The meaning of “employee” of a person with a special relationship under Articles 26(4)1 and 19(2)2 of the former Inheritance Tax and Gift Tax Act, and whether a transferor of high-priced transfer or a transferee of low-price transfer may be deemed to fall under a person with a special relationship under the above provision if the transferee is an employee of the other party (negative)

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); Article 19(2)2 (see current Article 19(2)), and 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. 18177, Dec. 30, 2003); Article 19(2)2 (see current Article 19(2));

[Judgment of the court below]

head of Dongjak-gu Tax Office

Seoul High Court Decision 2010Nu40030 decided June 29, 2011

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

The grounds of appeal are examined.

1. Article 35(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter “Inheritance Tax Act”) 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 1 provides that “If the property is transferred to a person in a special relationship with another person at a price lower than the market price, the transferee of the relevant property shall be deemed to have been donated; and Article 35(2) provides that “If the property is transferred to a person in a special relationship with another person at a price higher than the market price, the scope of a person in a special relationship with another person provided for in subparagraphs 1 and 2 of paragraph (1) is determined by the Presidential Decree; Article 25(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 187, Dec. 30, 17, 20003; hereinafter referred to “the transferee”).”

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 to a person with a special relationship under subparagraph 2, and Article 26(4) of the Enforcement Decree of the Inheritance and Gift Tax Act provides that a transferor is liable for gift tax if a property is transferred at a low-value transfer from a person with a special relationship under subparagraph 2, and Article 26(2) of the Enforcement Decree of the Inheritance and Gift Tax Act provides, in principle, the scope of a transferor or a person with a special relationship, who is the other party to the transaction, based on a transferor or a transferee at a high-priced transfer, and in light of the language and content, structure, etc. of the aforementioned statutory provisions, it is reasonable to deem that a “employee” means a person with a special relationship under Articles 26(4)1 and 19(2)2, etc. of the Enforcement Decree of the Inheritance and Gift Tax Act based on a transferor or low-price in a high-priced transfer that is a person liable for gift tax.

2. According to the reasoning of the judgment below and the record, the Plaintiff acquired 50,000,000 won of the company’s shares (hereinafter “instant shares”) from the Nonparty, the representative director, the Nonparty, as the largest shareholder of MDE (hereinafter “MDS”) on November 10, 203, and completed the transfer of title on the following day. Since the Defendant entered into an employment contract under which the Plaintiff would be appointed as an officer of MDS at the time of the transfer of the instant shares, it can be seen that the Nonparty, the transferor’s employee, was in a special relationship under Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act, and thus, imposed the gift tax of this case on the Plaintiff by applying Article 35(1)1 of the Inheritance Tax and Gift Tax Act.

However, in light of the aforementioned legal principles and regulations, insofar as the Nonparty, the transferor, is not an employee of the Plaintiff, even if the Nonparty, at the time of the acquisition of the instant shares, was in an employment contract with IMS, controlled by the Plaintiff by investment, such circumstance alone cannot be deemed to constitute a person with a special relationship stipulated in Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance and Gift Tax Act. Thus, the Defendant’s disposition imposing the gift tax of this case on a different premise is unlawful.

3. Although there are somewhat inappropriate points in the reasoning of the lower judgment, the lower court’s conclusion that the Defendant’s imposition of gift tax of this case was unlawful is justifiable. Therefore, contrary to the aforementioned legal principles, the allegation in the grounds of appeal disputing the purport that the lower court was unlawful on the ground that the Plaintiff was in a employment relationship with MDS at the time of the transfer of the instant shares, on the premise that even if the transferee of the instant shares at low price transfer is an employee of the opposite contractual party, the opposite contractual party constitutes a person with a special relationship under Articles 26(4)1 and 19(2)2 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act.

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 Shin (Presiding Justice)