Busan District Court 201Guhap4696 (2012.06.01)

Cho High Court Decision 2010Da3675 (Law No. 29, 2011)

Objects of gift tax on stock listing marginal profits shall include free capital increase, etc.

(1) It is difficult to view that there was a justifiable reason to believe that there was a violation of the duty to report and pay taxes on the sole basis that the taxable object of the gift tax on the stock listing marginal profits includes both capital increase without compensation, stock allocation, stock offering, and stock offering received by a third party, and that the tax investigation did not impose taxes on the new stocks for consideration.

2012Nu2160 Revocation of Disposition of Imposing gift tax

Nam

Head of Suwon Tax Office

Busan District Court Decision 2011Guhap4696 Decided June 1, 2012

September 14, 2012

October 19, 2012

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. The disposition of imposing gift tax of KRW 000 (including additional tax of KRW 000) imposed on the Plaintiff on July 1, 2010 shall be revoked.

1. Details of the disposition;

A. 1) On December 1, 2004, the Plaintiff acquired 18,000 shares of the non-party company (hereinafter referred to as “the first acquired shares”) as an officer of the company XX (hereinafter referred to as “non-party company”), and the Plaintiff fell under the largest shareholder under Article 41-3(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter referred to as “former Inheritance Tax and Gift Tax Act”).

2) On December 22, 2005, the Plaintiff acquired 4,500 shares out of the capital increase issued by the non-party company for capital increase (hereinafter “instant shares”) at KRW 000 per share, which is the face value.

3) On July 1, 2007, the non-party company divided its par value into KRW 000 per share (However, the non-party company listed it on KOSDAQ on January 25, 2008.

B. The Busan regional tax office conducted an integrated tax investigation with respect to the non-party company from August 10, 2009 to September 30, 2009, and determined as at the time of the donation that the reductionA constituted the largest shareholder, etc. under Article 41-3(1) of the former Inheritance Tax and Gift Tax Act, and imposed gift tax on the plaintiff about KRW 000 on the profits accrued from listing 18,000 shares originally acquired (the plaintiff did not dispute whether he is a person with whom the tax was paid, but did not impose gift tax on the profits accrued from listing 4,500 shares for consideration of the case.

C. 1) On January 25, 2010, the Board of Audit and Inspection issued a request to audit the business of the Busan Regional Tax Office to levy taxes on the interest arising from the listing of the instant new stocks for consideration.

2) On July 5, 2010, the Defendant imposed a gift tax of KRW 000 (including additional tax of KRW 000) on the Plaintiff by deeming the listed marginal profits as the value of donated property (hereinafter “instant disposition”).

[Ground for recognition] Unsatisfy

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The plaintiff is not a person having a special relationship with the AA.

The plaintiff is not an employee of the non-party company, who is an employee of the non-party company.

Therefore, insofar as Article 43(1) of the former Inheritance Tax and Gift Tax Act does not apply to the shares that were initially acquired by transfer, the said provision does not apply to the shares that were issued by means of a conspiracy, and thus, the instant disposition is unlawful.

2) Listing marginal profits on the instant shares for consideration are not subject to gift tax.

Article 41-3(1) of the former Inheritance Tax and Gift Tax Act provides that where the value of stocks increases as a person having a special relationship with the largest shareholder, etc. receives a donation of stocks from the largest shareholder, etc. or obtains the stocks for consideration on the securities market within five years, gift tax shall be imposed on the person having a special relationship with the largest shareholder, etc. by deeming the excess profits as the value of donated stocks when he obtains the profits exceeding the original donation price or acquisition price. In applying Article 41-3(1) of the same Act, the acquisition of stocks shall include

However, in light of the following various circumstances, Article 41-3(6) of the former Inheritance Tax and Gift Tax Act applies only to the new stocks donated by or acquired with compensation by the largest shareholder, etc., and it should be interpreted that it does not apply to the new stocks for consideration. Thus, the instant disposition imposing gift tax on the new stocks that the Plaintiff acquired from the non-party company based on the initial stocks acquired by the Plaintiff based on the acquisition from the A

① Under the premise that Article 41-3(6) of the former Inheritance Tax and Gift Tax Act is applicable, the taxation requirements for the shares acquired by a specially related person from a company that is not the largest shareholder, etc., on the premise that Article 41-3(6) of the same Act provides for the taxation requirements for the shares acquired by a company that is not the largest shareholder, etc... Of new shares acquired and allocated by a company following the issuance of new shares are the same as those acquired by a company through the division of shares (see Supreme Court Decision 2006Du20600, Mar. 12, 2009). As such, Article 41-3(6) of the former Inheritance Tax and Gift Tax Act applies to new shares free of charge as to new shares received from the largest shareholder, etc., but since shares purchased by a specially related person by paying new shares to a company for the acquisition of shares, they cannot be deemed as having been received from the largest shareholder, etc., as such shares cannot

(2) The shares issued with capital increase shall be clearly distinguishable from the shares acquired with consideration from the largest shareholder, etc., inasmuch as they are acquired under the decision-making of the shareholder who intends to acquire new shares from the company and do not acquire them due to the decision-making of the largest shareholder, etc. on the donation of new shares.

(3) If the interpretation of Article 41-3(6) of the former Inheritance Tax and Gift Tax Act applies to shares issued as well, gift tax is imposed on the specially related person who received shares issued as a result of the shareholder allocation; and there is unreasonable result that gift tax is not imposed on the specially related person who received shares issued as a result of the third party allotment.

④ In the case of capital increase, the capital structure of the company is changed due to the payment of capital increase, and the corporate value or the stock value is affected. The imposition of gift tax on the listed marginal profits on the stocks acquired by the specially related persons is not generated from the stocks originally donated, i.e., the amount of capital increase paid by the specially related persons or the listed marginal profits generated from the influence thereof. (In calculating the listed marginal profits under Article 31-6(4) and (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the changes in corporate value per se due

⑤ Article 31-6 (3) through (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is a provision delegated under Article 41-3 (1) of the former Inheritance Tax and Gift Tax Act. Under the strict interpretation principle, acquisition under each of the above provisions refers to only the acquisition from the largest shareholder, etc., as stated in Article 41-3 (1) of the former Inheritance Tax and Gift Tax Act. Since shares acquired from the company and shares acquired through capital increase with consideration are not included, there is no provision that calculates the taxable value of the shares

(iii) there are justifiable grounds for non-performance of obligation.

A) Even if the listing marginal profits of the instant new stocks are subject to gift tax, the Defendant did not impose gift tax on the listing marginal profits of the instant new stocks despite conducting a tax investigation with respect to the Nonparty Company on August 10, 2009, according to the Board of Audit and Inspection’s opinion on January 25, 2010. The issue of whether to impose gift tax on the listing marginal profits of the stocks issued with capital increase constitutes a matter of conflict among the tax authorities.

Therefore, since the Plaintiff cannot expect the return and payment of gift tax with the knowledge that the listed marginal profits of the instant shares are subject to taxation from the beginning, it shall be deemed that there exist justifiable grounds for the Plaintiff’s nonperformance of duty of return and payment, and thus, the portion of penalty tax is unlawful

B) Even if there is no justifiable reason due to the comparison of opinions on the interpretation of the Family Tax Act, the Defendant notified the wrong tax investigation result that the shares issued with capital increase is not subject to taxation on August 10, 2009. Since the notification of the above, the Plaintiff’s failure to pay gift tax on the exchange marginal profits of new shares issued with capital after the notification was made entirely by the Defendant’s notice of the result of the Defendant’s wrong tax investigation, the portion of the late payment for the erroneous payment that occurred from August 10, 2009 to

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Determination as to the first assertion (the plaintiff's assertion that the plaintiff is not a person with a special relationship to the AA)

Article 43-3(8) of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 21292, Feb. 4, 2009; hereinafter referred to as the "former Enforcement Decree") stipulates that "a person in a special relationship" under Article 31-6(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act refers to a person in a relationship under any subparagraph of Article 19(2) with one stockholder, etc. under Article 19(2)2 of the former Enforcement Decree, and Article 19(2)2 of the former Enforcement Decree provides that "an employee under any subparagraph of Article 13(9)2 of the former Enforcement Decree (including employees of a corporation under any control by investment; hereinafter the same shall apply) under Article 31-6(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 21292, Feb. 4, 2009; hereinafter referred to as "the former Enforcement Decree"). Article 19(2)2 of the former Enforcement Decree provides that "a person under any subparagraph 13 of Article 9(1) of the former Enforcement Decree shall be an employee:

In light of the above provisions, the employees of the company whose shareholders and their relatives hold more than 30% of the total number of shares issued and outstanding shall also become the employees of the company concerned. In light of the above provisions, when the reductionA transferred the shares originally acquired to the Plaintiff, 45% of the total number of shares issued and outstanding by the company was owned by the company involved, and the fact that the Plaintiff was an officer of the non-party company is not a dispute between the parties concerned, and the Plaintiff constitutes the employees

Therefore, this part of the plaintiff's assertion is without merit.

2) The judgment on the second assertion (the assertion that Article 41-3(6) of the former Inheritance Tax and Gift Tax Act does not apply to the new shares for consideration of the case)

A) The Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003) amended on Dec. 30, 2003 stipulated the constructive gift of listed methods as well as the general donation premised on the contract between the parties as the subject of the gift tax prior to the amendment. However, inasmuch as the new type of property not listed as above is not taxed, even if the type of taxation is not listed daily, the gift tax can be imposed if it falls under the de facto gratuitous transfer of property, and the regulation on deemed donation was introduced, such as conversion of the regulation

Accordingly, Article 2(3) of the same Act was newly established to include the transfer (including the transfer at a remarkably low price) of tangible or intangible property, regardless of the name, form, purpose, etc. of the act or transaction, to another person without compensation, or the increase of the property value of another person by the contribution. In the event that the gift tax is deemed to have been unjustly reduced by indirect or indirect means through a third party under paragraph (4) of the same Article, or by means of two or more acts or transactions, it was newly established that the provision of paragraph (3) shall be applied by deeming the transaction directly by the party or by deeming the continuous one act or transaction as a single transaction.

B) The legislative intent of Article 41-3 of the former Inheritance Tax and Gift Tax Act is to impose gift tax on the profits per se increased by the listing of stocks in order to prevent a large amount of assets from being excessively changed by taxation on the listing profits where the largest shareholder, etc. donates unlisted stocks to his/her children, etc. or transfers them for consideration with the aim of obtaining enormous profits from the listing of stocks on the securities market by using internal information that is not open to the public on the business management.

In addition, Article 41-3(6) of the former Inheritance Tax and Gift Tax Act is a provision newly established by the amendment on December 18, 2002. The amendment is intended to add the case where only the listed marginal profit acquired directly or with compensation from the largest shareholder was subject to taxation, and where it can be abused as a means of tax avoidance by being excluded from the taxable object despite the same economic effect. In other words, the largest shareholder recognized as having the status of using non-disclosure information as a means of tax avoidance, even if he/she did not directly donate or transfer his/her shares to the specially related person, even if he/she did not directly donate or transfer his/her shares to the specially related person (this part was added as subject to taxation by amending Article 41-3(1) of the former Inheritance Tax and Gift Tax Act when the amendment was made), thereby allowing the specially related person to issue new shares through the exercise of management rights so that he/she can obtain the listed marginal profit and avoid the imposition of gift tax. Thus, the legislative intent of adding the case where it is abused as a means of tax avoidance.

C) Based on each of the above provisions and legal principles, Article 41-3(6) of the former Inheritance Tax and Gift Tax Act applies only to the new stocks that are received or acquired with compensation from the relevant corporation on the basis of the stocks donated by the largest shareholder, etc. or acquired with compensation from the relevant corporation, and comprehensively taking account of the following circumstances, it is reasonable to interpret the above provision as applicable not only to the new stocks

① In applying the provision of Article 41-3(6) of the former Inheritance Tax and Gift Tax Act, the acquisition of stocks, etc. includes new stocks acquired and allocated by the corporation to increase its capital (including the amount of investments). In light of the language and text, it is clear whether the above new stocks are stocks with or without compensation, or by a third party allocation method in the case of stocks with compensation.

② Although it cannot be denied that there is a difference between free capital increase and capital increase with respect to the payment of subscription price, as alleged by the Plaintiff, there is no difference in the substance that the listing marginal profit arising from each of the above capital increase is transferred to the specially related persons, and the former Inheritance Tax and Gift Tax Act requires that gift tax be imposed with regard to the transfer of listing marginal profit.

③ As seen above, since the amendment on December 30, 2003, the Inheritance Tax and Gift Tax Act declared the complete comprehensive taxation. Article 41-3(6) of the former Inheritance Tax and Gift Tax Act also has to be interpreted in line with the legislative intent of the amendment. It is reasonable to interpret that the said provision imposes gift tax on a specially related person as being received from the largest shareholder, etc. gains from the listing of new stocks issued by the relevant corporation on the basis of stocks donated or acquired with compensation from the largest shareholder, etc. and acquired funds from the largest shareholder, etc.

(4) If the interpretation that Article 41-3 (6) of the former Inheritance Tax and Gift Tax Act applies only to new stocks without compensation as alleged by the Plaintiff is made, the imposition of gift tax on capital increase with no compensation may be avoided by receiving capital increase at a very low price.

In the case of this case, the Plaintiff did not return and pay gift tax, even though it acquired the instant shares with 000 won per share and obtained listed marginal profits equivalent to 000 won per share.

⑤ Since the language and text of Article 41-3(6) of the former Inheritance Tax and Gift Tax Act includes the fact that the issuer of new shares is a corporation (the fact that shares are acquired from a corporation), if the above provision is applicable, the part of "the largest shareholder" under Article 41-3(1) of the same Act should be interpreted as not being applicable, and such interpretation cannot be deemed as contrary to the principle of strict interpretation.

(6) In calculating the listing marginal profit under Article 31-6 (3) through (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the Plaintiff only calculates the listing marginal profit by regarding the company’s profit cumulative amount from the date of donation or the acquisition date until the date before the listing as the actual value increase in the company’s stock value, and does not consider the change in the real value of the company. Thus, it is alleged that it is premised on the premise that the company does not include the shares acquired as the reason for Article 41-3 (6) of the Inheritance Tax and Gift Tax Act. However, Article 31-6 (5) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act and Article 10-4 (1) of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 74 of Apr. 23, 2009; hereinafter the same) stipulate that the net profit per share should be calculated as the actual value per share in calculating the listing marginal profit from the listing marginal profit directly received from the largest shareholder.

3) Judgment on the third argument

A) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under tax law is an administrative sanction imposed under the conditions as prescribed by individual tax law in cases where a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, and it is unreasonable for the taxpayer to be aware of such obligations, and thus, it is unreasonable for the taxpayer to be reasonably present or to expect the performance of his/her obligations to the party concerned, etc., if there are justifiable grounds that make it unreasonable for the taxpayer to be unaware of such obligations, such as where there are circumstances that make it unreasonable for him/her to expect to fulfill his/her obligations (see Supreme Court Decision 2003Du4089, Apr. 15, 2005).

B) On August 10, 2009 through September 30, 2009, the Busan Regional Tax Office conducted a tax investigation with respect to the non-party company, and imposed gift tax on the profits arising from the listing of the newly acquired stocks, while not imposing gift tax on the listed profits from the listing of the shares with compensation in this case. According to the evidence No. 4, it is acknowledged that the director of the Busan Regional Tax Office carefully reviewed on March 22, 2010 whether the gift tax on the listed profits from the listing of the shares with compensation in this case may be imposed on the non-party company, but the head of the Busan Regional Tax Office responded to the purport that the imposition of gift tax on the listed profits from the listing of the shares in this case was omitted due to an error in interpreting Article 41-3(6) of the former Inheritance Tax and Gift

(4) The case holding that on September 14, 2009, the Busan Regional Tax Office's tax official who was in charge of the integrated tax investigation into the non-party company from August 10, 2009 to September 30, 2009, stated that the total amount of listed profits of 22,500 shares originally acquired on September 14, 2009 shall be deemed to be subject to gift tax, and that the public official of the Busan Regional Tax Office did not make an investigation into the total amount of listed profits of 22,50 shares and the amount of listed profits of 22,50 shares shall be deemed to be subject to gift tax, and that the public official of the Regional Tax Office did not have an opinion on the initial tax investigation into the non-party company's attorney's opinion on September 21, 2009 and did not have an opinion on the request of the director of the Regional Tax Office for disciplinary punishment of the non-party company's newly issued stocks at the time of entry into the Busan Regional Tax Office's revised tax investigation System.

On March 22, 2010, the fact that the director of the Busan Regional Tax Office explained that it is difficult to believe that it is possible to impose gift tax on marginal profits from listing new stocks of this case on the Board of Audit and Inspection on March 22, 2010; ii) there was no court's decision as to whether it is possible to impose gift tax on marginal profits from listing new stocks issued by the relevant corporation on the basis of the stocks donated by the largest shareholder at the time when the Plaintiff received the above new stocks with consideration; however, as seen earlier, it is clear that new stocks are included in the language and text of Article 41-3(6) of the former Inheritance Tax and Gift Tax Act; and considering the legislative intent of Article 2(3) and (4) of the same Act, it is difficult to view that there is difficulty or doubt in interpretation as to whether new stocks are applied for the first reason of Article 41-3(6) of the former Inheritance Tax and Gift Tax Act, and so long as the tax law is necessary for each tax official to interpret the new stocks for each of this case.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit, and the judgment of the court of first instance is just in conclusion, and the plaintiff's appeal is dismissed and it is so decided as per Disposition.