[1] Legislative intent of Articles 41-3(1) and 41-5(1) of the former Inheritance Tax and Gift Tax Act / Whether “new stocks” under Article 41-3(6) of the former Inheritance Tax and Gift Tax Act includes “new stocks” regardless of the property donated or acquired with compensation from the largest shareholder, etc., or the property donated without basis (negative)

[2] In a case where the provisions of the former Inheritance Tax and Gift Tax Act concerning the calculation of the value of donated property stipulate a specific type of transaction or act, and the scope of taxation is limited to only a certain transaction or act, and the scope of taxation is limited, thereby establishing the scope and limit of taxation of gift tax, whether the transaction or act excluded from the scope of taxation of gift tax or the scope of taxation among the transaction or act governed by the individual pricing provisions can be taxed even if it falls under the concept of donation under Article 2(3)

[3] The case holding that in a case where Gap corporation, an unlisted corporation, issued gift tax to Eul et al. on the ground that it does not meet the applicable requirements under Article 41-5 (1) and (3) of the former Inheritance Tax and Gift Tax Act and did not impose tax on Eul et al. on the listed stocks acquired by merger, and it cannot be imposed on Eul et al. on the listed stocks acquired by merger, on the ground that it did not meet the applicable requirements under Article 41-5 (1) and (3) of the former Inheritance Tax and Gift Tax Act, and it cannot be imposed on the listed stocks acquired by merger, etc. based on Article 2 (3) of the same Act, since Eul et al. was merged into Gap corporation, which was a KOSDAQ-listed corporation, and acquired stocks by merger to Eul et al.

[1] The legislative intent of Article 41-3(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “Inheritance Tax Act”) is to promote equality in taxation by imposing gift tax on listed profits of unlisted stocks acquired by a person with a special relationship with the largest shareholder, etc. before the donation or acquisition is made free of charge predicted at the time of the acquisition. Article 41-5(1) of the former Inheritance Tax and Gift Tax Act provides that gift tax shall be imposed on listed profits according to the merger with the same purport as Article 41-3(1) in consideration of the fact that there is no substantial difference between listing through the merger and listing of non-listed stocks directly. Accordingly, Articles 41-3(1) and 41-5(1) of the former Inheritance Tax and Gift Tax Act provide that where a person with a special relationship receives a donation from the largest shareholder, etc. or acquires a property donated with compensation from the largest shareholder, etc., or that person is subject to the application of new stocks issued by a corporation.

In addition to the purport of the above provisions, in light of the language and structure thereof, “new stocks” under Article 41-3(6) of the former Inheritance and Gift Tax Act does not include new stocks donated or acquired at a cost from the largest shareholder, etc., without being based on the stocks donated or acquired at a cost, nor does it include new stocks acquired or allocated regardless of the donated property. Even if such new stocks obtained listing benefits through a merger, it cannot be interpreted that the said provision constitutes the value of donated property under Article 41-

[2] Article 2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 2011; hereinafter “Gifts and Gift Tax Act”) provides that gift tax shall be imposed on donated property from another person’s donation. Article 2(3) of the same Act provides that “Doing” refers to a free transfer of tangible or intangible property, regardless of the name, form, purpose, etc. of such act or transaction, by direct or indirect means (including where transferring property at a remarkably low price), or an increase of property value of another person by donation in order to ensure predictability of taxpayers and promote stability in tax law relations, where a provision of the Inheritance and Gift Tax Act on the calculation of donated property (hereinafter “value calculation provision”) regulates a specific type of transaction or act limited only to a certain transaction or act subject to gift tax and limited scope of taxation, and where it can be deemed that gift tax is established within the scope and limit of taxation of gift tax, the concept of individual transaction or act excluded from the scope of taxation of gift tax under Article 2(3) of the former Tax Act.

[3] In a case where Gap corporation, an unlisted corporation, issued new stocks to Eul, etc. in a special relationship with Gap's officers and employees by giving them new stocks through a third party allotment method, and Eul et al. acquired stocks within five years, and Eul et al. acquired the stocks of Eul et al. through merger with Gap corporation which was the largest shareholder, and the tax authority imposed gift tax on Eul et al. on Gap et al. on the ground that the increase in the value of acquired stocks due to merger constitutes taxation requirement under Article 41-5 (1) or 2 (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 2011; hereinafter "Inheritance Tax Act"), the case holding that the judgment below did not err by misapprehending the legal principles on acquisition of new stocks under Article 41-5 (1) and (3) of the former Inheritance and Gift Tax Act without satisfying the application requirements under Article 41-5 (1) and (3) of the former Inheritance and Gift Tax Act, and it did not establish the limitation on the above acquisition of stocks.

[1] Articles 41-3(1) and (6), and 41-5(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201) / [2] Articles 2(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201); / [3] Articles 2(1) and (3), 41-3(1) and (6), and 41-5(1) and (3) of the former Inheritance and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201)

[2] Supreme Court Decision 2013Du13266 Decided October 15, 2015 (Gong2015Ha, 1683) Supreme Court Decision 2014Du1864 Decided October 29, 2015

Plaintiff 1 and three others (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Head of a tax office and 3 others (Law Firm Maritime Affairs Corporation, Attorneys Soh-ho et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2015Nu45092 decided October 5, 2016

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. (1) Article 41-5(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “Inheritance Tax Act”) provides that “Where a person with a special relationship with the largest shareholder, etc. has received stocks, etc. of the relevant corporation from the largest shareholder, etc. or has acquired stocks, etc. of another corporation with donated stocks, etc. of the relevant corporation for compensation, or has acquired stocks, etc. of the relevant corporation from a person other than the largest shareholder, etc., with donated stocks, etc. or donated, and where the value of the relevant stocks, etc. has increased as a result of the merger with the relevant corporation or another corporation having a special relationship with the corporation within five years from the date of donation or acquisition, the amount equivalent to such profits shall be deemed the value of donated stocks, etc. to the person who has acquired the profits exceeding the standard prescribed by the Presidential Decree.” The main sentence of paragraphs (3) provides that “The provisions of Article 41-3(2) through (7) shall apply mutatis mutandis.”

Meanwhile, Article 41-3(1) of the former Inheritance and Gift Tax Act provides that "where a person having a special relationship with the largest shareholder, etc. has received stocks, etc. of the relevant corporation from the largest shareholder, etc. or has acquired them for a fee, the date of donation or acquisition, and where stocks, etc. of the relevant corporation are acquired from a person who is not the largest shareholder, etc. with donated property, and the value increases as a result of listing the relevant stocks, etc. on the securities market within five years from the date of acquisition, and where a person who has received a donation or acquired the relevant stocks, etc. for a fee exceeds the original taxable value or acquisition value of donated property, it shall be deemed the value of donated property of the person who has acquired such profits." Paragraph (6) of the same Article provides that "

(2) The legislative purport of Article 41-3(1) of the former Inheritance and Gift Tax Act is to promote the equality of taxation by imposing gift tax on listed profits of unlisted stocks acquired by a person having a special relationship with the largest shareholder, etc., and imposing tax on such person by no later than the gratuitous transfer expected to be realized at the time of donation or acquisition. Article 41-5(1) of the former Inheritance and Gift Tax Act also provides that gift tax shall be imposed on listed profits according to the merger with the same purport as Article 41-3(1) of the former Inheritance and Gift Tax Act in consideration of the fact that there is no substantial difference between listing through the merger and listing of unlisted stocks directly. Accordingly, Articles 41-3(1) and 41-5(1) of the former Inheritance and Gift Tax Act provide that the cases where a person having a special relationship receives or acquires stocks from the largest shareholder, etc., or acquires them with the property donated or donated. Article 41-5(3) of the former Inheritance and Gift Tax Act, which applies mutatis mutandis to Article 41-5(1).

(3) In addition to the purport of such provisions, in light of the language and structure thereof, the “new stocks” under Article 41-3(6) of the former Inheritance and Gift Tax Act does not include the new stocks donated or acquired with compensation from the largest shareholder, etc., regardless of the property donated or acquired with compensation, or the new stocks acquired or allocated regardless of the property donated. Even if such new stocks obtained listed benefits from the merger, it cannot be interpreted that the said provision constitutes the donated property under Article 41-5(1) which applies mutatis mutandis

B. Therefore, the court below's decision to the same purport is based on the legal principles as seen earlier to the effect that although the plaintiffs are specially related to the majority shareholder of the UNH Game providing company, they directly bear the purchase price of new shares regardless of the largest shareholder in the capital increase procedure by the third party allocation method, and thus, they do not meet the application requirements under Article 41-5 (1) and (3) of the former Inheritance and Gift Tax Act. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on the interpretation of Article 41-3 (6) which applies mutatis mutandis

The Supreme Court precedents cited in the grounds of final appeal are different from this case, and thus are inappropriate to be invoked in this case.

2. Regarding ground of appeal No. 2

A. Article 2(1) of the former Inheritance and Gift Tax Act provides that gift tax shall be imposed on donated property from another person’s donation. Article 2(3) provides that “The term “donation” refers to a free transfer (including a transfer at a remarkably low price) of tangible or intangible property, regardless of the name, form, purpose, etc. of such act or transaction, or an increase in property value of another person by means of a direct or indirect method.” Provided, That in cases where a provision of the Inheritance and Gift Tax Act on the calculation of donated property (hereinafter “value calculation provision”) regulates a specific type of transaction and act in order to ensure predictability of taxpayers and promote stability in tax law relations, only a certain transaction and act among them shall be subject to gift tax, and the scope of taxation may be deemed to have set a limit on the scope and limit of gift tax by prescribing the scope of taxation of gift tax, such transaction and act excluded from the scope of taxation or scope of taxation among transactions and acts regulated by individual value calculation provisions shall not be deemed to fall under the concept of gift tax under Article 2(3) of the former Inheritance and Gift Tax Act (see Supreme Court Decision 2016Du1614.

B. The lower court, on the grounds that Article 41-5(1) of the former Inheritance and Gift Tax Act, etc. seems to have set a limitation on not imposing taxes on the acquisition of new shares that are the same as the instant shares, determined that the instant disposition by the Defendants, which was made on a different premise, was unlawful, on the grounds that the listed profits of the instant shares following the instant merger cannot be imposed under Article 2(3) of the former Inheritance and Gift Tax Act, barring special circumstances.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the above provisions, the lower court did not err in its judgment by misapprehending the legal doctrine on comprehensive gift taxation, contrary to what is alleged in the grounds of appeal.

The Supreme Court precedents cited in the grounds of final appeal are different from this case, and thus are inappropriate to be invoked in this case.

In addition, inasmuch as the above determination by the court below is just, the court below did not accept the ground of appeal to the effect that the court below erred by misapprehending the legal principles on calculation of the value of donated property in relation to this part, as it did not affect the conclusion of the judgment, on the ground that the court below did not err by misapprehending the legal principles on calculation of the value of donated property, even if it is assumed that the listed profits of the stocks of this case following the merger of this case may be taxed based on Article 2(3) of the former Inheritance and Gift Tax Act, citing the reasoning of the judgment of the court of

3. Conclusion

Therefore, all appeals are dismissed, 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 Kim So-young (Presiding Justice)