Seoul High Court 2012Nu38178 (Law No. 19, 2013)

early 2011west 1310 ( December 13, 2011)

A donation of stocks, etc. to a black juristic person shall not be taxed by universal donation by applying the provisions of Article 42 (1) 3 of the Inheritance Tax and Gift Tax Act.

Since the donation of the instant shares constitutes a donation of property to a juristic person with no deficit, and thus, it constitutes corporate tax on the gains accruing therefrom, gift tax cannot be levied on the interests that the Plaintiffs acquired pursuant to Article 2(3) of the Inheritance Tax and Gift Tax Act, and the donation of the instant shares does not constitute “business acquisition limit or organizational change, etc.” under Article 42(1)3 of the Act.

Article 2 (Gift Tax Taxables)

Article 42 (Donation, etc. of Other Profits)

2013Du14283

aa and one other

Head of Central Tax Office

Seoul High Court Decision 2012Nu38178 Decided 19, 2013

October 15, 2015

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. Relevant statutes;

Article 2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter referred to as the "Act") provides that gift tax shall be imposed on a donated property of another person. Article 2 (3) of the former Inheritance Tax and Gift Tax Act provides that "The act or the name, form, purpose, etc. of the transaction shall, notwithstanding the name, purpose, etc. of the transaction, transfer without compensation (including the case of transfer at a remarkably low price) any tangible or intangible property which can calculate economic values to another person or increase the value of another person's property by directly or indirectly." Article 31 (1) of the Act provides that "The donated property pursuant to the provisions of Article 2 of the Act shall include all things belonging to the donee and all de facto or all de facto rights having property value."

Article 41 (1) of the Act provides that "where a person who has a special relationship with a shareholder or investor (hereinafter referred to as "shareholders, etc.") of a corporation (hereinafter referred to as "specified corporation") who has any deficit or suspended or closed its business, obtains profits from a shareholder, etc. of a specified corporation through transactions falling under any of the following subparagraphs with the specified corporation, the amount equivalent to such profits shall be deemed the value of property donated to the shareholder, etc. of the specified corporation," and subparagraph 1 of Article 41 provides "the transaction of providing the property

In addition to donations under Articles 33 through 41, 41-3 through 41-5, 44 and 45, where profits falling under any of the following subparagraphs and above the standard prescribed by the Presidential Decree have been acquired, such profits shall be deemed the value of property donated to the person who has acquired such profits." In subparagraph 3 of Article 42 of the Act, the profits acquired by the increase or decrease of the corporation's capital such as investment, reduction of capital, merger, division, conversion, and exchange of stocks by convertible bonds, etc. under Article 40 (1) (hereinafter referred to as "stock conversion, etc.") or the profits acquired by the increase or decrease of the corporation's capital, such as transfer, acquisition, and exchange of stocks, or changes in the corporation's organization, etc., the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter referred to as the "Enforcement Decree"), after the change in the value of property acquired by transfer from 300 percent or more.

2. Regarding ground of appeal No. 1

The court below is just in holding that BB’s donation of 4,885,110 shares of BB to AA (hereinafter “AAA”) is merely a donation of shares, and it does not constitute “business acquisition by transfer or change of corporation’s organization, etc.” under the latter part of Article 42(1)3 of the Act. In so doing, contrary to what is alleged in the grounds of appeal, the court below did not err by misapprehending the legal principles on the interpretation of the above provision, thereby failing to exhaust all necessary deliberations.

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

(a) the introduction and limitation of the complete taxation system of gift tax;

(1) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) does not stipulate any unique definition on the concept of "donations", and instead borrows the concept of "donations under the Civil Act," one of the parties expresses his/her intention to grant property to the other party without compensation and approves it by the other party, subject to gift tax in principle. However, with respect to the transfer of a gift without compensation between the parties, the provision on the legal fiction of donation (Articles 32 through 42) was separately prepared and imposed. As a result, in the case of gratuitous transfer of a gift by means of new financial techniques or capital transactions, etc. which are not listed in the regulations on the legal fiction of donation, there was a limit to block the transfer of a gift without any appropriate tax burden.

Therefore, the Inheritance Tax and Gift Tax Act amended by Act No. 7010, Dec. 30, 2003, in order to realize fair taxation by allowing the taxation authority to impose gift tax on not only the taxable object originally intended but also the transaction and act that is identical or similar to that of the economic substance as well as the original taxable object in lieu of the provision of tax law, was introduced by comprehensively defining the taxable object of gift tax including not only the donation under the Civil Act, but also the direct and indirect free transfer of the property, and the increase in the value of the property by another person's contribution.

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with it in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, if any transaction or act constitutes the concept of gift under Article 2 (3) of the Act, it is possible to levy gift tax in accordance with Article 2 (1) of the Act.

(2) On the other hand, the conversion of the regulation on the calculation of the value of a donation into the provision on the deemed donation changes the title of Section 2 of Chapter 3 from "the legal fiction of donation, etc. to "Calculation of the value of the donated property", and changes the title of the regulation on individual deemed donation from "the legal fiction of donation" to "the value of the donated property" into "the value of each provision is deemed "the value of the donated property", and due to that, the content related to the taxation requirements such as the taxable object and the scope of taxation regulated in the previous provision on the deemed donation remains. In other words, the regulation on the calculation of individual value requires that a special relationship between the parties to a transaction exists between a certain type of transaction and a transaction, or the difference between market price, etc. and the value of the donated property is more than a certain amount, and the matters related to such taxable object or scope of taxation have been amended from time to time to time. This is to ensure predictability of taxpayers and stability of tax relations, and to prevent confusion in the previous regulation on the deemed donation and the scope of taxation.

Therefore, in order to ensure the predictability of taxpayers, the individual value calculation regulation limits only a certain transaction and act to be subject to gift tax and limits the scope of taxation of gift tax by prescribing the scope and limit of taxation of gift tax in a limited manner, the gift tax can not be imposed even if the transaction and act excluded from the subject or scope of gift tax among the transaction and act regulated by the individual value calculation regulation conforms to the concept of gift under Article 2 (3) of the Act.

(b) limitations on taxation of profit gifts through transactions with specific corporations;

Article 41(1) of the Act and Article 31(6) of the Enforcement Decree of the Act provide for the calculation of the value of donated property where profits acquired by stockholders, etc. are at least KRW 100 million by making transactions, such as free provision of property to a specific corporation, by a corporation having losses (hereinafter referred to as "contributed corporation") and a person having a special relationship with stockholders, etc. of a corporation under temporary or permanent closure of business, etc., are subject to gift tax in cases where the profits earned by such stockholders, etc. are at least KRW 100 million. This purport is to impose gift tax on an irregular donation that gives profits to stockholders, etc. of a specific corporation without bearing corporate tax on the donated value by means of offsetting the donated value as losses (see Supreme Court Decision 2008Du6813, Apr. 14, 201). In other words, each of the aforementioned provisions is limited to a corporation subject to temporary or permanent closure in cases where it is a corporation

This is clear that the legislative intent of intending to exclude profits acquired by stockholders, etc. from taxable subject to gift tax is based on transactions with corporations that bear corporate tax on assets increase profits, etc. while running a business normally, and it cannot be deemed that such legislative intent has been changed due to the introduction of the full-scale comprehensive taxation system. Therefore, it should be deemed that the limitation was established to prevent shareholders, etc. from imposing gift tax on the profits from transactions with corporations that do not have losses, or on profits from transactions with corporations that do not have losses other than corporations that suspend and discontinue business. Therefore, the said profits cannot be taxed on the grounds of Article 2(3) of the Act, unless there are special circumstances, such as the special provisions on the subject of gift tax.

C. Determination

According to the reasoning of the judgment below, ① on October 19, 207, bB, a conciliation division of the plaintiffs donated the shares of this case to AAA on the donation of this case. At the time, Plaintiff Aa was holding 10,250 shares out of 60,000 shares issued by AAA, and Plaintiff Cc was holding 10,50 shares out of 60,000 shares, ② The AAA reported and paid KRW 000 of corporate tax for the business year 2007 by including the asset receipt profit from the donation of this case as the gross income, ③ the defendant imposed gift tax by applying Articles 2(3) and 42(1)3 of the Act on February 10, 201 on the donation of the shares of this case as the donation of this case was deemed to have received profit equivalent to the increase in the value of the shares held by the plaintiffs, ④ The AAA was a corporation at the time of the donation of the shares of this case.

Examining these facts in light of the provisions and legal principles as seen earlier, even if BB indirectly donated the instant shares to AAA, and thereby indirectly increased the value of the shares owned by the Plaintiffs, the gift tax of this case constitutes a case where the instant shares were donated to a corporation with no deficit, and as AAA was liable for corporate tax on the profit from the receipt of its assets, it cannot be imposed pursuant to Article 2(3) of the Act on the profits earned by the Plaintiffs, and as such, the instant shares donation does not fall under the “business acquisition limit or corporate restructuring, etc.” under Article 42(1)3 of the Act, and thus, each disposition of this case on which the gift tax was imposed on the Plaintiffs by applying Articles 2(3) and 42(1)3 of the Act is unlawful as it goes beyond the limit of imposing gift tax.

The judgment below to the same purport is just, and contrary to the allegations in the grounds of appeal, there are 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.

4. 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.