[1] The standard for determining whether a domestic corporation’s shares issued by a domestic corporation, which is extinguished upon a merger between foreign corporations, are transferred to a merged corporation, constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act

[2] The case holding that the transfer of shares constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act and “transfer of share certificates” under Article 1 of the former Securities Transaction Tax Act, in case where the tax authorities imposed disposition, such as corporate tax and securities transaction tax, on the grounds that the transfer of shares constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act

[1] Whether transferring shares issued by a domestic corporation, which is extinguished by a merger between foreign corporations, to a merged corporation, constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007; hereinafter the same) should be determined based on whether the transfer of shares by the merger between foreign corporations constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2

[2] In a case where a foreign corporation Gap’s parent-company merged with a foreign corporation Eul and changed the name of Byung to a foreign corporation Byung, and where the shares issued by the corporation Gap were transferred to Byung as Byung corporation Byung corporation, the tax authority imposed corporate tax and securities transaction tax, etc. on Byung corporation, the case holding that a domestic corporation’s transfer of shares constitutes a transfer of shares under Article 80(1) and (4) of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007; hereinafter the same shall apply), Articles 122(1) and 14(1)1(a) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20619 of Feb. 22, 2008), and Article 14(1)1(c) of the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 10635 of Feb. 18, 200).

[1] Article 93 subparag. 10 (a) of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007) / [2] Article 16(1)5 and (2), Article 44(1)1 (see current Article 44(2)2), Article 80(1)2 (see current Article 44(4) and (4) and Article 93 subparag. 10 (a) of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007) / [2] Article 16(1)5 and (2), Article 44(1)1 of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007); Article 93 subparag. 10 (a) of the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 8831 of Feb. 2, 2008); Article 16 subparag. 214(a) of the former Enforcement Decree of the Corporate Tax Act (see current Article 17 subparag.

A. E. E.S. (Law Firm Chungcheong, Attorneys Han Chang-ho et al., Counsel for the plaintiff-appellant)

The director of the Nam-gu Tax Office and one other (the Government Law Firm Corporation, Attorneys Gu Chungcheongnam-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2009Nu27796 decided April 1, 2010

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 93 subparag. 10(a) of the former Corporate Tax Act (amended by Act No. 8831, Dec. 31, 2007; hereinafter the same) provides that “income accrued from the transfer of stocks, investment certificates, and other securities issued by a domestic corporation” as one of the domestic source income of a foreign corporation which is subject to corporate tax. Meanwhile, the main text of Article 1 of the former Securities Transaction Tax Act (amended by Act No. 9274, Dec. 26, 2008; hereinafter the same) provides that “the transfer of stock certificates or equity shares shall be subject to securities transaction tax under this Act” and Article 2(3) provides that “The transfer of stock certificates or equity shares means the transfer of ownership at a cost due to contractual or legal grounds.”

2. The court below, citing the reasoning of the judgment of the court of first instance, found the following facts: ① IT Group 2 (Amaus Group S.A.; hereinafter the “former Amas”) was merged into BY PHE 2 (WIE S.A.) on August 1, 2006, which held 60.83% of the issued shares; ② the head of the tax office of the tax payment notice was changed to 30% of the transferred shares to the Plaintiff under the name of the former Mamaus Ga Group 5 (hereinafter the “instant merger”); ② the head of the tax office of the tax office, upon considering that the transfer of shares was made to the Plaintiff under the name of the 5th EM 20 EM 2, which was the parent company, the 60% of the issued shares; ③ the transfer of shares to the Plaintiff, the head of the tax office of the tax office of the tax payment notice of this case, including the transfer of shares to 30% of the new shares to the Plaintiff.

Based on such factual basis, the lower court determined that the Defendants’ disposition of withholding corporate tax and securities transaction tax under the premise that the transfer of stocks and other securities by a domestic corporation owned by a foreign corporation by a merger between foreign corporations does not constitute “transfer of stocks” under Article 93 subparag. 10(a) of the former Corporate Tax Act, on the ground that the transfer of stocks and other securities by a foreign corporation by a merger between foreign corporations constitutes “transfer of stocks” under Article 93 subparag. 10(a) of the former Corporate Tax Act, on the ground that the transfer of stocks of the domestic corporation owned by a foreign corporation to the Plaintiff cannot be deemed as falling under “transfer of stocks” under Article 93 subparag. 10(a) of the former Corporate Tax Act, and on the ground that the transfer of stocks and securities by a foreign corporation cannot be deemed as falling under “transfer of stocks” under the main sentence of Article 1 and Article 2(3) of the former Corporate Tax Act.

3. However, we cannot agree with the judgment of the court below for the following reasons.

A. First, whether transferring shares issued by a domestic corporation, which is extinguished by a merger between foreign corporations, to a merged corporation, constitutes “transfer of shares” as referred to in Article 93 subparag. 10(a) of the former Corporate Tax Act should be determined by the interpretation of the former Corporate Tax Act on the ground that the increase in the value of the relevant shares, based on the merger, was realized as gains from transfer, and whether such increase in value can be considered as taxable income.

Article 80(1) of the former Corporate Tax Act provides that where a domestic corporation is dissolved due to a merger, the liquidation income amount shall be the total amount of the cost of merger received by stockholders, etc. of the merged corporation from the merged corporation minus the total amount of equity capital as of the date of the registration of the merger. Article 122(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20619, Feb. 22, 2008; hereinafter the same shall apply) provides that “the total cost of merger under Article 16(1)5 of the Act” and “the total amount of the cost of merger calculated by adding the value of stocks, etc. under Article 80(2)2 of the Act” (Article 16(1)5 of the former Corporate Tax Act; Article 16(2)1 of the former Enforcement Decree of the Corporate Tax Act; Article 122(1)4 of the former Enforcement Decree of the Corporate Tax Act provides that “the total value of stocks, etc. acquired from the merged corporation at the time of the merger shall be the total value of stocks.

As can be seen, Article 80(1) and (4) of the former Corporate Tax Act, Article 122(1) and Article 14(1)1(a)(c) of the former Enforcement Decree of the Corporate Tax Act provides for the method of calculating gains from transfer by deeming that the transfer of assets following a merger constitutes the transfer of assets realizing gains from the transfer of assets. Exceptions to cases meeting the requirements under Article 44(1)1 and 2 of the former Corporate Tax Act, insofar as the face value of stocks received in return for a merger is deemed as the consideration for the transfer of assets, a corporation provides a policy special exception to taxation on the transfer until the merged corporation disposes of the assets. On the contrary, a foreign corporation provides for income accruing from the transfer of stocks, etc. issued by a domestic corporation under Article 93 subparag. 10(a) of the former Corporate Tax Act, and there is no policy special exception to taxation on the transfer of stocks, etc. between a foreign corporation and a domestic corporation under Article 93(1)10(c) of the former Corporate Tax Act.

B. In addition, in light of the language and text and purport of Articles 1 and 2(3) of the former Securities Transaction Tax Act, and Article 117(1)14 of the Restriction of Special Taxation Act (amended by Act No. 6538, Dec. 29, 2001) newly provides that “where stocks are transferred for the purpose of a merger satisfying the requirements under each subparagraph of Article 44(1) of the Corporate Tax Act” shall be subject to the exemption of securities transaction tax, there is no reason to deem that the transfer of stocks by a merger does not constitute a “transfer of stock certificates” under the said provision.

C. Nevertheless, the lower court determined otherwise that all the Defendants’ notice of tax payment of corporate tax and resident tax to be imposed on corporate tax and securities transaction tax are unlawful on the grounds that the transfer of the instant shares following the merger does not constitute “transfer of shares” under Article 93 subparag. 10 (a) of the former Corporate Tax Act or “transfer of share certificates” under Articles 1 and 2(3) of the former Corporate Tax Act. In so doing, the lower court erred by misapprehending the legal doctrine on “transfer of shares” under Article 93 subparag. 10 (a) of the former Corporate Tax Act or “transfer of share certificates” under Articles 1 and 2(3) of the former Securities Transaction Tax Act, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning this error is with merit.

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee Sang-hoon (Presiding Justice)