The meaning of “a person in a special relationship” under Articles 26(4)1 and 19(2)2, etc. of the Enforcement Decree of the former Inheritance Tax and Gift Tax Act, and in cases where a transferor or a transferee of high-priced transfer or low-priced transfer falls under an officer of a legal entity controlled by an investment of the other party, whether the other party constitutes “a person in a special relationship” (negative)

In light of the language and text, structure, etc. of Articles 35(1)1, 2, and 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 200); Articles 13(4)2, 19(2)2, and 26(4)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 17039, Dec. 29, 200; hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act”), it is reasonable to view that an “employee” or an “executive of a corporation under special relationship with an employee under special relationship with an other party to a transaction, who is a taxpayer, constitutes an employee of the said corporation or a transferee based on an employee of the said corporation, who is an employee or transferee at a low price, and thus, constitutes an employee or transferee under control by the said regulations.

Articles 35(1)1, 2, and 35(2)(see current Article 35(3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 7010, Dec. 30, 2003); Articles 13(4)2 (see current Article 13(10) and 19(2)2 (see current Article 19(2)), 26(4)1 (see current Article 12-2(1) and 26(4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 17039, Dec. 29, 200)

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

The Head of the District Tax Office (Law Firm Squa, Attorneys Kim Tae-tae et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2009Nu6263 decided May 9, 2011

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 35(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “Gift”) provides that “When the pertinent property is transferred or transferred to a person falling under any of the following subparagraphs, an amount equivalent to the difference between the price and the market price and is donated to the person who is equivalent to the profits prescribed by the Presidential Decree shall be deemed to have been donated.” Article 35(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that “If the property is transferred to a person in a special relationship at a price lower than the market price, the transferee of the relevant property shall be deemed to have been donated; Article 35(2) provides that “a person in a special relationship under subparagraphs 1 and 2 of paragraph (1) includes a person who acquires the relevant property at a price higher than the market price; Article 25(1)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act includes an employee under Article 4(2)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 2039).

As above, Article 35(1) of the Inheritance and Gift Tax Act separates a low-price transfer and high-priced transfer from a person with a special relationship under subparagraph 1, and Article 26(4) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that a transferor shall be liable for gift tax in cases where a property is transferred at a low-priced level from a person with a special relationship under subparagraph 2 to a person with a special relationship. In addition, Article 26(2) of the Enforcement Decree of the Inheritance and Gift Tax Act, as a matter of principle, provides for the scope of a person with a special relationship who becomes a partner of the transaction based on a transferor

In light of the language, structure, etc. of the provisions of the statutes, it is reasonable to view that the term “employee”, who is a person in a special relationship under Articles 26(4)1 and 19(2)2, etc. of the Enforcement Decree of the Inheritance and Gift Tax Act, or “employee of a corporation controlled by investment” or “officer of a corporation controlled by investment” as the transferor or transferee at a high-priced transfer, who is a taxpayer of gift tax, refers to his/her employee or an officer of a corporation under the control of investment by him/her. Therefore, it cannot be deemed that the transferee at a high-priced transfer or low-price constitutes an employee of a corporation under the control of the other party to the transaction by investment, and the other party to the transaction falls under an officer of a corporation under a special relationship under the said provisions.

2. According to the reasoning of the judgment below, around December 6, 200, the Plaintiff acquired 80,000 shares issued by the International Tourist Hotel Co., Ltd. (hereinafter “instant shares”) from Nonparty 1, Nonparty 2, and Nonparty 3 (hereinafter “Nonindicted 1, etc.”) at KRW 1,000,00 (hereinafter “instant shares”). Under the premise that at the time of the Plaintiff’s acquisition of the instant shares, Nonparty 1, etc., as an executive officer of the international tourist hotel, who was controlled by Nonparty 1, etc. by investment, the Defendant was under a special relationship with Nonparty 1, etc. as prescribed in Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, on the premise that the Plaintiff acquired the instant shares at a price lower than the market price, and thus, was subject to the imposition of the gift tax by applying Article 35(1)1 of the Inheritance Tax and Gift Tax Act.

Examining these facts in light of the legal principles and provisions as seen earlier, insofar as Nonparty 1 et al. did not correspond to an employee of the Plaintiff or an officer of a legal entity controlled by the Plaintiff’s investment, even if Nonparty 1 et al., the counterparty at the time of acquiring the instant shares, etc. were an officer of an international tourist hotel controlled by investment, such circumstance alone cannot be deemed as constituting “a person in a special relationship” as stipulated in Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance and Gift Tax Act, and thus, the Defendant’s imposition of gift tax of this case on a different premise is unlawful.

Therefore, under the premise that if Nonparty 1, the other party to the transaction at the time of acquiring the shares of this case, etc. were an executive of an international tourist hotel controlled by investment, Nonparty 1, etc. constitutes “a person in a special relationship” as stipulated in Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance and Gift Tax Act, the argument in the grounds of appeal disputing the judgment of the court below that the Plaintiff was not an executive of an international tourist hotel at the time of acquiring the shares of this case cannot be accepted further.

3. 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 on the bench.

Justices Kim So-young (Presiding Justice)