Cho High Court Decision 2014Da82 (Law No. 11, 2014.09)

It is illegal that gift tax is imposed on the increase in the stock value of shareholders by exercising convertible rights of a corporation.

Since the acquisition of profits through the conversion of convertible bonds is a corporation, Article 42 (1) 3 of the Act cannot be directly applied to the shareholders, and even if related profits constitute taxable objects of gift tax under Article 2 (3) of the Act, Article 42 (1) 3 of the Act cannot be applied by analogy to the calculation of the value thereof.

Gift, etc. of other profits under Article 42 of the Inheritance Tax and Gift Tax Act

2014Guhap73999 Revocation of Disposition of Imposition of Gift Tax

1. Park A2. ParkB

1. O head of the tax office;

April 24, 2015

December 18, 2015

1. On July 10, 2013, the head of the competent tax office’s imposition of gift tax OOO(including additional taxes) by Defendant OOOO(including additional taxes) and the imposition of gift tax OOO(including additional taxes) imposed on Plaintiff GB on July 9, 2013 by the head of the competent tax office shall be revoked.

2. The costs of lawsuit are assessed against the Defendants.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. P(hereinafter referred to as “Y”) was a principal affiliated company of the XX group with Plaintiff LA as its president; Plaintiff LA’s shares were 27.42% of Plaintiff LA’s 27.58% of Plaintiff LA’s 9.58% of Plaintiff LA; Plaintiff LA’s 6.34% of WW, YY Co., Ltd. (hereinafter referred to as “Y”)’s 0.15% of total 0.5% of total 56.5% of total 56.5% of total Y shares were issued. Meanwhile, Plaintiff LA’s corporate shareholders owned 52.8% of Plaintiff LA, 37.5% of total Z(hereinafter referred to as “Z”), Plaintiff LA’s coloned Plaintiff LA owned 2.72% of total 72% of total Y shares, Plaintiff LA’s YA’s shares issued YA and 5.5% of total YA shares, respectively.

B. XX, on June 1, 2009, issued bearer convertible bonds of 16 billion won (hereinafter referred to as the "instant convertible bonds") with the term "1,888 won per share conversion price by private placement method (the first conversion price was adjusted to 1,930 won on March 19, 2010, but the due date was adjusted to 1,888 won on March 19, 2010), "the due date", and "the due date from June 1, 2010 to May 1, 2012", and Y acquired all the said convertible bonds on the same day.

C.Y on December 17, 2010, by converting the instant convertible bonds into 8,474,576 shares issued (hereinafter “Y”) and acquiring 15.32% of the shares of XX at the time of conversion (hereinafter “the instant conversion of shares”). Y was 5,050 won per share at the time of conversion, and Y was 42,796,608,800 won (=8,474,576 shares acquired by the said conversion of shares) at the market price of the shares, and 16 billion won [16 billion won acquired by the instant convertible bonds, 8,874,576 won per share, 15,99, 498, and 206, 2000,000,000,000 won per share were 1,888,000 won per share, and 200,0000,0000 won per share were subject to the disposition of Y1,6060,06.

D. From September 10, 2012 to October 31, 2012, the Director of the Regional Tax Office: (a) as a result of conducting a general consolidated investigation with regard to XX and its affiliate companies, Y acquired from the conversion of the instant shares, Y acquired conversion of KRW 24,469,000,000 subtracting conversion value of KRW 16 billion from conversion value of KRW 42,79,608,80,000 from conversion value of KRW 16 billion; (b) as a result, Y acquired conversion value of the instant shares, YY shares increased by net asset value of KRW 9,803,00,000,000 compared to the instant conversion value of KRW 30,000,000,000; (c) under the premise that the said increase in stock value was 52,796,000,0000,000 won or more of the gift amount of KRW 28,5197,9636,717.6

E. Accordingly, on July 10, 2013, the head of the Defendant OOO head of the tax office determined and notified the Plaintiff ParkbB of the gift tax for the year 2010 (i.e., the income acquired as Y shareholders + the income-related OOO and additional tax for the gift-related Z). The head of the Defendant OO head of the tax office determined and notified the Plaintiff ParkbB of the gift tax for the year 2010 (including additional tax) respectively (hereinafter referred to as “the first disposition”).

F. The Plaintiffs were dissatisfied with the initial disposition and filed an appeal with the Tax Tribunal on October 4, 2013. On September 11, 2014, the Tax Tribunal rendered a decision that “In calculating the net asset value and the assessment value per share after conversion of YY’s net asset value, the tax Tribunal corrected the tax base and the amount calculated by subtracting corporate tax, etc. incurred by the date of conversion of the instant stocks, and dismissed the remaining appeal.”

G. Accordingly, according to the above Tax Tribunal’s decision, the Defendants calculated the Plaintiffs’ donation profit (hereinafter “the gift profit of this case”) in the manner as seen earlier after reducing the increase in the Y stocks from approximately KRW 6,347,00,000,000 in the previous amount of approximately KRW 9,803,00,000, and the Defendants issued a revised and notified the Plaintiffs’ donation profit of this case (hereinafter “instant disposition”). Defendant OOOO head of the tax office (“the gift tax of this case”) for the gift tax of 2010 (including the gift tax of Y’s profit acquired as Y’s shareholder + OOO and additional tax of gift tax related to the profit acquired as ZZ’s shareholder + the gift tax of this case’s gift tax of this case’s gift tax of this case’s gift tax of this case’s first disposition”).

[Ground of recognition] Facts without dispute, Gap's 1 to 3, 6 evidence, Eul's 1 to 9 evidence (including various numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The Plaintiffs’ assertion (as long as the Plaintiff imposed corporate tax on Y on the converted profit of this case on Y, it was argued that the imposition of gift tax on the Plaintiffs’ increase in stock value due to the conversion of this case was double taxation, but the said imposition of corporate tax was revoked according to the decision of the Tax Tribunal as seen earlier).

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) The instant disposition is based on Article 2(3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “former Inheritance Tax and Gift Tax Act”) and the latter part of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “former Inheritance Tax and Gift Tax Act”). However, it cannot be deemed that Y took over the instant business, or there was business exchange, change, or any other similar type of transaction, solely on the ground that Y held 15.32% of the shares due to the conversion of the instant shares.

2) According to Article 58-2(2)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 23040, Jul. 25, 2011; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”), convertible bonds for which stock conversion is possible shall be regarded as the assessed amount whichever the larger of the value of the convertible bonds that can be acquired as the conversion and the present value of the convertible bonds. Accordingly, the convertible bonds of this case are assessed as the assessed amount. Thus, since there is no change in the net asset value of Y before and after the conversion of the instant shares, and there is no change in the value of Y stocks owned directly and indirectly by the Plaintiffs, there is no

3) It is merely a 'property valuation profit that is subject to the exclusion from taxable income as stipulated in Article 18 subparag. 1 of the Corporate Tax Act until Y transfers the Y stocks acquired by the conversion of the instant shares to a third party. As such, since the net asset value of Y was not increased due to the said stock conversion, there is no increase in the value of Y shares owned directly or indirectly by the Plaintiffs. In order to impose the unrealized gain, the issue of fair and accurate measurement of taxable gain, establishment of a supplementary provision for the decline in asset value, should be settled. However, in the absence of such prior determination problem, gift tax was imposed by deeming that the increase in stock value, which is the unrealized gain, is subject to taxation.

4) Even if the gift income of this case exists, it is against the principle of no taxation without law to impose gift tax on the Plaintiff Park A, an individual shareholder of the Y, on the profits accrued to the Z. As long as the Defendant deemed the donor of this case to be the Plaintiff Park A in this case, the part on the Plaintiff Park A in the disposition of this case does not constitute a gift to others, and thus, the Plaintiff Park B was donated by the Plaintiff Park Ba, and as such, the amount of KRW 5,00,000 should be deducted from the taxable value of gift tax pursuant to Article 53 subparag. 4 of the former Inheritance Tax and Gift Tax Act.

(b) Related statutes;

Attached Form 2 is as shown in the relevant statutes.

C. Determination

(1) The introduction and limitation of the complete taxation system of gift tax as a whole;

A) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) does not stipulate any unique definition on the concept of "donation", and instead borrows the concept of "donations under the Civil Act, and expresses an intention to grant property to the other party without compensation by the other party, and the other party approves it, subject to gift tax in principle. However, with respect to the transfer of a division without compensation between the parties, a separate provision on deemed donation (Articles 32 through 42) was formulated and imposed on the transfer of a division without compensation, which is not stipulated in the regulations on deemed donation. As a result, in the case of gratuitous transfer of a division by means of new financial techniques or capital transactions, etc. which are not listed in the regulations on deemed donation, there was a limit to block the transfer of a division without any appropriate tax burden.

Therefore, in order to realize fair taxation, the Inheritance Tax and Gift Tax Act amended by Act No. 7010 on December 30, 2003, which was amended by Act No. 7010 on December 30, 2003, comprehensively defined the subject of gift tax, including the concept of donation, and the "increased transfer of property directly and indirectly without compensation" as well as the "increased increase of property value by another person" as a whole defined the subject of gift tax including the concept of donation, and introduced the so-called comprehensive taxation system of complete taxation of gift tax by converting the previous listed provisions into the provisions on the timing of donation and calculation of the value of property (hereinafter referred to as "the provision on calculation of value").

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with it in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, if any transaction or act constitutes the concept of gift under Article 2 (3) of the Act, it is possible to levy gift tax in accordance with Article 2 (1) of the Act.

B) On the other hand, the conversion of the regulation on the calculation of the value of a donation into the regulation on the calculation of the value of the donation is changed from the "the legal fiction of donation, etc." to the "Calculation of the value of the donated property", and the title of the regulation on individual donation is changed from "the legal fiction of donation" to "the value of the donated property" to "the value of each provision is deemed "the value of the donated property", and due to that, the content related to the taxation requirements such as the taxable object and the scope of taxation regulated in the previous regulation on the donated donation remains as it is. In other words, the regulation on the calculation of the value of individual transaction requires that the special relationship between the parties to the transaction exists between a certain type of transaction or the difference between the market value and the market value should be more than 30% of the market value, and it is necessary to revise from time to time the matters related to such taxable object or scope of taxation. This is to ensure predictability of taxpayers and stability of tax relations, and to prevent confusion in the previous regulation on the donated donation.

Therefore, in cases where the individual value calculation rule limits only a certain transaction and act as subject to gift tax while regulating a specific type of transaction and act and limits the scope of taxation of gift tax by prescribing the scope and limit of taxation of gift tax, even if the transaction and act excluded from the subject and scope of taxation of gift tax among the transaction and act regulated by the individual value calculation rule is consistent with the concept of gift under Article 2(3) of the Act, gift tax may not be imposed (see Supreme Court Decision 2013Du13266, Oct. 15, 2015).

2) Whether the gift interest of this case is subject to gift tax

A) the relevant regulations and the organization of issues;

(1) In addition to donations under Articles 33 through 41, 41-3 through 41-5, 44, and 45 of the former Inheritance Tax and Gift Tax Act, where profits falling under any of the following subparagraphs and above the standard prescribed by the Presidential Decree have been acquired, such profits shall be deemed as the value of donated property to the person who has acquired such profits. The first sentence of subparagraph 3 provides that "in case where profits are acquired by the increase or decrease of the corporation's capital such as investment, reduction of capital, merger, division, and conversion, acquisition, exchange of stocks by convertible bonds, etc. under Article 40 (1) (hereinafter "stock conversion, etc.") or by the change of the corporation's organization, etc., the profits acquired by the increase or decrease of the company's capital such as transfer, exchange, etc. or the profits acquired by the change of the company's capital or the value of the shares shall be 00 million won or more after the change in the value of shares at the time of stock conversion, etc., the former part of subparagraph 3 of Article 27 of the Inheritance Tax and Gift Tax Act shall be delegated.

(2) In the case of this case, the defendants judged that "Y stock value reflects the converted profit of this case and that "the appraised value of the above shares before the reflection of the converted profit" is subject to gift tax. This seems to be based on Article 42 (1) 3 of the former Inheritance Tax and Gift Tax Act and Article 31-9 (2) 5 (b) of the Enforcement Decree of the same Act (the defendants also asserted on the premise that the disposition of this case was applied or applied by analogy of Article 42 (1) 3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act). Therefore, in order to levy gift tax on the transferred profit of this case, it is necessary to examine whether Article 42 (1) 3 of the former Inheritance Tax and Gift Tax Act can be applied directly, ② whether Article 42 (1) 3 of the former Inheritance Tax and Gift Tax Act can be applied by analogy if it is difficult to apply directly, and ③ whether Article 42 (3) 3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act can be applied to the supplementary method of the gift Tax Act.

B) If Article 42(1)3 of the former Inheritance Tax and Gift Tax Act is applied directly

According to Article 42 (1) 3 of the former Inheritance Tax and Gift Tax Act, in the case of stock conversion, etc., the amount obtained by subtracting the value of the stock conversion from the value of the stock at the time of stock conversion, etc. In this case, the above profits are only YY with the possession of the instant convertible bonds as seen earlier. Thus, there is no room to apply the part of the first sentence of the above provision to the plaintiffs who are merely YY shareholders. Meanwhile, the business acquisition limit, business exchange, and business restructuring of the first sentence of the above provision is not a unique concept under the tax law but a private law loan, and therefore, it is true that Y holds 15.32% of shares due to the stock conversion of this case. The fact is that YY holds not only the business exchange of this case, i.e., a business transfer organized for a certain business purpose, maintaining its identity and identity, and there is no room to apply the change of the company's own personality to the company's share change under the former part of Article 2 of the Inheritance Tax and Gift Tax Act.

C) Whether Article 2(3) and Article 42(1)3 of the former Inheritance Tax and Gift Tax Act can be applied mutatis mutandis

Even if the benefit of this case from the conversion of shares constitutes the subject of the gift tax under Article 2(3) of the former Inheritance Tax and Gift Tax Act, it is difficult to view that Article 42(1)3 of the former Inheritance Tax and Gift Tax Act is applied mutatis mutandis to the calculation of the value on the following grounds.

(1) Of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act, the part concerning stock conversion, etc. shall be limited to profits derived from deducting the value of stock conversion, etc. from the value of stocks as at the time of stock conversion. As such, the foregoing provision may not apply to the disposition of this case where gift tax was imposed on profits obtained from a change in the value of shares owned by the said profits

② In light of the fact that the stock conversion of this case causes a change in the ownership relationship of assets for business use (in the case of business takeover) or changes in the legal form, etc. (in the case of a change in the structure), it is difficult to see that there is a change in the same nature as the above, and that Article 42(1)3 of the former Inheritance Tax and Gift Tax Act provides that "the transactions that increase or decrease the corporation's capital by the common concept in the case of investment, reduction, merger, stock conversion, etc." in the former part of the first sentence, while the latter part of the first sentence provides for "the transactions that change in the company's capital by the acquisition of business, exchange of business, or change in the corporation's organization, etc." and thus it is difficult to extract the common concept of common concept, it is difficult to set the limit of taxation rather than just examples.

③ “The shares owned or the value of which is changed” under the latter part of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act is naturally incidental to a corporation’s most profit and loss transaction. If it is deemed that the above provision can be applied to all the cases that occur as above, the subject of the regulation would be too wide, and the individual amount calculation provision under Articles 33 through 41-5 of the former Inheritance Tax and Gift Tax Act is likely to be unreasonable. Therefore, the above provision needs to be interpreted narrowly.

④ In principle, our tax law does not impose tax on the difference in the appraisal of assets that are unrealizedly acquired, if the relevant assets are disposed of, at the time of taxation as capital gains. However, the latter part of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act and Article 31-9(2)5(b) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act stipulate that the value of donated assets under the said provision is the difference in the appraisal of the relevant assets before and after the change in the value of shares owned, taxation on unrealized acquired assets is exceptionally recognized. The taxation on unrealized acquired assets should be decided by the Constitutional Court (see, e.g., Constitutional Court Decision 92Hun-Ba49, 52 (Joint Order, etc.)) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act and the latter part of Article 31-9(1)4 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, which provides for the difference in the value of donated assets before and after the change in the value of shares held.

D) Whether Article 2(3) of the former Inheritance Tax and Gift Tax Act and the provision on the supplementary method of assessment of unlisted stocks is applicable

Even if the Defendants imposed gift tax pursuant to Article 2(3) of the former Inheritance Tax and Gift Tax Act without direct or analogical application pursuant to Article 42(1)3 of the same Act, and calculated the difference in appraisal of Y shares owned by the Plaintiffs based on the supplementary method of assessment of non-listed stocks as the value of donated property, the method of calculating the value of donated property cannot be deemed an objective and reasonable method, and it is unlawful against the taxpayer’s predictability or equity in taxation.

① Considering that the Defendants’ application of the supplementary evaluation method of unlisted stocks is merely for the assessment of the market price at the time of the evaluation base date of the pertinent stocks, and that it constitutes exceptional cases to compute the appraisal difference of property as the value of donated stocks, the latter part of Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 42(1)3) should be premised on the application of the latter part of Article 42(1)3 of the same Act to calculate the stock value difference before and after the conversion of

② As to the type of donation, such as the conversion of shares, the former part of Article 40 and Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20358, Feb. 1, 2008; Presidential Decree No. 20135, Feb. 1, 2008; Presidential Decree No. 20135, Feb. 2, 2008; Presidential Decree No. 20134, Feb. 1, 2008; Presidential Decree No. 20134, Feb. 2, 2008; Presidential Decree No. 20130, Feb. 2, 2008; Presidential Decree No. 20130, Feb. 2, 2007).

③ If the difference in stock value assessment in accordance with Article 2(3) of the former Inheritance Tax and Gift Tax Act and the supplementary assessment method of unlisted stocks is recognized as subject to gift tax indiscreetly, it is likely that the parties to the transaction have a special relationship, or that the difference between the market price, etc. and the market price, etc. is at least 30% of the market price, or that the value of donated property is at least a certain amount, the legislative intent of

④ Meanwhile, the entire comprehensive gift taxation was introduced in order to resolve problems that could not cope with the new type of modified gift tax only with the separate provision for calculating the value of the gift tax under Articles 32 through 42 of the former Inheritance Tax and Gift Tax Act. As seen earlier, the stock conversion of this case is merely a type of transaction under the former part of Article 40 and Article 42(1)3 of the former Inheritance Tax and Gift Tax Act, and it is difficult to view it as a new type of modified gift that could not have been predicted in advance.

3) Sub-determination

Ultimately, even if there was an indirect increase in the value of shares held by the Plaintiffs, a shareholder of the Y through the conversion of shares between the Y and XX, the instant disposition that imposed gift tax on the Plaintiffs by applying Articles 2(3) and 42(1)3 of the former Inheritance Tax and Gift Tax Act is unlawful as it goes beyond the limit of imposing gift tax, without further review as to the other allegations by the Plaintiffs.

3. Conclusion

Therefore, the plaintiffs' claim of this case is reasonable, and it is so decided as per Disposition.