No economic substance of the transaction can be deemed as a single transaction.

Generally, acts such as the establishment of a company, transfer of business, merger, etc. can be freely conducted according to the situation of the company, and each act is not related to one another, and the economic substance of transactions conducted by more than two transactions or acts cannot be viewed as a single transaction. Thus, there is no gift or act which is subject to gift tax,

2013Guhap3955 Revocation of Disposition of Imposition of Gift Tax

1.A 2.B

1.The Head of Seocho Tax Office;

August 13, 2013

October 10, 2013

1. The imposition of an OOO on May 18, 201 by the director of the Seocho Tax Office against Plaintiff Cho Jae-A and the imposition of an OOOOOO on May 16, 201 by the director of the Seocho Tax Office shall be revoked on May 16, 201.

2. The costs of lawsuit shall be borne by the Defendants.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

"CCC Co., Ltd. (hereinafter referred to as "CC") is a corporation established on January 5, 1981 and operated by the plaintiffs as non-listed corporations that manufacture and sell vessel components." "B. CCC et al. (hereinafter referred to as "CCC") was established on March 30, 2005 with investment of the plaintiffs, DaD and CE for the purpose of engaging in the construction business on March 30, 2005, the plaintiffs, DaD and CE were established with investment of OO members (the capital was OO members at the time of its establishment, OO, the plaintiffs, and CE invested each OO member at the time of its establishment)," "CCC transferred its business department and design department on September 1, 2006 to CCC, but acquired shares of 30% of the new shares at the time of the merger and acquisition of the CCC shares from 30% shares and 50% shares of each of the CCC after the merger.

See Table 3. Decision

E. From October 25, 2010 to December 10, 2010, the Director of the Busan Regional Tax Office: (a) conducted an investigation into the corporate tax for 205 to 2008 on the CCC; (b) established the CCC and transferred the CCC’s business department to CCC; (c) made the instant merger after two years and eight months (hereinafter “instant transaction”); (d) the instant transaction constituted a gift pursuant to Article 2(3) and (4) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11609, Jan. 1, 2013; hereinafter “OB”), and (e) notified the Plaintiffs of the disposition of imposition of gift tax for the remaining amount of 10 OB gift tax by deeming that the Plaintiffs were entitled to the gift pursuant to Article 2(1) and (4) of the CCC’s existing shareholders and the CCC’s gift tax exemption method; and (e) notified the Defendants of the disposition of imposition of gift tax for 150OB.

[Reasons for Recognition] The entry of Gap evidence Nos. 1 through 7, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

The instant disposition is unlawful for the following reasons.

1) Article 2(3) and (4) of the Inheritance Tax and Gift Tax Act cannot be a separate provision on the basis of taxation of gift tax, and there is no provision on the basis of calculation of gift tax. Thus, there is no provision on the basis of taxation of gift tax on

2) Even if Article 2(3) and (4) of the Inheritance Tax and Gift Tax Act can be the basis for imposing independent gift tax, the instant transaction does not constitute gift since the Defendants did not have any contribution act by this ArticleD or FF as a donor, and did not constitute gift since it was conducted in a series of process according to the company’s reasonable business judgment and there was no separate act of gift.

3) Each act constituting the instant transaction, even though it is legitimate under the tax law, imposing tax on the instant transaction by deeming it as a series of acts, disregarding the motive, requirements for taxation, and predictability of each act, and violates the legal principles set forth in the establishment and determination of tax liability, as well as is unreasonable as a taxation on unrealized gains.

4) In relation to the calculation of the value of donated property, disregarding the increase in value through its independent business performance, and deeming all the increased shares due to a merger as the value of donated property is contrary to the general method of calculating the value.

5) Even if the instant disposition (main tax part) is lawful, the Plaintiffs’ failure to report and pay gift tax in relation to the instant disposition has justifiable grounds. As such, the penalty tax portion out of the instant disposition is unlawful.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

1) Whether the taxation can be made by applying Article 2(3) and (4) of the Inheritance Tax and Gift Tax Act

A) Introduction and purport of the complete comprehensive gift taxation

“The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003; hereinafter “former Inheritance Tax and Gift Tax Act”) borrowed the concept of donation under the Civil Act with no definition provision on the concept of donation. The concept of donation borrowing alone does not have any way to prevent the avoidance of gift tax through an irregular donation without following the form of donation under the Civil Act. As such, the tax authorities have several statutory provisions on donation (Articles 32 through 42 of the former Inheritance Tax and Gift Tax Act). However, the regulations on individual donation donation alone pointed out the problem that it is difficult to cope with a new type of gift due to a new type of gift arising from a new type of gift financial product or financial technique, a variety of capital transactions, etc., and introduced the so-called comprehensive donation under the Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003; hereinafter “the former Inheritance Tax and Gift Tax Act”) and introduced the so-called comprehensive donation under Article 23(3) of the former Inheritance Tax and Gift Tax Act (Article 4).

Article 2(1) of the Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) provides that gift tax shall be imposed on another person's donated property under Article 2(3) of the Inheritance Tax and Gift Tax Act. Article 2(3) provides that the term "donation" means a free transfer (including a transfer at a remarkably low price) of tangible or intangible property (including a transfer at a remarkably low price) to another person by direct or indirect means, or an increase of the value of another person's property by means of contribution, which is distinct from a gift under the Civil Act. Article 33 through 42 of the Inheritance Tax and Gift Tax Act provides that the concept of donation that is separate from a gift under the Civil Act shall be formulated separately, and Article 2(3) and (4) of the Inheritance Tax and Gift Tax Act shall apply to an example provision on the calculation of the value of donated property

As seen earlier, it is difficult to simply interpret Article 2(3) of the Inheritance Tax and Gift Tax Act as a confirmatory and declaration provision in light of the structure of other provisions, such as the introduction of the concept of donation based on the complete universalism under Article 2(3) of the Inheritance Tax and Gift Tax Act in order to impose gift tax on the transfer of property in a variety of unpredicted forms or increase in the value of property (see, e.g., Supreme Court Decision 208Du17882, Apr. 28, 2011) (see, e.g., Supreme Court Decision 208Du17882, Apr. 28, 201). In light of the background, legislative purport, system, etc. of the introduction of Article 2(3) of the Inheritance Tax and Gift Tax Act (see, e.g., Supreme Court Decision 208Du1782, Apr. 28, 2011).

Meanwhile, Article 2(4) of the Inheritance Tax and Gift Tax Act provides that Article 2(3) shall apply to cases where it is deemed that the inheritance tax or gift tax has been unjustly reduced by indirect method via a third party, or by means of two or more acts or transactions, the relevant economic substance shall be deemed a direct transaction or a continuous single act or transaction. This provision provides for "tax based on the economic substance" for the same purpose as Article 14(3) of the Framework Act on National Taxes rather than the provision on the basis of the taxation of the independent gift tax based on the complete comprehensive taxation of the gift tax, and it is reasonable to deem that the principle of substantial taxation is provided for in the gift tax like the Framework Act on National Taxes."

“The Defendants: (a) deemed that the instant transaction was conducted by two or more transactions or acts by applying Article 2(4) of the Inheritance Tax and Gift Tax Act (a transaction in which DaD or FF transfers cCC shares owned by them to the Plaintiffs); and (b) applied Article 2(3) of the Inheritance Tax and Gift Tax Act by deeming that DaD or FF transferred cCC shares without compensation to the Plaintiffs through the instant transaction, i.e., gratuitously transferring cCC shares; and (b) first, whether the instant transaction constitutes Article 2(4) of the Inheritance Tax and Gift Tax Act.

(1) Requirements under Article 2(4) of the Inheritance Tax and Gift Tax Act

Article 2(4) of the Inheritance Tax and Gift Tax Act provides that Article 2(3) shall apply to cases where it is deemed that the inheritance tax or gift tax has been unjustly reduced by indirect means via a third party, or by means of two or more acts or transactions, based on such economic substance, deeming such transactions as a direct transaction or a single act or transaction in succession. As such, Article 2(4) of the Inheritance Tax and Gift Tax Act provides that the purport of deeming two or more acts or transactions to be a single act or transaction in succession is not only to prevent tax avoidance, but also to prevent tax evasion as a whole if a certain transaction is imposed at each stage without imposing tax on a whole, it would cause the economic substance of the transaction to cause an inappropriate taxation as to the whole transaction, and thus,

Therefore, in order to apply Article 2(4) of the Inheritance Tax and Gift Tax Act, it should be limited to cases where not less than a pool of acts or transactions are deemed to be a circumventing or multi-stage act for tax avoidance, and the economic substance thereof is deemed to be a single act or transaction with continuous economic substance. Whether the economic substance constitutes a single act or transaction with continuous economic substance should not be determined uniformly only based on the result, but rather on a comprehensive basis of the specific circumstances, such as the nature of each transaction, interval and mutual relationship, intent

(2) Facts of recognition

(A) After completing the construction business registration on March 30, 2005 and completing the report on overseas construction business on April 21, 2005, CCC had examined the large-scale housing construction project amounting to USD OOOO in Peru around October 2005, but also suspended its further business due to the local business entity in Peru, which was to conduct the business.

(B) On August 25, 2005, with respect to the guarantee of payment to GGG International Inc., a foreign subsidiary, the CCC was subject to provisional attachment by the creditor, HHHHBH, and the creditor, around October 2005, filed an objection against the provisional attachment order. On November 2005, 2005, the CCC filed a lawsuit for the confirmation of the existence of a debt against HHHHBH. On October 2007, CCC entered into an agreement with HHHHGBH on the payment guarantee of the above payment, and rescinded the provisional attachment on November 15, 2007.

(C) The management performance of the CCC for the business year from 2005 to 2008 is as follows (unit: KRW 00,000).

See Table 9 of the Court Decision

(D) On January 1, 2006, CCC transferred its business department and design department to CCC. Accordingly, CCC’s business department and employees affiliated with design department have retired from employment to CCC. CCC had used the pre-existing CCC’s business department and design department as it is.

(E) In the transaction agreement drawn up on January 1, 2006 between CCC and CCC, the CCC test vicariously executes the business and design of CCC, and CCC provides goods to CCC test at the price of 95% of the price supplied to the seller.

(F) The management performance for the CCC 2006-2008 business year is as follows (unit: KRW 00,000).

See Table 10 of the Court Decision

(G) The current status of shareholders change in the CCC is as follows:

See Table 10 of the Court Decision

(3) Determination

“In full view of the aforementioned evidence and the overall arguments, the following circumstances, which are acknowledged as a whole, cannot be seen as a single transaction (i.e., a transaction in which the CCC shares are transferred to the Plaintiffs) in which the economic substance of the instant transaction was conducted through two or more transactions or actions. As such, Article 2(4) of the Inheritance Tax and Gift Tax Act cannot apply to the instant transaction. Therefore, as long as the instant transaction cannot be deemed as a continuous transaction, there is no gift and gift tax on the Plaintiffs of DaD and FF. Therefore, the instant disposition is unlawful without any need to further examine the remaining arguments of the Plaintiffs. (A) The instant transaction consists of (i) the act of establishing CCCtech; (ii) the act of transferring the business department and design department to CCC; (iii) the act of supplying goods to CCC; and (iv) the merger with CCC. In light of the nature of each transaction, each party’s result from the beginning; and (iii) the act is not related with each other, and thus, it is difficult to view that each of the following acts can be freely transferred or dependent.

(B) The purport of imposing tax on two or more acts or transactions by deeming them as a series of transactions depending on their economic substance is to prevent the act of changing taxation by sharing at least a single transaction, and to regard two or more transactions or acts as a single transaction consecutively, the similarity of the form or character of the transaction between each of the two or more transactions or acts as a single transaction should be recognized. However, the act of establishing a company that constitutes the instant transaction and the Defendant’s act of transferring equity as a series of transactions are completely different in the form or nature of the transaction. In other words, if a single transfer of equity is divided into several parts, multiple transfer of equity can be created, but it cannot be said that the act of establishing a company, business transfer, merger, etc. is not created.

(C) Each act constituting the instant transaction was conducted through the business judgment taking into account the company’s situation as follows, and there exists a reasonable reason and motive.

① Establishment of the CCC et al.: CCC et al. was established on March 30, 2005 as a corporation established on March 30, 2005 to run an overseas construction business, and actually carried out a housing construction project in Peru as of the end of 2005. From 2006, CCC et al. made considerable profits while carrying out export and wholesale business. It cannot be deemed that CCC owned by DaD and FF was a simple Domin or nominal company for the purpose of transferring the shares of CCC owned by the Plaintiffs.

② The transfer of the CCC’s business department and the CCC’s business agency: (a) around 2005, the CCC was subject to provisional attachment of deposit claims equivalent to the OOOOO won in relation to the payment guarantee for overseas subsidiaries, thereby resulting in the cCC’s loss in its business activities. In order to solve such crisis situation, the CCC transferred the business department that major sales occur to a separate corporation. At the time, CCC was seeking new profit-making businesses in the situation where the cCC had occurred due to the poor performance of overseas construction projects. Meanwhile, the business and purchase agency through the relevant company is widely performed in order to promote the efficiency of its business; (b) in this case, the profit rate was reasonable to the extent of 5%; and (c) as seen thereafter, at the time, there was no problem of imposing gift tax on the above transaction activities.

③ Merger between CCC and CCC: (a) the cancellation of the provisional attachment of the above deposit claim around the end of 2007, which led to the removal of the provisional attachment, the CCC maintained the CCC test, which is in charge of light design duties, as a separate legal entity. The CCC merged with the CCC test to create a collapse effect by integrating manufacturing work, business, and design work.

(D) In light of the following circumstances, it cannot be deemed that the inheritance tax or gift tax has been unfairly reduced through the instant transaction that goes through two or more acts or transactions by the Plaintiffs.

① At the time of the merger, the merger of this case complies with all laws and regulations related to the merger, including evaluating the corporate value of the CCC and CCC as fair value, calculating the merger ratio. It does not constitute the merger under the Inheritance Tax and Gift Tax Act.

② Ultimately, the Defendants’ gift profits in the instant transaction are equivalent to the CCCC’s corporate value at the time of the instant merger, and it is difficult to view that the CCCC’s corporate value increase, regardless of its own effort, was made by DaD and FF solely based on the contribution of DaD and FF, when the CCCC’s corporate value increase.

③ On December 31, 2011, the Inheritance Tax and Gift Tax Act was amended (Act No. 111130), which was newly established under Article 45-3 of the Inheritance Tax and Gift Tax Act on the legal fiction of donation of profits through a transaction with a specially related juristic person. This is to impose taxes on the gains accrued from the transaction during the sunset period between the specially related juristic persons within a certain scope. On the other hand, Article 3 of the Addenda provides that the said provision shall apply from the transaction with the specially related juristic person, which first commences after the enforcement of this Act, and provides that the said provision shall apply from the transaction with the special related juristic person, which first commences after the enforcement of this Act. Accordingly, even if CCC has increased corporate value by obtaining profits through a transaction with CCC (a special relationship between the juristic persons), this is related to the transaction with the specially related juristic person prior to the enforcement of Article 45-3 of the Inheritance Tax and Gift Tax Act on the legal fiction of donation of profits through a transaction with the specially related juristic person, and thus, it cannot be deemed that the Plaintiffs unfairly reduced inheritance tax or gift tax.

④ Whether the CCC and CCC are merged is the area of the business judgment. As seen earlier, insofar as there exist reasonable grounds and motive for the merger and there is no profit distribution based on the merger itself, it cannot be determined whether to impose gift tax on the following grounds: (a) the merger does not take place; and (b) there is no profit distribution by the merger itself.

(E) It is difficult to deem that there exists a time interval between the first phase of the instant transaction (establishment of the CCC) and the last phase (mergers betweenCC and CCC) and three years and five months, and that there was a binding contract between DaD, FF cost and the Plaintiffs with respect to the first phase of the correction in which the first phase of the transaction took place.

3. Conclusion

The plaintiffs' claims are justified, and they are accepted.