Whether gift tax may be imposed on shareholders, etc. on the portion of profits from a transaction with a loss corporation or “profit from a transaction with a corporation other than a corporation that has no loss due to business suspension or closure” on the grounds of Article 2(3) of the former Inheritance Tax and Gift Tax Act (negative in principle)

Articles 2(3) and 41(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Article 31(1) and (6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 22042, Feb. 18, 2010);

Supreme Court Decision 2013Du13266 Decided October 15, 2015 (Gong2015Ha, 1683)

Plaintiff (Law Firm Sejong, Attorneys Cho Jong-tae et al., Counsel for the plaintiff-appellant)

Head of Central Tax Office

Seoul High Court Decision 2013Nu14827 decided October 31, 2013

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

Taking account of the circumstances as indicated in its reasoning, the lower court determined that the Nonparty’s donation of 4,885,110 shares of Daeyang Metal Co., Ltd. (hereinafter “instant share donation”) to the Daeyang-NC Co., Ltd. (hereinafter “Mayang-NC”) did not constitute “business acquisition limit or corporate restructuring, etc.” under the latter part of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Act”). Considering the reasoning of the lower judgment in light of relevant legal principles and records, the lower court’s determination is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the interpretation of the aforementioned provision, thereby failing to exhaust all necessary deliberations.

2. As to the grounds of appeal Nos. 2 through 4

Article 41(1) of the Act and Article 31(1) and (6) of the Enforcement Decree of the Act (amended by Presidential Decree No. 22042, Feb. 18, 2010) provide for the calculation of the value of donated property subject to gift tax in cases where a person in a special relationship with a corporation having losses (hereinafter “contributed corporation”) or stockholders, etc. of a corporation under suspension or closure of business makes transactions, such as providing property to a specific corporation free of charge, and the profits earned by such stockholders, etc. are at least KRW 100 million. This provision excludes profits acquired by such stockholders, etc. from the subject of gift tax by excluding profits acquired from transactions with a corporation which bears corporate tax on the increase and decrease of assets, etc. while running a business normally from the subject of gift tax. As such, it should be deemed that there is a limit in preventing a shareholder, etc. from imposing gift tax on such profits, barring special circumstances, on such grounds as Article 2(3) of the Act.

According to the reasoning of the judgment below and the records, the non-party, the father of the plaintiff, donated the shares of this case to Yangyang on October 19, 2007, and at the time the plaintiff was holding 39,250 shares of Yangyang-D's 60,00 shares, and the plaintiff was holding 25,646,827,50 shares of Taeyang-D's 6,412,974,260 shares of corporate tax for the business year 2007, including the amount of 25,646,827,50 shares of this case, and reported and paid the amount of 6,412,974,260 shares as corporate tax for the business year 207, and the defendant imposed gift tax on February 17, 201 by applying Articles 2(3) and 42(1)3 of the Act by deeming that the plaintiff was donated benefits equivalent to the increase in the value of the shares in this case.

Examining these facts in light of the provisions and legal principles as seen earlier, even if the non-party indirectly donated the shares of this case to Yangyang, which is the shareholder of Yangyangdi C, to increase the value of the shares held by the plaintiff, indirectly, the non-party's donation of this case constitutes a donation of property to a juristic person with no deficit, and since Boyangdi C bears corporate tax on the profit from the receipt of its assets, the gift tax cannot be imposed on the profits acquired by the plaintiff pursuant to Article 2 (3) of the Act, and as seen earlier, the donation of this case does not constitute "business transfer or organizational change, etc." under Article 42 (1) 3 of the Act. Accordingly, the disposition of this case imposing the gift tax on the plaintiff by applying Articles 2 (3) and 42 (1) 3 of the Act shall be deemed unlawful.

The judgment below to the same purport is just, and contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the interpretation and application of Articles 2(3), 41(1), and 42(1)3 of the Act.

3. Conclusion

Therefore, the appeal is 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.

Justices Kim So-young (Presiding Justice)