Seoul Administrative Court 201Guhap35118 (2012.03)

National Tax Service Review Donation 2011-0036 (Law No. 26, 2011)

It is necessary for the tax authority to prove that there is no justifiable reason for the transaction to be transferred or acquired at a high price between the unrelated parties.

It is reasonable to deem that there was an objective reason that the buyer’s acquisition of the shares of this case at a price higher than the market price was an abnormal reason from the viewpoint of a reasonable economic person, and since the evidence submitted by the defendant alone is insufficient to reverse the recognition, the disposition of this case is unlawful.

2013Nu25766 Revocation of Disposition of Imposition of Gift Tax

CivilAA

Samsung Head of Samsung Tax Office

Seoul Administrative Court Decision 2011Guhap35118 decided May 3, 2012

Seoul High Court Decision 2012Nu15700 Decided January 24, 2013

Seoul High Court Decision 2012Nu15700 Decided January 24, 2013

October 23, 2013

November 13, 2013

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The imposition of gift tax by the Defendant on June 9, 201 on the Plaintiff shall be revoked.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

(1) On March 2, 2007, the Plaintiff acquired 300,000 shares (hereinafter referred to as the “first transaction”) that were acquired from DoB, CC, and DaD (hereinafter referred to as DoB, etc.”) by transfer of the total value of 300,000 shares per share to OO (hereinafter referred to as “the instant transfer price”) by transfer of 300,000 shares (hereinafter referred to as “the instant shares”) to OOO (hereinafter referred to as “the instant transfer price”) total amount of 300,00 shares (hereinafter referred to as “the instant transfer price”) that were acquired from OOO (hereinafter referred to as “the instant transfer price”), and after (2) after May 14, 207, the Plaintiff reported and paid the instant transfer price of shares as the transfer price per share by transfer of the instant shares.

(3) From February 17, 201 to March 18, 2011, the director of the Central District Tax Office: (a) calculated the value of donated property pursuant to Article 35(2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the former Inheritance Tax and Gift Tax Act; hereinafter the same), and notified the Defendant of the assessment standard for gift tax; (b) the Defendant decided and notified the Plaintiff of the KRW OOOO on June 9, 201 (hereinafter the “Disposition”). (c) The Plaintiff dissatisfied with the request and dismissed the request for examination by the Commissioner of the National Tax Service on June 14, 2011.

[Reasons for Recognition] Each entry of Gap evidence Nos. 11 through 16 (including paper numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

① Article 2(2) of the former Inheritance Tax and Gift Tax Act declares the principle of priority in income taxation by prescribing that gift tax shall not be imposed in cases where income tax is levied on a donee for donated property. As such, where the income earned by the Plaintiff from transferring the instant stocks to an OOO won per share is subject to capital gains tax, only income tax may be imposed, and gift tax may not be imposed.

② The acquisition price of the instant shares falls under “The market price because both of them are freely determined in an equal relationship pursuing the maximizement of their respective economic interests by taking into account the situation of each of the parties to the transaction, and even if the market price of the instant shares does not fall short of the OO00 won, the FF has guaranteed that the Plaintiff may participate in the EE EE Ri agent’s management while taking over the instant shares, and the FF has secured that the value per share of the instant shares can exceed the EE Ri agent’s future profit by maximizeing the value of the EE Ri agent’s future profit when the FF takes over the instant shares and purchased the price per share of the instant shares as the OO for each share, so it cannot be said that the Plaintiff and FF set the transfer price per share without justifiable cause as the OO for each transaction.”

It is as shown in the attached Form.

C. Determination

(1) As to the Plaintiff’s assertion

Article 2(2) of the former Inheritance Tax and Gift Tax Act provides that “The gift tax shall not be imposed if the donee imposes income tax on the donated property provided for in Article 2(2)(1) of the former Inheritance Tax and Gift Tax Act, unless there is any special provision that excludes double application.” However, in light of the language and text of the said provision and the nature of the gift tax as supplementary tax, where gift tax is imposed on the donee, it does not constitute a special provision excluding overlapping application of capital gains tax and gift tax (see, e.g., Supreme Court Decision 2012Du3200, Jun. 14, 2012), since the taxation authority imposes income tax on the donee, it shall be deemed that the transfer price of shares should be determined independently in accordance with the respective taxation requirements, and thus, it shall not be deemed that the transfer price of shares is the amount calculated by deducting KRW 300,000,000,000 from the market price of the Plaintiff’s shares calculated by deducting KRW 300,000,00.

Therefore, the instant disposition cannot be deemed to be in violation of Article 2(2) of the former Inheritance Tax and Gift Tax Act, and the Plaintiff’s above assertion is without merit.

(2) As to the Plaintiff’s assertion

The legislative purport of Article 35(2) of the former Inheritance Tax and Gift Tax Act is to: (a) where profits equivalent to the difference between the price and the market price are actually transferred without compensation through abnormal means that manipulates the transaction price for the benefit of the other party; (b) thereby coping with and promoting fair taxation by imposing gift tax on the benefit of the other party to the transaction. However, since the transaction between the unrelated parties does not coincide with each other; (c) it is difficult to deem that the difference was donated to the other party to the transaction solely on the basis that there is a difference between the price and the market price; (d) Article 35(2) of the former Inheritance Tax and Gift Tax Act added taxation requirement that the transaction between the unrelated parties would have no justifiable reason for the practice of the transaction between the unrelated parties. Therefore, even if the parties to the transaction who transferred or acquired property at a higher price did not have any reasonable reason to believe the transaction price at a normal price that reflects the objective exchange value, it is reasonable to view that the transferee’s acquisition of property at a reasonable economic point, without such reason, has no justifiable reason for the transfer of the market price.

The evidence mentioned above, Gap's evidence and evidence Nos. 2, 19, 21, 23, 25 through 27, 30, Eul evidence Nos. 2 and 4 (including branch numbers), and Eul evidence Nos. 2 and 4 (including branch numbers), and the testimony of the witness Lee F of the court of first instance considered the whole purport of the pleadings, i.e., the following circumstances, the transfer of Lee F after the transfer of this case took part in the management of EE EEriris, such as taking office as a director of EEris, and attracting investment in Japan, and further, the Plaintiff re-purchase the stocks of this case from Lee F on or around February 27, 2008 at the initial transfer price of the stocks of this case from Lee F was highly likely to have been conducted in accordance with the Plaintiff's explicit or implied promise, and even if the Plaintiff did not have an objective value of management of the above company's stocks at the time of the transfer of the stocks of this case, it is difficult to view that the above company's objective value of management and investment.

Therefore, the Plaintiff’s transfer of the instant shares to EXF should have justifiable grounds for transactional practice. Therefore, the instant disposition that differs from this premise is unlawful. Ultimately, the Plaintiff’s aforementioned assertion is with merit.

3. Conclusion

Therefore, the plaintiff's claim of this case shall be accepted on the grounds of its reasoning, and the judgment of the court of first instance is just and therefore the defendant's appeal is dismissed. It is so decided as per Disposition.