Seoul High Court 2015Nu68279 (Law No. 17 May 2017)

Where a preemptive right is acquired through a third financial institution, gift tax under Article 40 of the Inheritance Tax and Gift Tax Act may not be levied.

Where a preemptive right is acquired through a third financial institution, gift tax under Article 40 of the Inheritance Tax and Gift Tax Act may not be levied.

Article 40 (Donation of Benefits from Conversion, etc. of Convertible Bonds, etc. into Stocks)

The appeal is dismissed.

The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1 and 2

A. Article 40(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter referred to as the "former Inheritance Tax and Gift Tax Act") provides that "in cases where any of the following profits is acquired by converting into or exchanging stocks with convertible bonds, bonds with warrant (referring to warrant certificates, if they are separated) or other stocks, or by transferring or exchanging stocks with bonds entitled to take over stocks (hereinafter referred to as "convertible bonds, etc.") or accepting stocks with the bonds entitled to take over stocks, an amount equivalent to such profits shall be deemed the value of property donated to the person who has acquired such profits." In subparagraph 2(b) of the same Article, "in cases where the largest shareholder of the corporation which issued convertible bonds, etc. or a person in a special relationship with him/her acquires or acquires (including cases where he/she has taken over or acquired them from an underwriter under Article 9(12) of the Financial Investment Services and Capital Markets Act in proportion to the number of stocks owned by the corporation, the profits acquired by conversion amount exceeding the convertible bonds, etc."

B. In full view of the adopted evidence, the court below acknowledged that ○○○ Co., Ltd. (hereinafter referred to as “○○○○○”) issued the instant bonds in the form of private placement on September 18, 2008, and that ○○○○ Co., Ltd. (hereinafter referred to as “○○ Bank”) sold ○○ Securities Co., Ltd. (hereinafter referred to as “○○ Securities”) by separating the total of 20 copies of warrant certificates (500 million won total of 20 million won) from the total of ○○ Securities Co., Ltd., and sold ○○ Securities Co., Ltd. (hereinafter referred to as “○○ Securities”) on the same day, ○○ Securities Co., Ltd. (hereinafter referred to as “○○ Securities”) immediately sold 16 of the above 20 copies of warrant certificates to the Plaintiff.

(1) In order to be subject to Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act, ○○ Securities, which sold warrant certificates, to the Plaintiff, constitutes an underwriter under Article 2(7) of the former Securities and Exchange Act (amended by Act No. 8635, Aug. 3, 2007; hereinafter the same shall apply) that was promulgated as Act No. 8635, Feb. 4, 2009, and were subsequently repealed by the Financial Investment Services and Capital Markets Act.

(2) In order to constitute an underwriter under Article 2 (7) of the former Securities and Exchange Act, an act falling under any of the subparagraphs 1 through 3 of Article 2 (6) of the former Securities and Exchange Act shall be conducted, and in particular, Article 2 (6) 1 of the former Securities and Exchange Act lists one of the above acts of acquiring all or part of the securities from an issuer for the purpose of selling them in issuing them. Furthermore, in order to constitute an "public sale" under the above Act, Article 2 (4) of the former Securities and Exchange Act and Article 2-4 (2) of the former Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 20947, Jul. 29, 2008; Presidential Decree No. 2 of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (amended by Presidential Decree No. 20947, Jul. 29, 200) must be 50 or more persons who received an offer

(3) However, it is difficult to view that the ○○ Securities acquired 20 copies of the warrant certificates issued in total of 500 million won and sold 16 copies of such warrant certificates to the Plaintiff immediately, and that the purpose of “sale” was to make an offer to sell or invite an offer to purchase to at least 50 investors at that time.

(4) As such, ○○ Securities cannot be deemed to have committed an act falling under Article 2(6)1 of the former Securities and Exchange Act, and cannot be deemed to have committed an act falling under subparagraphs 2 and 3 of the same paragraph. Thus, ○○ Securities cannot be deemed to have been in the position of underwriter under Article 2(7) of the former Securities and Exchange Act at the time of selling the warrant certificates.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal doctrine and the record, the lower court did not err in its judgment by misapprehending the legal doctrine on interpretation and application of Article 40(1)2 (b) of the former Inheritance Tax and Gift Tax Act and Article 2(7) of the former Securities and Exchange Act,

2. As to the third ground for appeal

A. Article 42(1) of the former Inheritance Tax and Gift Tax Act provides, “In cases where profits falling under any of the following subparagraphs, other than donations under Article 40, are earned above the standard prescribed by Presidential Decree, such profits shall be deemed the value of donated property of the person who has acquired such profits.” Article 42(1) of the same Act provides, “The profits acquired by a transaction which increases or decreases the capital of the corporation, such as the conversion, acquisition, exchange, etc. of stocks by convertible bonds, etc. under Articles 40(1)3 and 40(3) provides, and Article 42(3) provides, “The same shall not

The legislative purport of Article 42(1) of the former Inheritance Tax and Gift Tax Act, which requires a transaction partner to levy gift tax on the profits earned by the transaction partner when the transaction partner actually transfers profits from the acquisition and exercise of preemptive rights to the transaction partner free of charge through abnormal means, is to cope with and promote fair taxation. However, in the case of transactions between unrelated parties, it is a common and easy way to allow the transaction partner to gain gift by giving up opportunities for mutual benefits by which the interests conflict with each other. Thus, Article 42(3) of the former Inheritance Tax and Gift Tax Act provides that Article 42(1) of the former Inheritance Tax and Gift Tax Act does not apply in a case where the “justifiable cause exists in light of the transaction practice.” Therefore, even if the transaction partner gains profits from the acquisition and exercise of preemptive rights through transactions between unrelated parties, it is reasonable to deem that there are reasonable grounds to believe that the transaction partner has made a transaction by reflecting an objective exchange value appropriately, or that such transaction under such conditions was made from a reasonable economic point of view (see, e.g., Supreme Court Decision 2014(2).

B. In light of the following circumstances, the lower court determined that the Plaintiff cannot impose gift tax by applying Article 42(1)3 of the former Inheritance Tax and Gift Tax Act, on the grounds that the Plaintiff’s acquisition of warrant certificates from ○○ Securities cannot be deemed as having justifiable grounds for transactional practice.

(1) At the time of issuance of the instant bonds, ○○○○○ was anticipated to have a low share price and a large amount of investment loss. As such, ○○○ Securities continued to hold the warrant certificates and immediately sold them, rather than undermining the risk of stock price fluctuation, and collected profits early. It cannot be deemed that ○○ Securities lack rationality in such choice.

(2) The ○○ Securities found the purchaser as to four of the 20 warrant certificates that ○○ Bank acquired from the ○ bank, but the remaining 16 copies were not found by the purchaser and demanded the Plaintiff, the largest shareholder, to purchase them on behalf of the Plaintiff. As such, the cases where the financial institutions that acquired the ○○ Securities sold the ○○ Securities to the related parties, such as the largest shareholder of the issuing corporation, etc., can also be found in the electronic publication system of the

(3) The ○○ Securities purchased the above 16th warrant certificates in KRW 36 million, and sold them to the Plaintiff with KRW 256 million, thereby causing losses in selling KRW 80 million. However, since ○○○○○ received KRW 90 million from the said 16th warrant certificates, the said ○○○○○ received revenues of KRW 10 million.

(4) Ultimately, ○○○○○ has raised funds at a favorable interest rate, and ○○ Bank and ○○ Securities have obtained profits from their respective business activities, but rather, the Plaintiff, the largest shareholder of ○○○○○, by inserting personal property, seems to have contributed to the urgent financing of ○○○○○○.

C. Examining the reasoning of the lower judgment in light of the aforementioned legal principles and records, the lower court did not err in its judgment by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal doctrine on “justifiable cause” under Article 42(3) of the former Inheritance Tax and Gift Tax Act, contrary

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.