AHHFD Co., Ltd. (LLC, Kim & Lee LLC, Attorneys Kim Jong-ho et al., Counsel for the defendant-appellant)

head of Sung Dong Tax Office

September 8, 2011

Seoul Administrative Court Decision 2010Guhap40885 decided May 19, 2011

1. Revocation of a judgment of the first instance;

2. The Defendant’s disposition of imposition of KRW 13,292,420 against the Plaintiff on April 15, 2008 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. Status of stockholding of the Plaintiff in 2004

Of the total number of the Plaintiff’s issued shares, Nonparty 1 owned 65,340 shares (3%) of Nonparty 1’s 50,760 shares (25.64%) of Nonparty 1’s spouse, Nonparty 3 owned 41,40 shares (20.91%) of Nonparty 1’s 40 shares (20.45%) of Nonparty 1’s 40,50 shares (20.45%).

B. Status of stock ownership in 2004 of the Fran Industrial Co., Ltd. (the trade name of January 3, 2007 was changed to Franchi Development Co., Ltd.; hereinafter “Franchis company”).

Of the total number of shares issued by the non-party company 1,602,00 shares, the non-party 1 held 1,476,00 shares (93%, and 846,00 shares out of the above shares), the non-party 2 held 72,00 shares (4%) and the non-party 54,00 shares (3%).

C. Capital increase issued by the non-party company and acquisition of the plaintiff company's shares

On June 24, 2005, shareholders of the non-party company decided to issue a common share and redemption priority share to KRW 41,700 per share within the limit of KRW 1,700,000 and distribute to the plaintiff all of them. The board of directors of the non-party company decided to issue a common share and redemption priority share to KRW 382,00 per share and KRW 660,000 per share (the minimum dividend rate shall be 1:1 conversion per common share during the period between one year and five years after issuance) per share, total of KRW 1,042,00 per share, total of KRW 41,30 per share (hereinafter “the shares of this case”). Accordingly, the non-party company issued and allocated the shares of this case to the plaintiff on the same day, and the plaintiff acquired the shares of this case to KRW 43,634,600,00 per share on the same day.

D. Disposition imposing corporate tax on the plaintiff

The Defendant: (a) deemed that Nonparty 1, etc. renounced the right to receive new shares with respect to capital increase issued by Nonparty 1, etc. and received profits from Nonparty 1, etc. at a price lower than the market price; and (b) determined that such profits were to be included in the Plaintiff’s gross income for the business year of 2005 pursuant to Article 89(6) of the former Enforcement Decree of the Corporate Tax Act; (b) Article 15(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 201; hereinafter the same shall apply); and (c) Articles 11 subparag. 9 and 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter the same shall apply); and (d) Article 205(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same shall apply).).

[Ground of Recognition] Facts without dispute, Gap evidence 1 through 4, Gap evidence 8, 9, 11, 12 evidence, Eul evidence 1-1 to 14, Eul evidence 2, 3, Eul evidence 4-1, 2, Eul evidence 5 and 6, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

(1) In order to include profits distributed by a person with a special relationship pursuant to Article 11 subparagraph 9 of the former Enforcement Decree of the Corporate Tax Act in the corporation’s profit, the requirements under Article 88(1)8 of the above Enforcement Decree shall be met. However, Article 88(1)8 of the above Enforcement Decree limits the subject who distributes profits to the corporation’s shareholders. Since the person with a profit in this case’s interest is the non-party 1, etc. who is the individual shareholder, there is no room to apply Article 11 subparag. 9 of

(2) In order to improve the financial structure, the non-party company did not allocate new shares to the existing shareholders but did not allocate the forfeited shares to the plaintiff. This does not constitute a type of capital transaction stipulated in Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act, and thus, Article 11 subparag. 9 of the same Enforcement Decree cannot be applied.

(3) Where assets are purchased at a low price under the Corporate Tax Act, corporate tax should be imposed on marginal profits between the transfer value and the acquisition value at the time of transfer of the relevant assets. Therefore, it cannot be deemed that the marginal profits between the market price and the issue value of the instant stocks are reverted to the business year 2005, when the Plaintiff purchases the instant stocks.

(4) The issue price of redemption priority among the shares of this case is adjusted by taking into account the Plaintiff’s interest cost, preferential dividend, repayment interest, etc., and there is no profit earned by the Plaintiff in the event of redemption in the future. Moreover, it is unreasonable to assess that the redemption priority interest has the same value as the common share even though there is a difference between the common share and the preferential share, such as preferential dividend or repayment interest, and there is no voting right and there is a possibility of compulsory repayment. Furthermore, since it is unclear whether the redemption priority is to be converted into the common share, it is unclear whether the redemption priority is converted into the common share, and thus, it is necessary to impose tax on the converted interest, etc. at the time of conversion into the common share. As such, it is against the principle of substantial taxation.

B. Relevant statutes

It is as shown in the attached Form.

C. Judgment on the Plaintiff’s first argument

Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act provides for the profits to be included in gross income as “the profits received by distribution from a person with a special relationship due to capital transactions under the provisions of each item of Article 88(1)8.” In addition, Article 88(1)8 of the former Enforcement Decree provides that “Where a corporation which is a stockholder, etc., distributes profits to another stockholder, etc., who is a person with a special relationship, due to any of the following capital transactions” as the type of wrongful calculation denial, three types of capital transactions subject to the avoidance of wrongful calculation under each item are stipulated as “where a corporation distributes profits to the other stockholder, etc., who is a person with a special relationship.” As one of the cases, “the whole or part

In full view of the above provisions, “each item of Article 88(1)8” cited in Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act does not include the main text of Article 88(1)8 of the Enforcement Decree, which provides that the subject of the act is a stockholder, etc., as a corporation, and “the case where a corporation which is a stockholder, etc., distributes profits to other stockholders, etc., who are a person with a special relationship,” but does not include “the case where a corporation which is a stockholder, etc., distributes profits to other stockholders, etc.,” but it seems that three of the items of Article 8(1)8 of the Enforcement Decree of the above Act cited only the type of capital transactions. In addition, there is no special reason to limit

Therefore, one of the types of capital transactions provided for in each item of Article 88(1)8 of the former Enforcement Decree of the Corporate Tax Act shall be deemed to include the profits received by the corporation pursuant to Article 11 subparag. 9 of the former Enforcement Decree, regardless of whether the investor has a corporate shareholder or a shareholder, in the case of waiver of all or part of the right to receive allocation of new stocks or acceptance of new stocks at a price higher than the market price.

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

D. Judgment on the second argument by the Plaintiff

(1) Interpretation of relevant laws and regulations and reorganization of issues

Article 418(1) of the Commercial Act provides that “A shareholder shall have the right to receive new shares in proportion to the number of shares he/she holds,” thereby allowing shareholders to allocate new shares, while Article 418(2) of the Commercial Act provides that “a company may, notwithstanding the provisions of paragraph (1), allocate new shares to persons other than shareholders in accordance with its articles of incorporation: Provided, That in such cases, it shall be limited to cases where it is necessary to achieve the managerial objectives of the company, such as the introduction of new shares and the improvement of financial structure,” thereby exceptionally restricting shareholders’ preemptive rights and allowing a third party to directly allocate new shares (Article 418(2) of the Commercial Act is a provision newly established when the Commercial Act is amended by Act No. 6488, Jul. 24, 2001).

Article 39(1)1 of the former Inheritance Tax and Gift Tax Act provides, with respect to the donation of profits from the issuance of new stocks at low price, and Article 39(1)1 of the same Act provides, “In case where a stockholder of the relevant corporation waives all or part of the right to receive new stocks, and where such renounced new stocks are allocated, the benefits acquired by the person who received the allocation of forfeited stocks,” and “in case where a stockholder of the relevant corporation gives up all or part of the right to receive new stocks, and where he does not allocate forfeited stocks, the benefits acquired by the person who has a special relationship with the person who renounced the relevant new stocks, in question, by acquiring the new stocks.”

However, Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act only provides that “a person, other than a shareholder of the relevant corporation, directly receives new stocks from the relevant corporation, in cases where he/she gives up all or part of the right to receive allocation of new stocks or acquires new stocks at a price higher than the market price.”

Therefore, the issue of this case is whether Article 11 subparagraph 9 of the Enforcement Decree of the Corporate Tax Act can be applied to a case where a third party, who is not a shareholder, did not accept forfeited stocks and received new stocks directly from the company, falls under the capital transaction type stipulated in Article 88 (1) 8 (b) of the former Enforcement Decree of the Corporate Tax Act, and the following is examined.

(2) Disposition of forfeited shares due to the waiver of shareholder's preemptive rights and third party allocation;

If a person who holds a preemptive right issues new shares has made an offer by the date of subscription and has paid the price in full by the due date, the person who has subscribed for new shares has the right and duty as a shareholder from the day following the due date of subscription (Article 423(1) of the Commercial Act). However, even if a person holding a preemptive right fails to make an offer by the due date of subscription (Article 419(4) of the Commercial Act), or has made an offer for subscription to new shares by the due date of subscription (Article 423(2) of the Commercial Act), if he/she fails to pay the subscription by the due date of subscription, the forfeited share occurs due to the forfeiture of the right to receive new shares (Article 42

In principle, when a stock company issues new shares, shareholders have preemptive rights, but Article 418(2) of the Commercial Act exceptionally limits shareholders’ preemptive rights and allocates new shares to third parties.

In cases where a third party directly distributes new shares, the company and the third party enter into a contract for underwriting new shares in accordance with the provisions based on the articles of incorporation, and do not go through such procedures as waiver of preemptive rights and disposal of forfeited stocks by shareholders, but the necessity for achieving business objectives of the company, such as the introduction of new technologies and improvement of financial structure, should be recognized (Article 418(2) of the Commercial Act), and the suitability of the purpose and means should be recognized.

(3) recognised facts

The following facts can be acknowledged in full view of the purport of the entire evidence presented above.

① Article 12(1) of the articles of incorporation of the non-party company provides for the principle of allocating new shares by stating, “A shareholder of the party concerned has the right to be allocated new shares in proportion to the number of shares he/she owns in the issuance of new shares.” Article 12(5) of the same Act provides for the method of disposal of forfeited shares in cases where a shareholder renounces or loses preemptive rights or bears short shares in the allocation of new shares.”

(2) Meanwhile, Article 12(2) of the articles of incorporation of the non-party company provides that the non-party company may directly allocate new shares to a third party other than the shareholder upon the resolution of the board of directors or the special resolution of the general meeting of shareholders, stating that “Notwithstanding the provisions of paragraph (2), in the following cases, new shares may be allocated to a person other than the shareholder (excluding the shareholder),” and Article 12(3) of the same Act provides that “in cases where the company intends to allocate new shares to a person other than the shareholder in excess of the scope prescribed in paragraph (2), the company’s articles of incorporation

③ The shareholders of the non-party company decided on June 24, 200 to issue a common share and redemption priority share of KRW 41,70,000 per share within the limit of KRW 1,70,000 and to distribute to the Plaintiff in full. The board of directors of the non-party company decided on June 29, 200 to issue a common share of KRW 382,00 per share and a redemption priority share of KRW 660,00 per share (the minimum dividend rate of KRW 1:1 conversion per common share during the period between one and five years after issuance) and the redemption priority share of KRW 660,00 per share, total of KRW 1,042,00 per share (hereinafter “instant shares”). Accordingly, the non-party company issued and allocated the instant shares to the Plaintiff on the same day, and the Plaintiff acquired the shares in full in KRW 43,034,600 per share on the same day.

④ The minutes of the temporary general meeting of the non-party company on June 24, 2005 stated as follows: “The chairperson is unable to know the large business as of June 29, 2005 due to the current business situation of the company concerned, and therefore, the procedures and details of the issuance of new shares must be determined at the temporary general meeting of the shareholders on this day, i.e., shareholders, etc., shall be examined and approved to issue the following new shares; and Article 12(4) of the minutes of the board of directors of the non-party company on June 29, 2005 stated as follows: “The minutes of the board of directors of the non-party company on June 29, 2005 stated as follows:

(4) Determination

In light of the principle of no taxation without law, or the requirements for non-taxation or tax exemption, and the interpretation of tax laws shall be made in accordance with the text of the law, barring special circumstances, and it shall not be allowed to expand or analogically interpret without reasonable grounds (see Supreme Court Decision 2000Du4378, Jul. 26, 2002, etc.).

First of all, according to the above facts, the issuance of the shares of this case is not done according to the procedure of waiver of preemptive rights and disposal of forfeited stocks under the Commercial Act, but was done by a third party in accordance with the procedure of directly allocating new shares in order to achieve business objectives of the company

Furthermore, in cases where a third party, who is not a shareholder, did not accept forfeited stocks and received new stocks directly from the company, the following circumstances are comprehensively taken into account as to whether Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act and Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax Act, and comprehensively taking into account the evidence and the purport of the entire arguments, where a third party, as seen in the instant case, did not accept forfeited stocks and received new stocks directly from the company, it does not constitute a type of capital transaction stipulated in Article 88(1)8(b) of the former Enforcement Decree, and thus, Article 11 subparag. 9 of the former Enforcement Decree of the Corporate Tax

① Above all, Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act provides that “a person, other than a shareholder of the relevant corporation, is directly allocated new stocks from the relevant corporation” only in cases where “a person, other than a shareholder of the relevant corporation, waives all or part of the right to receive allocation of new stocks or acquires new stocks at a price higher than the market price.”

② The preemptive rights of shareholders under Article 418 of the Commercial Act can be divided into abstract preemptive rights and specific preemptive rights. The abstract preemptive rights are rights to acquire a certain quantity of shares if a company issues new shares, and they are rights that cannot be transferred or renounced separately from shares as part of shareholders' rights. On the other hand, specific preemptive rights occur on the date of allocation of new shares as determined by the board of directors when a company actually issues new shares, and they can be transferred or renounced as obligatory rights to the company.

Therefore, since the meaning of waiver of the preemptive right is that a specific preemptive right is waived, a specific preemptive right shall accrue to a shareholder (specific preemptive right is a right arising to a shareholder listed in the shareholder registry as of the date of allocation of new stocks determined by a resolution of the board of directors, and the company shall publicly announce it two weeks prior to the date of allocation of new stocks (Article 418(3) of the Commercial Act)). As seen above, the non-party company issued the instant shares under the procedure of direct allocation of new stocks by a third party under the special resolution of the general meeting of shareholders and the resolution of the board of directors as stipulated in the articles of incorporation. Thus, there is no possibility

(3) In allocating new stocks or equity shares (hereafter referred to as "new stocks" in this paragraph) in order to increase the capital or amount of investment of the corporation, the former Inheritance Tax and Gift Tax Act amended by Act No. 5193 on December 30, 1996 stipulated in Article 39 (1) 1 that "in case where the stockholders of the relevant corporation waives all or part of the right to receive the allocation of new stocks, the benefits as provided in the following items:

In light of the amendment process of the provisions of the Inheritance Tax and Gift Tax Act, it can be seen that the subject of deemed donation has been expanded, and it appears that the previous provisions alone are intended to include the cases where the subject of taxation cannot be considered even though the real property is transferred without compensation. According to such provisions of the Inheritance Tax and Gift Tax Act, it is reasonable to view that the term “distribution of forfeited stocks due to the waiver of shareholder’s preemptive right to new stocks” and “distribution of third party” are distinct concepts under tax law.

④ Supreme Court Decision 200Du4378 Decided July 26, 2002 rendered that “The persons to whom forfeited shares occurred due to the waiver of preemptive rights by the existing shareholders shall be deemed to have been donated the difference equivalent to the actual value of shares and the value of subscribed shares, and thus, Article 34-5(1)1 of the former Inheritance Tax Act (amended by Act No. 5193 of Dec. 30, 1996), Article 41-4(1) of the Enforcement Decree of the same Act (amended by Presidential Decree No. 14862 of Dec. 30, 195), and Article 5(6)1(b)2 of the Enforcement Decree of the same Act shall be calculated by applying the formula of the same Act, and Article 41-4(2) of the Enforcement Decree of the same Act cannot be applied to cases where forfeited shares are not once again allocated, and the above Supreme Court decision did not apply to cases where the forfeited shares are cultivated by applying the same applying mutatis mutandis to cases where the forfeited shares are not separately.”

In conclusion, the allocation of forfeited shares arising from the waiver of preemptive rights after the allocation of shareholders and the allocation of forfeited shares to a third party are clearly distinguishable requirements, and the provisions applicable to the allocation of forfeited shares arising from the waiver of preemptive rights after the allocation of shareholders cannot be considered as the basic provisions for taxation in the case of the allocation of forfeited shares to a third party. Ultimately, the plaintiff's assertion in this part

E. Sub-committee

Therefore, the Defendant’s instant disposition based on a different premise is unlawful without having to examine the remainder of the Plaintiff’s remaining arguments.

3. Conclusion

Therefore, the plaintiff's claim of this case is accepted on the grounds of its reasoning, and the judgment of the court of first instance is unfair on the grounds of its conclusion, so the judgment of the court of first instance is revoked and the disposition of this case is revoked, and it is so decided as per Disposition.

[Attachment Form 5]

On the same day as judge Lee Jong-dae (Presiding Judge)