early 2010west0833 (20 April 20, 2011)

It constitutes a wrongful calculation that purchases new stocks from a person with a special relationship and distributes profits;

It is reasonable to deem that the tax burden on corporate income has been unjustly reduced by purchasing new shares from the non-party company, which is a specially related person, and distributing profits to the issuing company, constitutes an abnormal transaction that disregards economic rationality in light of sound social norms and commercial practices.

2011Guhap23436 Revocation of Disposition of Corporate Tax Imposition

XX Pharmaceutical Co., Ltd.

Head of Eastern Tax Office

December 28, 2011

January 18, 2012

1. All of the plaintiff's claims are dismissed.

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

The Defendant’s imposition of corporate tax of KRW 2,872,07,560 for the business year 2005 against the Plaintiff on November 1, 2009 and corporate tax of KRW 906,139,260 for the business year 2006 shall be revoked.

1. Details of the disposition;

A. The Plaintiff is the largest shareholder who holds shares 1,854,000 shares of PP Development Co., Ltd. (hereinafter referred to as “foreign company”) (the share ratio of 53.4%) and paid a debt that the Nonparty Company received from the mobilized mutual savings bank (hereinafter referred to as “the debt of this case”) up to 18 billion won.

B. On October 15, 2004, the non-party company offered new shares with the issuance price of KRW 5,000 per share of KRW 5,00 (hereinafter referred to as the “instant new shares”). On October 25, 2004, the Plaintiff acquired the forfeited shares of other shareholders, including 1,60,641 shares and 1,39,359 shares (hereinafter referred to as the “instant forfeited shares”), and paid the total acquisition price of KRW 1.5 billion, thereby increasing the Plaintiff’s share ratio to 74.9%.

C. Around October 27, 2004, Nonparty Company used 15 billion won in the repayment of the instant debt, which was paid by the Plaintiff.

D. The Plaintiff, at the time of filing a corporate tax return for the business year 2004, sold the forfeited stocks of this case 1,399,359 shares with the subscription price of this case as follows: (a) Article 52(1) of the Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same shall apply) and Article 88(1)8(b) of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter the same shall apply) to the wrongful calculation of the subscription price of this case; and (b) Article 3,242,076,020 won (5,00 won per share) as the market price; and (c),754,718,980 won per share as earnings or other losses from the company; and (d) reserved them as well as to the calculation of losses.

E. On September 1, 2005, the Plaintiff sold 2.239,802 shares out of the instant new shares to KimA, a total of 22,711,592 shares (10.14 won per share). On January 17, 2006, the Plaintiff reduced 684,178 shares by 1/10, and sold the remaining 76,020 shares to ParkB on November 15, 2006 (10.4 won per share).

F. The Plaintiff sold the shares as above and included 3,754,718,980,980 won in the deductible expenses industry and 14,969,580,000 won in the disposal loss (11,176,298,408 won in the business year 2005, 3,793,281,592 in the business year 2006) in the gross income (2,803,275,975 won in the business year 2005, 2005, 2005, and 2006 corporate tax for the business year and 2006.

G. The Defendant determined that the Plaintiff purchased new shares at a high price in the form of capital increase with a subscription to new shares; and calculated profits by deducting KRW 3,754,718,980 per share after the Defendant’s acquisition price per share after deducting KRW 499 from the difference of KRW 5,000 per share after deducting KRW 3,754,718,980 already reported by the Plaintiff; and then, 10,081,349,815 won when calculating the income amount for the business year of 2005, 3,421,650,185 won when calculating the income amount for the business year of 2006, applying Article 88(1)1 of the Enforcement Decree of the Corporate Tax Act (hereinafter “instant disposition”). On November 1, 2009, the Defendant imposed corporate tax for the Plaintiff in the business year of 205,872,07,560 won and corporate tax for the business year of 906,260 won each (hereinafter “instant disposition”).

H. The Plaintiff filed an appeal against the instant disposition with the Tax Tribunal on January 29, 2010, but was dismissed on April 20, 201.

[Ground for Recognition: The absence of dispute, Gap's evidence Nos. 1 through 3, 8, 10, Gap's evidence No. 4, 5, 7, and 9-1, 2, Gap's evidence No. 6-1 through 3, Eul's evidence No. 1 through 5, and the purport of the whole pleadings]

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

For the following reasons, the instant disposition is unlawful.

1) The Plaintiff’s participation in the issue of capital increase with a view to eliminating the financial balance of the non-party company and avoiding the financial risk that the Plaintiff may go bankrupt with the non-party company by providing words, and thus, was an act of economic rationality, and the non-party company actually obtained a profit of KRW 3 billion in comparison with the time of bankruptcy, and thus, is not subject to the avoidance of wrongful calculation.

2) Even if not, Article 88 (1) 1 of the Enforcement Decree of the Corporate Tax Act does not apply to the acquisition of new shares issued by another corporation for tax accounting purposes as it constitutes the purchase of investment assets.

3) The company’s new shares under Article 52(2) and (4) of the Corporate Tax Act are not 499 won but 2,317 won calculated pursuant to Article 89(6) of the Enforcement Decree of the said Act.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) As to the first argument

In light of the above facts and the above facts, the non-party company's acquisition of new shares by 00 won or 101 won per share of 205 and 2006, the non-party company's acquisition of new shares by 40 won or less per share of 14,969,508, 2005, 208, 209, 208, 2008, 209, 208, 208, 2005, 201, 30, 40, 400 won or more per share of the non-party company's acquisition of new shares by the non-party company's capital increase by taking account of the above facts and the above facts, and there is no possibility that the non-party company's acquisition of new shares by 10,000 won or more per share of the company's capital increase by 40,000 won after the above market value of the company's capital increase by 200.

2) As to the second argument

6. In light of the above circumstances, i.e., the rejection of unfair calculation of new stocks by a corporation under Article 52 of the Corporate Tax Act without reasonable means for its own transactions with a person with a special relationship, i.e., the method of calculating the value of the new stocks issued by the corporation pursuant to Article 88(1) of the Enforcement Decree, i.e., the method of calculating the value of the new stocks issued by the corporation pursuant to Article 88(1) of the Corporate Tax Act ; ii) where it is deemed that the corporation has avoided or reduced the tax burden arising from ordinary transactions by using ice or multi-level transactions or other abnormal methods; iii) the method of calculating the value of the new stocks issued by the corporation pursuant to Article 88(1) of the Enforcement Decree 1 of the Corporate Tax Act i.e., the method of calculating the value of the new stocks issued by the person with a special relationship i., the method of calculating the value of the new stocks issued by the company i.e., the method of calculating the value of the new stocks;

3) As to the third argument

A) Article 52(1) and (2) of the Corporate Tax Act provides that whether a corporation’s tax burden on its income is deemed to have been unjustly reduced due to transactions with a person with a special relationship shall be based on the market price. Article 52(4) of the same Act and Article 89(2)2 of the Enforcement Decree of the same Act provide that where the market price of stocks is unclear, the determination shall be made on the basis of the amount calculated by applying mutatis mutandis the provisions of Articles 39 and 63 of the Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “Gift Tax Act”) and Article 89(5) of the Enforcement Decree of the Corporate Tax Act provides that where a transaction with a person with a special relationship falls under wrongful calculation under Article 88 of the same Act, the amount of income for each business year of the relevant corporation shall be calculated by including the difference between the market price under Article 89(1) through (4) of the Enforcement Decree of the same Act and Article 89(2)2(3) of the same Act shall apply mutatis mutandis.

In full view of the above-mentioned provisions, where new shares are acquired at a price higher than the market price and the market price of the shares acquired is unclear as it constitutes a wrongful calculation type under Article 88(1)1 of the Enforcement Decree of the Corporate Tax Act, unlike the cases falling under the wrongful calculation type under Article 88(1)8 of the Enforcement Decree of the Corporate Tax Act by acquiring new shares at a price higher than the market price, the amount assessed under Article 89(2)2 of the Enforcement Decree of the Corporate Tax Act and Articles 39 and 63 of the Inheritance Tax Act should be deemed as the market price and the amount of the wrongful calculation denied should

B) On October 25, 2004, the Plaintiff’s acquisition of the new stocks of this case, which are non-listed stocks, as of October 25, 2004, is KRW 0, and the net asset value per share, per share, is KRW 1,248. According to the above facts of recognition, the value per share of the stocks of the non-party company calculated pursuant to Article 89(2)2 of the Enforcement Decree of the Corporate Tax Act, Article 63 of the Gift Tax Act, and Article 54(1) of the Enforcement Decree of the Gift Tax Act, shall be 499 won (the net value per share 0 x 3 + the net asset value per share 1,248 x 2). Thus, the above assertion by the Plaintiff is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.