principle of no taxation without law, and there

(c) Whether they are subject to gift tax under Articles 2 (4), 40 (1) 1 (a), and 40 (1) 2 (a) of the former Inheritance and Gift Tax Act;

1) Article 2(4) of the former Inheritance and Gift Tax Act provides that gift tax shall be imposed by deeming the act or transaction subject to gift tax as a continuous single act or transaction according to economic substance where it is deemed that two or more acts or transactions have been reduced unfairly by means of two or more acts or transactions. The purpose of this provision is to deny various stages of transactions in order to achieve the effect of gift bypassing or changing the transaction through multiple stages of transactions, and to cope with the avoidance of gift tax reduction, and to ensure fair taxation by deeming the same as one act or transaction subject to gift tax depending on substance. However, one of the forms of application of the substance over form principle is to be determined at a level of gift tax in order to achieve the same economic purpose, and the tax authority as one of the various legal relations chosen by the parties, barring any special circumstance, should be respected, and the tax authority may intervene in the process of performing the transaction at a different level, such as compensating for risks, such as losses, and thus, it should not be readily concluded as one of the parties to the transaction at least 2015 forms of gift tax imposition.

2) In full view of the aforementioned facts and the purport of the entire arguments, the following circumstances can be acknowledged.

① At the time of the issuance of the instant bonds with warrants, the instant company was planning to invest approximately KRW 13 billion, a new business entity, in five years from the 2010 to the implementation of the instant bonds with warrants. In fact, the instant bonds with warrants to raise operating funds by obtaining a considerable amount of loans from other financial institutions. However, the interest rate on the instant bonds with warrants is 1.0% per annum, and the maturity guarantee rate is 3.5% per annum, which is more favorable than the interest on loans (5.4% per annum to 6.72% per annum) received from other financial institutions, and thus, the instant bonds with warrants is a transaction with business purposes.

② The purchase of the instant warrant certificates, separate from the bonds, by the directors of the instant company including the Plaintiff, on the date of the issuance of the instant warrant certificates, is in line with the demands of the instant capital company. From the perspective of an investment financial institution, there are many cases where the instant capital company requires the acquisition of the instant warrant certificates in the purport that it would promptly dispose of the preemptive rights included in the instant warrant certificates rather than holding them for a long time and make profits therefrom, and avoid risks arising from price fluctuations. In light of the foregoing, the instant capital company may sell the instant warrant certificates to the largest shareholder and his specially related persons on the date of issuance of the instant warrant certificates to the said purport. In short, the sale of the instant warrant certificates cannot be said to have not been for any

③ The Plaintiff acquired the warrant certificates of this case (total 225,00,000 won) was 4.5% of the face value of the warrant certificates (five billion won). This is the price equivalent to 4-5% of the face value of the warrant certificates. Moreover, the original exercise price of the warrant rights of this case was determined pursuant to Articles 5-24(1) and 5-22(1) of the Regulations on Issuance and Public Notice of Securities, and the adjustment of exercise price of KRW 17,465 per share was based on the exercise price adjustment provision stipulated in Article 3(7) of the Agreement on the Acceptance of Bonds with Warrants of this case. Accordingly, the initial determination and exercise price of the warrant rights of this case were made orally and mechanically, and there was no room for involvement of the Plaintiff’s exercise price of the warrant rights of this case between the de facto company and the de facto company with no special relationship.

④ Even if the Plaintiff obtained gains from the acquisition and exercise of the instant preemptive right in excess of the converted value, it is premised on the Plaintiff’s assumption that the Plaintiff had been able to suffer a considerable period of time due to the decline in the stock price of the instant company. In addition, the Plaintiff’s disclosure of the instant patent right is a result of the increase in the stock price through multiple factors, such as financing due to the issuance of the instant bonds with warrants, entry into the training program, publication of patent rights, etc. However, the instant patent right was announced to the extent of a week after the issuance of the instant bonds with warrants. However, even though the Plaintiff acquired more than 12 patent rights until the exercise of the instant preemptive right, it was not announced to the public. Since March 2012, it is difficult to view that the instant patent right’s disclosure to realize gains from the Plaintiff’s acquisition and exercise of the instant preemptive right.

⑤ Not only did the Plaintiff acquired the preemptive right to new shares that can be exercised at the time of the issuance of the instant bonds with warrants, but also there is no evidence suggesting that the stock price increase is sufficiently anticipated at the time of the exercise. Therefore, it is difficult to conclude that the Plaintiff planned to obtain gains from acquiring new shares of the instant company from the beginning through a series of acts, such as the issuance of the instant bonds with warrants and the acquisition and exercise of the instant preemptive right. Ultimately, it is difficult to conclude that the aforementioned series of acts were used as the means for the purpose of excessive distribution of profits from the stock price increase to the Plaintiff, the largest shareholder of the instant company.

3) In full view of the aforementioned circumstances, it is difficult to view that a series of acts, at intervals of about one year and two months from the issuance of the instant bonds with warrants to acquire and exercise the Plaintiff’s preemptive right to new shares of the instant company, were an abnormal act of evading or reducing gift tax without any particular business purpose.

Therefore, in this case, Articles 2(4), 40(1)1(a), and 40(1)2(a) of the former Inheritance and Gift Tax Act cannot be deemed as the basis provision for gift tax imposition.

(d) Whether a gift tax is subject to Article 40 (1) 3 of the former Inheritance and Gift Tax Act;

1) Article 40(1)3 of the former Inheritance and Gift Tax Act provides that “In cases where the method and profits are similar to those prescribed in subparagraph 1 or 2 of the same Article by accepting, acquiring, or transferring convertible bonds, etc., or by converting, exchanging, or accepting stocks with convertible bonds, etc., and where profits have been acquired directly or indirectly from a person having a special relationship by trading convertible bonds, etc., or by converting, etc. into stocks with convertible bonds, etc., the amount equivalent to such profits shall be deemed as the value of donated property to the person having a special relationship.” The above provision provides that “In cases where a person having a special relationship with a corporation has acquired profits similar to those listed in the former Inheritance and Gift Tax Act by taking advantage of capital transaction, such as capital increase, etc., a comprehensive gift tax shall be imposed on the person having a special relationship with the corporation, thereby coping with modified donations using new

2) As seen earlier, the instant capital company entered into an underwriting contract with the instant company on its own as an investor’s status, and among them, it can be deemed that the capital Capital and the New Capital sold the instant warrant certificates to the Plaintiff as their own transactional act. It is difficult to deem that the Plaintiff, from the beginning, planned to obtain gains from acquiring new shares of the instant company through a series of acts, such as the issuance of the instant warrant certificates and the acquisition and exercise of the instant warrant rights. Accordingly, it cannot be readily concluded that the said series of acts were conducted from the beginning with the beginning for the purpose of planning the stock price increase of the instant company and allocating excessive profits to the Plaintiff, who is the largest shareholder of the instant company, for the purpose of allocating excessive profits from the stock price increase.

Therefore, the evidence presented by the Defendant and the circumstances asserted by the Defendant are insufficient to deem that the Plaintiff obtained a “profit directly or indirectly from a person in a special relationship (or from a person in a special relationship)” as prescribed by Article 40(1)3 of the former Inheritance and Gift Tax Act.

Therefore, in this case, Article 40 (1) 3 of the former Inheritance and Gift Tax Act cannot be viewed as a provision of the basis for imposing gift tax.

E. Whether gift tax is subject to Article 2(3) and Article 42(1)3 of the former Inheritance and Gift Tax Act

1) Article 42(1) of the former Inheritance and Gift Tax Act provides that “In cases where profits falling under any of the following subparagraphs, other than donations pursuant to Articles 33 through 39, 39-2, 39-3, 40, 41, 41-3 through 41-5, 44 and 45, are acquired above the standard prescribed by Presidential Decree, such profits shall be deemed the value of donated property to the person who has acquired such profits.” Article 42(1)3 of the former Inheritance and Gift Tax Act provides that “The profits are acquired through a transaction of increasing or decreasing the capital of a corporation, such as conversion, acquisition, exchange, etc. of stocks by convertible bonds, etc. pursuant to Article 40(1) (hereinafter “stock conversion, etc.”) and Article 42(3) of the former Inheritance and Gift Tax Act provides that “The profits shall be the value calculated by subtracting the value of stock conversion, etc. from the value of stocks at the time of stock conversion, etc. in cases of stock conversion.” Meanwhile, Article 42(3) of the former Inheritance Tax Act provides that “where there exist justifiable reasons among related parties.”

The legislative intent of Article 42(1) of the former Inheritance and Gift Tax Act, which provides for the transaction partner to impose gift tax on the profits earned by the transaction partner without compensation through abnormal means, is to cope with variable donation acts and promote fair taxation. However, it is inevitable to allow the transaction partner to gain gift benefits by waiver of opportunities to obtain such profits in general and easy manner. As such, Article 42(3) of the former Inheritance and Gift Tax Act provides that if the transaction partner does not have any reasonable ground to believe that the transaction partner should obtain benefits from the acquisition and exercise of preemptive rights, even if there were reasonable grounds to believe that there were no reasonable grounds to believe that the transaction partner would have made a transaction by appropriately reflecting the objective exchange value, or if it is deemed that there were no reasonable grounds to believe that there were no legitimate reasons to believe that there were no legitimate reasons to believe that there were no legitimate reasons to believe that there were no legitimate reasons to believe that there were no legitimate reasons to believe that there was a transaction partner based on such terms and conditions of transaction between the parties to the transaction in question and the parties to the transaction. However, it is difficult to apply the objective requirement of taxation.

2) First, we examine whether the Plaintiff’s act of acquiring and exercising the instant preemptive right constitutes a transaction between related parties.

“A person in a special relationship” under Article 42 of the former Enforcement Decree of the Inheritance and Gift Tax Act (amended by Presidential Decree No. 23591, Feb. 2, 2012) refers to a person as defined in any of the following subparagraphs. 1. A person in a special relationship under Article 42(3) and (4)3 of the Act: A person in a relationship under any of subparagraphs of Article 19(2). In this case, “one stockholder, etc.” under Article 19(2) shall be deemed “a person who has acquired profits”, and Article 19(2) of the same Decree shall be deemed “the largest stockholder or largest investor” under Article 22(2) of the Act shall be deemed “a person who has made an investment in 10/10 or more of the total number of stocks issued by a stockholder, etc. and a person falling under any of the following subparagraphs shall be deemed 10/10 or more of the total number of stocks issued by a stockholder, etc. and a person falling under subparagraphs 6 through 10/5, etc.:

In addition, Article 31-9(3) of the former Enforcement Decree of the Inheritance and Gift Tax Act (amended by Presidential Decree No. 24358, Feb. 15, 2013) provides that "a related person prescribed by Presidential Decree" in Article 42(3) of the Act refers to a person who has a relationship referred to in any subparagraph of Article 12-2(1) with a person who obtains a profit and a related person falling under any subparagraph of Article 12-2(1). Article 12-2(1) of the same Decree provides that "a related person prescribed by Presidential Decree" in the proviso to Article 16(2) of the Act refers to a person who has a relationship falling under any of the following subparagraphs with the principal:

In addition, there is no evidence to prove that the Plaintiff had a special relationship with the Gag Capital and Dog Capital as above at the time the Plaintiff acquired the instant preemptive right. While the Plaintiff was the representative director and the largest shareholder of the instant company at the time of exercising the instant preemptive right, there is no evidence to prove that the Plaintiff and her relatives, etc. possessed 30% or more of the instant shares.

Therefore, all parties to the transaction at the time when the plaintiff acquired the preemptive right of this case and exercised the preemptive right of this case are not related parties under Article 42 (3) of the former Inheritance and Gift Tax Act.

3) Next, we examine whether there exists “justifiable cause for transaction practice”.

As seen earlier, the instant company issued the instant bonds with warrants according to the need to raise funds, such as the promotion of new projects, and the sale of the instant bonds with warrants after the issuance of the instant bonds with warrants to the Plaintiff, etc. seems to be attributable to the intent of the instant capital company. In addition to the Plaintiff’s gains from the exercise of the instant warrant rights after the issuance of the instant bonds with warrants with considerable period of time, it is reasonable to deem that the gains from the exercise of the instant bonds with warrants have been derived from the increase in the company’s stock price by means of financing due to the issuance of the instant bonds with warrants and the entry into the bble PC project, etc., the Plaintiff’s acquisition and exercise of the instant warrant rights had justifiable grounds under Article 42(3) of the former Inheritance Tax and Gift Tax Act.

4) Therefore, in this case, Articles 2(3) and 42(1)3 of the former Inheritance and Gift Tax Act cannot be deemed as the basis provision for gift tax imposition.

(f) Whether gift tax is subject to Article 35(2) of the former Inheritance and Gift Tax Act;

1) Article 35(2) of the former Inheritance and Gift Tax Act provides that where property is acquired or transferred by transfer between persons who are not specially related parties without justifiable grounds in light of transaction practices, an amount equivalent to the difference between the price and the market price shall be presumed to have been donated, and the amount equivalent to the profits prescribed by Presidential Decree shall be deemed to be the value of donated property to the person who has acquired such profits. The legislative purport of Article 35(2) of the former Inheritance and Gift Tax Act lies in: (a) in cases where profits equivalent to the difference between the price and the market price are de facto gratuitously transferred by abnormal methods that manipulates the market price for the benefit of the transaction partner; (b) it is difficult to view that the difference was donated to the other party to the transaction solely on the basis that there is a difference between the price and the market price; and (c) in cases where property is de facto gratuitously transferred by a party to the transaction without any justifiable reason, it is reasonable to deem that there is no reasonable reason to view that there is no justifiable reason for the transfer of property from the standpoint that there was no justifiable reason for the transfer of property under tax law.

2) In light of the aforementioned various circumstances, the evidence submitted by the Defendant and the circumstances alleged by the Defendant alone are insufficient to recognize that the Plaintiff acquired the instant preemptive right from the new Capital Capital and Capital Capital at a significantly low price, or that the said transaction did not have justifiable grounds in light of the transactional practice, and there is no other evidence to acknowledge otherwise.

Therefore, in this case, Article 35(2) of the former Inheritance and Gift Tax Act cannot be viewed as a basis provision for gift tax imposition.

G. Sub-committee

The Plaintiff’s profit derived from the acquisition and exercise of the instant preemptive right cannot be subject to gift tax pursuant to the provisions of the former Inheritance and Gift Tax Act, and thus, the instant disposition is unlawful.

4. Conclusion

If so, the plaintiff's claim of this case is justified, and the judgment of the court of first instance is unfair with different conclusions, so the judgment of the court of first instance, including the plaintiff's appeal, shall be accepted and the claim expanded in the trial, shall be modified as above. It is so decided as per Disposition.

[Attachment]

Judges Kim Jong-hee (Presiding Judge)