Whether the purpose of title trust is tax avoidance

In full view of the fact that the holding ratio of the nominal trust shares was in mind of non-taxation of capital gains tax that may arise after registration on KOSDAQ, and as a result, Nonparty Company’s delinquent amount exceeds 8.8 billion won, it is reasonable to deem that there was an incidental purpose of tax avoidance even if there was an incidental purpose of the requirement for

Donation of title trust property under Article 41-2 of the Gift Tax Act

1. All of the plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

The Defendant’s disposition of imposition of KRW 80,080,000, each of the gift tax imposed on the Plaintiffs on February 11, 2005, shall be revoked.

1. Details of the disposition;

A. On July 2, 2004 through October 29, 2004, the director of the regional tax office of ○○○○○○ (hereinafter “○○○”) revealed the fact that ○○○, a representative director of ○○○○○ and a major shareholder, each of the 14,000 shares out of ○○○○○’s shares owned (hereinafter “instant shares”) held on February 28, 200, and notified the Defendant of the taxation data.

B. Accordingly, on February 11, 2005, based on the provision of Article 41-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 6780, Dec. 18, 2002; hereinafter referred to as the “the Act”), the Defendant issued a disposition imposing gift tax (hereinafter referred to as the “original disposition”) on each of the Plaintiffs (the sum of the amount of gift tax calculated by applying the value per share of the instant shares as the tax base of KRW 700,000,000 (=50,000; X 14,000) and the amount of additional tax for negligent return and for negligent payment).

C. The Defendant received a notice from the director of ○○○ Regional Tax Office to the effect that ○○○○○, etc., which received gift tax from title trust and received ○○○○ shares from ○○○○, as the Plaintiffs, should evaluate the value per share of 24,00 won in the national tax appeal case, and that the amount of gift tax should be reduced by 24,00 won per share. On November 30, 2006, the Defendant corrected the amount of gift tax against the Plaintiffs from 21,00,000 to 80,000,000 won each (hereinafter “the disposition in this case”).

[Ground of recognition] Facts without dispute, Gap evidence 7, Eul evidence 1-1, 2, 3, Eul evidence 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

The Plaintiffs asserted that the instant disposition is unlawful on the following grounds.

(1) In the process of lowering the stock holding ratio by ○○○○, an executive officer of ○○○○○○, for the purpose of registration on the KOSDAQ of ○○○○○○○○, the Plaintiffs promised to resolve the title trust upon the completion of the registration on the KOSDAQ of ○○○○○○○○, which was an executive officer of ○○○○○○○○○○○○○, and, in compelling the title trust of the instant shares, the Plaintiffs, who are relatives of ○○○○○○ and relatives of ○○○○○, have lent their names without any possibility of concern over the personnel and economic disadvantages of ○○○○○○○○○, and not only did the Plaintiffs have the purpose of tax avoidance, but also had the primary reason for which ○○○○○○ entrusted the instant shares to the Plaintiffs, and even if there is a possibility of avoiding other taxes such as capital gains tax, etc., it cannot be said that the purpose of tax avoidance exists with respect to the deemed donation of title trust shares.

(2) The provision on constructive gift of title trust property is a provision on constructive gift of title trust property: ① a person wholly liable for a gift tax is not liable for any burden against the title trustee; ② a punishment or administrative sanction is imposed uniformly according to the prescribed tax rate if a certain taxation requirement arises; ③ if a title trust not intended to avoid a gift tax is deemed a gift to be a gift, it is excessively harsh for the title trustee to impose taxes on a person incapable of paying taxes because there is no substantial control over the entrusted property right; ④ including all taxes in addition to the gift tax under the provision on tax avoidance purpose violates the excessive prohibition principle; ④ abuse of tax as a means to impose taxes on a person incapable of paying taxes; ⑤ imposition of taxes on a person without the ability to pay taxes on a title truster; ⑤ The person subject to a penalty under the Act on Registration of Real Estate under the Real Estate Actual Titleholder’s Name accords with substantial taxation to a title truster; and ④ disposition is in violation of the principle of equal taxation and the principle of equal taxation under the Constitution, and disposition in violation of the principle of equal taxation and the principle of equal taxation.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

(1) The purpose of ○○○, a major shareholder and the representative director, registered on the KOSDAQ market, thereby increasing its capital, and accumulated shares through the increase in the price of shares owned by ○○, starting the preparation process for the registration on KOSDAQ from the end of 1999. The current status of ○○’s shares held by ○○ at the time of January 1, 200, is as follows.

Stockholders

Number of Stocks

Par value

amount of gold

Ratio of Shares

(m)○○

240,000

5,000

1,200,000,000

50.0%

○

204,000

5,000

1,020,000,000

42.5%

○○ and five others

36,000

5,000

180,000,000

7.5% by mass

Total System

480,000

5,000

2.400,000,000

100.0

(2) On the other hand, the above ○○○ is the wife of ○○○ and the vice head of ○○○○○, and 24,000 shares in total, including 2,400 shares, 36,00 shares in each of 2,400 shares. The above ○○○ and 5 other are all persons within the influence of ○○○○, and ○○ actually exercised the rights to shares.

(3) On January 13, 200, ○○ opened negotiations on the purchase and sale of shares by explaining a plan to register on the KOSDAQ of ○○○○, a Japanese corporation (hereinafter “○○○”) which owned 50% of the shares of ○○○○○, and by notifying its intention to acquire shares in advance, since it is not easy to dispose of shares if the shares are registered on the KOSDAQ.

(4) On February 28, 2000, when ○○ actually decided to purchase its stocks from ○○○, 70,000 shares out of the shares of 204,000 shares owned by ○○○○, each of which was 14,00 shares, respectively, and agreed to the Plaintiffs, ○○○○ (the head of ○○○’s business division at the time of the instant title trust (hereinafter referred to as the “instant primary title trust”), and the title trust (hereinafter referred to as the “instant part against the Plaintiffs”) was called the “instant title trust”), ○ prepared a formal share sales contract and listed the shareholders’ name on the list of shareholders as the Plaintiffs. Meanwhile, at the time of February 28, 200, the shares held by ○○○○ as of February 28, 200 are as follows.

Stockholders

10 10

February 28, 2000

Number of Stocks

Ratio of Shares

Number of Stocks

Ratio of Shares

○

204,000

42.5%

134,000

27.915%

(m)○○

240,000

50.0%

240,000

50.0%

○○ and five others

36,000

7.5% by mass

36,000

7.5% by mass

○ ○

14,000

2.917%

○ ○

14,000

2.917%

○ ○

14,000

2.917%

○ ○

14,000

2.917%

○ ○

14,000

2.917%

Total System

480,000

100%

480,000

100%

(5) As a result, during the period from April 3, 200 to the 20th of the same month, ○○○ transferred 98,000 shares owned by it to four investment companies including ○ Investment Trust Operation (States) and 37 personal investors including ○○○○ (36,00 shares) on April 20, 200 as follows.

Stockholders

Original

April 20, 2000

Number of Stocks

Ratio of Shares

Number of Stocks

Ratio of Shares

○

134,000

27.915%

36,000

7.5% by mass

( Note) ○○

240,000

50.0%

240,000

50.0%

Other (5 title trustee, ○○○ et al., 5 others)

106,000

22.1%

106,000

22.1%

○○ Investment Trust (State), etc. 4 investment officers;

62,000

12.9%

○○ and other personal investors 37 persons

36,000

7.5% by mass

Total System

480,000

100%

480,000

100%

(6) On April 24, 200, ○○○○○○○○○○○○○○○○ has acquired 240,00 shares from the ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ KRW KRW 600, May 4, 200, each of the above shares with KRW 14,000.

Stockholders

10 10

April 24, 2000

Number of Stocks

Ratio of Shares

Number of Stocks

Ratio of Shares

○

36,000

7.5% by mass

206,000

42.9%

( Note) ○○

240,000

50.0%

The first trustee, five trustees, ○○, and five others.

106,000

22.1%

106,000

22.1%

○○ Investment Trust (State), four institutional investors, including ○ Investment Trust Operation (State), and ○○ and 37 personal investors.

98,000

20.4%

98,000

20.4%

○○ and five secondary title trustees, including ○○

70,000 note 14,000 for each trustee

14.6% (2.92% by Trustee)

Total System

480,000

100%

480,000

100%

(7) On March 30, 200, ○○○○ was selected as a weekly subscription for shares for the registration of the KOSDAQ, and around November 17, 2004 of the same year, ○○○○ was also insolvent on or after the end of May 2004 while the KOSDAQ gradually entered into the KOSDAQ market from the end of 2000, and ○○○ became more and more active in the process of registration of the KOSDAQ due to the issue of the act of arranging the payment guarantee to an affiliate, etc.

(8) On the other hand, the ordinary KOSDAQ registration procedures provide that the number of minority shareholders (an employee stock ownership association shall be deemed one shareholder) shall be at least 50 persons (or at least 10% and 5 million shares) as of the date of application for registration, and that the number of minority shareholders (an employee stock ownership association shall be deemed one shareholder) shall be at least 30% of total number of outstanding stocks as of the date of application for registration, and that the number of minority shareholders (an employee stock ownership association shall be deemed to be effective from April 1, 200), under Article 18 of the Securities Association Registration Rules, where stocks are distributed by public offering because stocks are not distributed, among the requirements for stock distribution among the requirements for registration of the KOSDAQ market prescribed in Article 4 of the Regulations on the Operation of the Association Brokerage Market.

(9) On the other hand, as ○○○○○○ located in its jurisdiction did not pay the total amount of 8,851,019,833 won of national taxes, such as corporate tax and value-added tax, as of July 2004, ○○○○○○○ designated and imposed ○○○○ as the secondary taxpayer over 36 times between September 20, 2004 and January 31, 2007 5,841,673,090 won [=8,851,019,833 X 0.6 (including shares held in the shareholder registry by ○○○○), and shares held in title trust to 10 persons such as the Plaintiff, etc. and shares held in title trust through ○○○○○’s second title trust and exercising the rights prescribed in Article 39(2) of the former Framework Act on National Taxes, Article 39(2) and Article 204 of the former Framework Act on National Taxes].

[Ground of recognition] Facts without dispute, Gap 5 evidence, Eul 2 evidence, Eul 3-1 to 4, the purport of the whole pleadings

D. Determination

(i)whether there is no purpose of tax avoidance;

Article 41-2(5) of the Act does not limit the "tax to the gift tax," but does not limit the scope of the "tax to be avoided by both national and local taxes and customs duties. This means that if a title trustee or a title truster has any tax that can be avoided by the title trust, such tax shall be deemed as a gift. Therefore, the purport of Article 41-2(1)1 of the Act is that only the Plaintiffs, who are the title trustee, have no purpose of tax avoidance, or that there was no purpose of tax avoidance as to the gift tax.

In addition, the legislative purport of Article 41-2(1) of the Act is to recognize an exception to the substance over form principle in the purport that the act of tax avoidance using the title trust system is effectively prevented, thereby realizing the tax justice. Thus, if the title trust is recognized to have been conducted for any reason other than the purpose of tax avoidance, and it is merely a minor reduction of tax incidental to the said title trust, such title trust cannot be deemed to have a "tax avoidance purpose" under the proviso of the same Article, and the burden of proving that there was no purpose of tax avoidance in the title trust is against the title trustee claiming it (see, e.g., Supreme Court Decision 2005Du14714, Jun. 9, 2006).

Therefore, in light of the fact that ○○○○○○○○ (○○○○○)’s ownership of shares in the name of an oligopolistic shareholder for a considerable period of 200 years prior to the issuance of the instant shares, ○○○○○○○ (hereinafter “○○○○”)’s ownership of shares in the name of an oligopolistic shareholder 2, including the Plaintiff’s shares under the name of an oligopolistic shareholder 2, 30% prior to the issuance of the instant shares, and the fact that ○○○○○ (including the Plaintiff’s shares in the name of an oligopolistic shareholder 2, 40% prior to the issuance of the instant shares) was not established around May 204. However, there is no evidence to acknowledge that ○○ was not subject to tax evasion under Article 41-2(1)1 of the Act, and rather, there is no reason to view that ○○○○ was 6% prior to the issuance of the instant shares in the name of an oligopolistic shareholder 2, including the Plaintiff’s shares under title trust 30%.

(6) As a result, in light of the fact that ○○○○ was insolvent due to business deterioration, and the amount of national taxes, such as corporate tax, exceeds KRW 8.8 billion, and the amount of delinquent taxes to be borne by ○○○ as a secondary taxpayer exceeds 5.8 billion and cannot be deemed as a minor reduction of tax arising out of incidental to the title trust, it is reasonable to deem that ○○ was an incidental purpose of tax avoidance even if the title trust was made with the main purpose of tax avoidance, or even if the prior share distribution for the registration of the KOSDAQ was the main purpose in performing the title trust of the instant company, it was an incidental purpose of tax avoidance.

Therefore, this part of the plaintiffs' assertion that ○○ did not have an objective of tax avoidance in carrying out the title trust of this case is without merit.

(2) Whether the principle of equality is violated

① Since the main text of Article 41-2(1)1 of the Act and Article 41-2(2)1 and Article 41-2(2) thereof, “where property is registered, etc. in the name of another person” is prohibited from evading gift taxes on the ground of title trust, the legislative purpose of which is to ensure that the principle of substantial taxation is carried out without going against the form, and thus, it is recognized as legitimate. The imposition of gift taxes on title trust with the purpose of evading gift taxes is appropriate to achieve the purpose of deemed gift tax evasion. The imposition of gift taxes on title trust with another alternative method suitable for preventing tax evasion using title trust is a way to deny such judicial effect and impose penalty surcharges on the title trust with the same purpose of evading gift taxes on the grounds that such act is not contrary to the principle of fair taxation, and thus, it is unreasonable to impose gift taxes on the title truster and to impose gift taxes on the same way as gift taxes on the grounds that it does not go against the principle of fair taxation of gift taxes on title trust, and thus, it is unreasonable to impose gift taxes on the title trustee more than other alternative means.

3. Conclusion

Therefore, the plaintiffs' claims are without merit, and they are dismissed. It is so decided as per Disposition.