[1] Criteria for determining whether a person is an oligopolistic shareholder who is liable to pay deemed acquisition tax under Article 7(5) of the former Local Tax Act, and whether a person with a special relationship with an existing oligopolistic shareholder is subject to deemed acquisition tax in case where the person is transferred stocks from an existing oligopolistic shareholder but there is no change in the ratio of total stocks owned by the existing oligopolistic shareholder and

[2] In a case where Company A acquired the entire shares of Company B from their spouse’s joint children, and the head of the competent Gu deemed Company A to have acquired the real estate of Company A pursuant to Article 7(5) of the former Local Tax Act on the premise that it became an oligopolistic shareholder under Article 47 subparag. 2 of the former Framework Act on Local Taxes, and the head of the competent Gu imposed acquisition tax, etc. on Company A, the case holding that Company A may not be subject to deemed acquisition tax on the ground that Company B, etc., who is an executive officer of Company A, together with Company B, can be deemed as a specially related person, and Company A should also be deemed as a specially related person, such as Company C, even if Company A acquired the entire shares of Company A and became a new oligopolistic

[1] Whether it constitutes an oligopolistic shareholder who is liable to pay deemed acquisition tax under Article 7(5) of the former Local Tax Act (amended by Act No. 14474, Dec. 27, 2016) ought not to be determined on the basis of the increase of shares by one shareholder among oligopolistic shareholders, but on the basis of the increase of the total shares owned by a group of oligopolistic shareholders. Therefore, even if shares are transferred within a group of oligopolistic shareholders or relative with an existing oligopolistic shareholder or any other special relationship with the former oligopolistic shareholder, a person who was not a shareholder of the said corporation, but became a new oligopolistic shareholder upon transfer of all or part of the shares from the existing oligopolistic shareholder, if there is no change in the ratio of the total shares owned by the existing oligopolistic shareholder

[2] In a case where Company A, who manufactures cosmetics, etc., acquired the entire shares of Company B from their spouse’s joint children (hereinafter “disease, etc.”), and thereby becomes an oligopolistic shareholder under Article 47 subparag. 2 of the former Framework Act on Local Taxes (wholly amended by Act No. 14474, Dec. 27, 2016; hereinafter the same shall apply), and the head of the competent Gu imposed acquisition tax, etc. on Company A on the ground that Company A acquired the real estate of Company B pursuant to Article 7(5) of the former Local Tax Act (wholly amended by Act No. 14474, Dec. 27, 2016; hereinafter the same shall apply), the case holding that the lower court erred by misapprehending the legal doctrine on “A’s living together with Party B’s spouse and children,” and where Company A did not constitute an oligopolistic shareholder under Article 2(1) subparag. 34(b) of the former Framework Act on Local Taxes (wholly amended by Presidential Decree No. 2729, Mar. 27, 2017, 2017).

[1] Article 7(5) of the former Local Tax Act (Amended by Act No. 14474, Dec. 27, 2016); Article 2(1)34, and Article 47 subparag. 2 (see current Article 46 subparag. 2) of the former Framework Act on Local Taxes; Article 2-2 subparag. 1 (see current Article 2(2) and 3 (see current Article 2(2)3); Article 2-2(2)3 (see current Article 2(2) and 24(2) of the former Enforcement Decree of the Framework Act on Local Taxes (Amended by Act No. 1474, Dec. 27, 2016); Article 47 subparag. 2 (see current Article 47 subparag. 2) of the former Framework Act on Local Taxes (Amended by Act No. 14774, Dec. 27, 2016); Article 2-2 subparag. 3 (2) of the former Enforcement Decree of the Framework Act on Local Taxes) / [2] Article 47 subparag. 2 subparag. 47(2(2) of the former Framework Act on Local Taxes

[1] Supreme Court Decision 2007Du10297 Decided August 23, 2007 (Gong2007Ha, 1482) Supreme Court Decision 2012Du12495 Decided July 25, 2013 (Gong2013Ha, 1626)

Dak Cosmetics Co., Ltd. (Law Firm Gaon, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

The head of Nam-gu Incheon Metropolitan City

Seoul High Court Decision 2020Nu33673 decided August 28, 2020

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. Scope of specially related persons under Article 2(1)34(c) of the former Framework Act on Local Taxes (wholly amended by Act No. 14474, Dec. 27, 2016; hereinafter the same) (ground of appeal No. 2)

The lower court determined that it was difficult to view that Nonparty 1 had a management control relationship under Article 2(1)34(c) of the former Framework Act on Local Taxes with the Plaintiff, since it cannot be deemed that Nonparty 1 had a controlling influence over the Plaintiff’s management.

Examining the reasoning of the lower judgment in light of the relevant provisions and legal principles, the lower judgment did not err by misapprehending the legal doctrine on the scope of specially related persons under the former Framework Act on Local Taxes, thereby adversely affecting the conclusion

2. Scope of related parties under Article 2(1)34(b) of the former Framework Act on Local Taxes (Ground of appeal No. 1)

A. (1) Article 7(5) of the former Local Tax Act (amended by Act No. 14474, Dec. 27, 2016; hereinafter the same) provides that, if an oligopolistic shareholder becomes an oligopolistic shareholder pursuant to Article 47 subparag. 2 of the former Framework Act on Local Taxes by acquiring a corporation’s stocks or shares, the oligopolistic shareholder shall be deemed to have acquired the real estate, etc. of the relevant corporation. According to Article 47 subparag. 2 of the former Framework Act on Local Taxes and Article 24(2) of the former Enforcement Decree of the Framework Act on Local Taxes (wholly amended by Presidential Decree No. 27958, Mar. 27, 2017; hereinafter the same) in the case of a corporation, the term “ oligopolistic shareholder” refers to a person who holds stocks owned by one shareholder and a person who actually exercises the rights thereto exceeding 50/100 of the total number of outstanding stocks of the relevant corporation.

Meanwhile, Article 2(1)34 of the former Framework Act on Local Taxes provides that “a person in a relationship prescribed by Presidential Decree with the principal, such as blood relative, blood relative, etc. [a], “economic relationship prescribed by Presidential Decree with an executive officer, employee, etc.” [b], or “management control relationship prescribed by Presidential Decree with a shareholder, investor, etc.” [c] as “specially related person”, and Article 2(2)1 and 3 of the former Enforcement Decree of the Framework Act on Local Taxes provides that “a person in a special relationship shall be deemed as a specially related person in applying this Act and local tax-related Acts.” Article 2(2)1 and 3 of the former Enforcement Decree of the Framework Act on Local Taxes provides that “a person in a special relationship with an executive officer and a relative

In principle, the former Framework Act on Local Taxes is applied in preference to local tax-related Acts including the Local Tax Act (Article 3 and Article 2 (1) 4 of the former Framework Act on Local Taxes).

(2) Whether it constitutes an oligopolistic shareholder liable to pay deemed acquisition tax under Article 7(5) of the former Local Tax Act shall not be determined on the basis of the increase in the total stocks owned by a group of oligopolistic shareholders rather than on the basis of the increase in the number of stocks owned by a group of oligopolistic shareholders. Therefore, even if a person, who was neither a relative nor a person having a special relationship with an oligopolistic shareholder, but was a new oligopolistic shareholder after the transfer of all or part of the stocks from the existing oligopolistic shareholder, becomes an oligopolistic shareholder, it cannot be subject to the deemed acquisition tax if there is no change in the ratio of the total stocks owned by the existing oligopolistic shareholder and the new oligopolistic shareholder (see Supreme Court Decisions 2007Du10297, Aug. 23, 2007; 2012Du12495, Jul. 25, 2013).

B. According to the reasoning of the lower judgment, the following facts are revealed.

(1) The Plaintiff is a corporation that manufactures cosmetics, etc., and Nonparty 2 served as a representative director or an internal director from August 22, 201 to November 15, 2016.

(2) On April 19, 2016, the Plaintiff acquired all of the shares of IM cosmetic Co., Ltd. (hereinafter “MM cosmetic”), an unlisted corporation, from Nonparty 1 and Nonparty 3 and Nonparty 4 (hereinafter “Nonindicted 1, etc.”) who are Nonparty 2’s spouse.

(3) On the premise that the Plaintiff acquired the entire stocks of the IM cosmetic and thereby became an oligopolistic shareholder under Article 47 subparag. 2 of the former Framework Act on Local Taxes, the Defendant deemed that the Plaintiff acquired real estate, etc. of the IM cosmetic pursuant to Article 7(5) of the former Local Tax Act, and imposed a total of KRW 232,984,00 (including additional taxes) on the Plaintiff on November 21, 2017 (hereinafter “instant disposition”).

C. Examining these factual relations in light of the aforementioned provisions and legal principles, the following conclusion is derived. Since Nonparty 1, etc. is the spouse and children of Nonparty 2, who are the Plaintiff’s executive officers, Nonparty 2, etc., if their livelihood together with Nonparty 2, it may be deemed as “the relatives living together with the Plaintiff’s executive officers and employees,” and may be deemed as the Plaintiff’s specially related person pursuant to Article 2(1)34(b) of the former Framework Act on Local Taxes and Article 2-2(2)3 of the former Enforcement Decree of the Framework Act on Local Taxes. If Nonparty 1, etc. is the Plaintiff’s specially related person, the Plaintiff shall be deemed as the specially related person, such as Nonparty 1. Even if the Plaintiff acquired the entire shares of the KM cosmetic from Nonparty 1, etc. and became a new oligopolistic shareholder, it is difficult

The lower court should have deliberated on whether Nonparty 1 et al. were the relatives living together with Nonparty 2, an officer of the Plaintiff, and determined the lawfulness of the instant disposition. Nevertheless, the lower court determined that the instant disposition was lawful on the ground that Nonparty 2 was not in a special relationship with the Plaintiff and Nonparty 1, etc. on the basis of Nonparty 2 on the ground that Nonparty 2 did not hold stocks of IM cosmetics without examining the issue. The lower court erred by misapprehending the legal doctrine on the scope of the specially related persons under the former Framework Act on Local Taxes and failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds

3. Conclusion

The Plaintiff’s appeal is with merit, and the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on

Justices Lee Dong-won (Presiding Justice)