In a case where Company A acquired new shares at low price by the method of direct third party allocation from Company B, and the tax authority deemed that Company A received profit distribution from the existing shareholders of Company B having a special relationship, and imposed corporate tax pursuant to Article 11 subparag. 9 and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act, the case affirming the judgment below that the above disposition was unlawful.

In a case where Company A acquired new shares at a low price by directly allocating them to a third party, and the tax authority deemed Company A to have received profits from the existing shareholders of Company B having a special relationship, and imposed corporate tax pursuant to Article 11 subparag. 9 and Article 88(1) subparag. 8(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328 of Feb. 9, 2006; hereinafter “Enforcement Decree”), the case affirming the judgment below holding that the above disposition is unlawful on the ground that Article 88(1) subparag. 8(b) of the Enforcement Decree of the Corporate Tax Act cited in Article 11 subparag. 9 of the Enforcement Decree only provides that “the case where a person, other than the shareholders of the relevant corporation, waives all or part of the right to receive new shares in the increase of corporate capital” does not provide for “the case where a person who received new shares from the existing shareholders of the relevant corporation under Article 418(2) of the Commercial Act by acquiring new shares at a low price, even if there is no benefit from the existing shareholders.

Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328 of Feb. 9, 2006), Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act, Article 418(2) of the Commercial Act

AHHD Co., Ltd. (LLC, Kim & Lee LLC, Attorneys Kim Tae-chul et al., Counsel for the defendant-appellant-appellant-appellee)

head of Sung Dong Tax Office

Seoul High Court Decision 2011Nu19828 decided November 3, 2011

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

Article 11 Subparag. 9 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter “Enforcement Decree”) provides for “profit received by distribution from a person with a special relationship as a result of capital transactions pursuant to the provisions of each item of Article 88(1)8” as gains, and Article 88(1)8(b) of the former Enforcement Decree provides for “a case where a person waives all or part of the right to receive new stocks or acquires new stocks at a price higher than the market price”.

In full view of the adopted evidence, the court below held that the Plaintiff’s low-price acquisition of the new shares of this case from the Flad Industrial Co., Ltd. (hereinafter “ND”) did not follow the waiver of preemptive rights and the disposal of forfeited rights by the shareholders of the non-party company, but did not follow the direct allocation of new shares by the non-party company to a third party other than shareholders pursuant to Article 418(2) of the Commercial Act, and only Article 88(1)8(b) cited in Article 11 subparag. 9 of the Enforcement Decree only provides that “the waiver of all or part of the right to receive new shares in the increase of corporate capital” under Article 418(2) of the Commercial Act does not provide that “the case where a person who is not a shareholder of the relevant corporation directly receives new shares from the relevant corporation pursuant to Article 418(2) of the Commercial Act, even if the Plaintiff received profits from the existing shareholders who acquired the new shares of this case at low-price, it cannot constitute gross income under Article 11 subparag. 9 of the Enforcement Decree.

In light of the above provisions and relevant legal principles and records, we affirm such judgment of the court below, and there were no errors by misapprehending the legal principles as to Article 11 subparagraph 9 of the Enforcement Decree.

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 on the bench.

Justices Park Il-young (Presiding Justice)