The case holding that, in a case where Eul et al., the non-listed corporation Gap's representative director, who operated the above company for not less than 20 years and Eul's mother Eul, owned 70% and 30% of the total number of shares issued by Eul, and thereafter Eul received part of Eul's shares from Byung, Eul succeeded to the whole shares of Eul's spouse, and upon Eul's death before 10 years elapse since the above donation was made, Eul succeeded to Eul's shares, and upon Eul's internal director and the representative director appointed to Eul and reported inheritance tax, Eul applied the deduction of inheritance tax only to the existing shares held for not less than 10 years, but the above donation shares were claimed as the object of deduction of inheritance tax, and the head of the competent tax office rejected this request, but the above donation shares constitute the shares subject to deduction of inheritance tax under Article 15 (3) 1 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act.

As the representative director of the Gap corporation, the non-listed corporation Eul, who has operated the above company for not less than 20 years, Eul et al. held 70% and 30% of the total number of shares issued by Eul, and thereafter Eul received part of Eul's shares from Byung. After the death of Eul, Eul et al. Eul succeeded to the entire shares held by Eul's spouse, and upon the death of ten years after the above donation, Eul filed a inheritance tax report, Eul filed a inheritance tax deduction for the existing shares held by Eul for not less than 10 years among the above inherited shares, but the above donated shares are also subject to the deduction of inheritance tax, but the head of the competent tax office rejected this claim, although the head of the competent tax office rejected this claim.

Article 18(2)1 and (4) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 15224, Dec. 19, 2017; hereinafter “former Inheritance Tax Act”); Article 15(3)1 Item (a) and Article 19(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 28638, Feb. 13, 2018; hereinafter “former Enforcement Decree of the Inheritance Tax Act”); in light of the language, content, form, structure, etc. of Article 18(2)1 of the former Inheritance Tax and Gift Tax Act, where an enterprise was operated in the form of an unlisted corporation, the case determined that the shares of the deceased were owned for at least 10 years before the commencement of inheritance, and that, in order to apply the deduction of inheritance business pursuant to Article 18(2)1 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 15220, Dec. 19, 2015).

Articles 3-2(1) and 18(2)1 and (4) (see current Article 18(5) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 15224, Dec. 19, 2017); Articles 15(3)1(a) and 19(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 28638, Feb. 13, 2018);

Plaintiff (Law Firm Jeong, Attorneys Park Jae-min et al., Counsel for the plaintiff-appellant)

Head of the tax office;

May 21, 2020

1. The Defendant’s disposition rejecting to rectify KRW 1,482,606,641 of inheritance tax against the Plaintiff on January 25, 2019 is revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. Status of parties and inheritance of Plaintiff’s shares

1) Patom Co., Ltd. (hereinafter “Patom Co., Ltd.”) is an unlisted corporation established on June 28, 1989 for manufacturing and selling stoms.

2) The Plaintiff’s spouse Nonparty 1, from August 20, 1995 to June 10, 2017, worked as the representative director of the Patom company and managed the said company.

3) Since the subscription for new shares issued in around 1999, 500 shares issued by Patom company, Nonparty 1 held 35,000 shares and Nonparty 2 held 15,00 shares respectively, and Nonparty 1 received 4,563 shares from Nonparty 2 on November 26, 2007 and held 39,563 shares in total.

B. The plaintiff's inheritance and the determination of inheritance amount

1) From March 31, 1997 to June 30, 2017, the Plaintiff served as an auditor of the Patom company. As Nonparty 1 died on June 10, 2017, Nonparty 1 succeeded to 39,563 shares issued by the Patom company, an inherited property, and on June 30, 2017, the Plaintiff was appointed as an internal director and a representative director of the Patom company.

2) On January 2, 2018, the Plaintiff reported KRW 6,265,190,538 of inheritance tax by applying the deduction for inheritance tax to only 35,000 shares owned by Nonparty 1 for at least 10 years among the above shares of inheritance.

3) From May 30, 2018 to August 29, 2018, the director of the Seoul Regional Tax Office conducted an inheritance tax investigation on Non-party 1’s death, and concluded the investigation by deeming the reported content as appropriate in addition to the underassessment of the stock value in relation to the deduction for family business.

C. Plaintiff’s request for correction and refusal

1) On December 11, 2018, the Plaintiff asserted that the remaining 4,563 shares issued by Patom 39,563 shares (hereinafter “instant shares”) inherited from Nonparty 1 are eligible for the deduction of family business, and filed a claim for rectification seeking reduction of KRW 1,482,606,640 of inheritance tax. However, on January 25, 2019, the Defendant rejected the said claim for rectification (hereinafter “instant disposition”).

2) The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on April 24, 2019, but was dismissed on July 11, 2019.

[Reasons for Recognition] Unsatisfy, Gap evidence 1 to 8, Eul evidence 1 to 3, the purport of the whole pleadings

2. Whether the disposition is lawful;

A. Summary of the parties' assertion

1) Plaintiff

A) Article 18(2)1 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 15224, Dec. 19, 2017; hereinafter “former Inheritance Tax Act”) provides that in the case of inheritance of a family business, the amount equivalent to the value of the property of the family business shall be deducted from the taxable value of the inherited property within the credit limit. Article 15(3)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 28638, Feb. 13, 2018; hereinafter “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) that stipulates the requirements for the deduction of the inheritance tax shall be met by the decedent to “a small or medium enterprise or a middle-standing enterprise’s largest shareholder and his/her related party shall continue to hold more than 10/100 (30/100 in the case of a listed corporation) of the total number of shares issued by the relevant enterprise, and thus, it is unlawful to continue to hold the shares subject to the credit for at least 10 years.”

B) Even if the requirement for deduction of family business requires “the decedent shall continue to hold shares subject to inheritance for at least 10 years”, Article 15(3)1(a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act does not require the decedent to hold the shares independently for at least 10 years. Therefore, if the decedent’s shares totaled with shares of his/her specially related parties and more than 50% of the total number issued shares, the shares should be deducted from the taxable value of inherited property as the property value of inherited property. However, the shares inherited by the Plaintiff from Nonparty 1 were owned by Nonparty 1 and his/her specially related party until June 10, 2017, which was the date of commencing capital increase issued at around 199, since the shares were owned by Nonparty 1 and Nonparty 2 together for at least 10 years after the date of commencing the inheritance, the instant disposition is unlawful since the inheritance deduction of the shares in this case is acknowledged.

2) Defendant

Article 15(3)1(a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "at least 50/100 of the total number of shares issued shall be continuously owned for at least 10 years" as the requirements for the decedent subject to inheritance deduction, and otherwise, if the period of holding shares subject to inheritance does not constitute the requirements for the period of holding shares subject to inheritance, the legislative intent of the deduction for inheritance of a family business shall be eliminated and may be abused as the means of tax avoidance.

B. Relevant statutes

[Attachment] The entry is as follows.

C. Determination

1) Under the principle of no taxation without law, or under the principle of no taxation without law, the interpretation of tax laws and regulations shall be interpreted in accordance with the law, barring special circumstances, and it shall not be permitted to expand or analogically interpret without reasonable grounds (see Supreme Court Decision 2002Du6781, May 27, 2004, etc.).

2) Article 18(2)1 of the former Inheritance and Gift Tax Act defines “family business” as “small and medium enterprises prescribed by Presidential Decree or those middle-standing enterprises prescribed by Presidential Decree (hereinafter “small and medium enterprises, etc.”) as “small and medium enterprises that continuously run business for at least ten years,” and stipulates that the amount equivalent to the value of property of family business shall be deducted from the taxable value of inherited property in cases of inheritance.”

Article 15(3)1(a) of the former Enforcement Decree of the Inheritance and Gift Tax Act, upon delegation of Article 18(4) of the former Inheritance and Gift Tax Act, provides that “If a decedent is the largest shareholder or largest investor of a small or medium enterprise, etc. (hereinafter referred to as “major shareholder, etc.”) among the requirements of the decedent for the application of inheritance of a family business under Article 18(2)1 of the former Inheritance and Gift Tax Act, at least 50/100 (30/100 if a corporation listed in the Exchange is listed in the Exchange) of the total number of outstanding stocks, etc. of the relevant company shall continue to hold at least 10/100 (30/10 if the corporation is listed in the Exchange) of the requirements of the decedent for the application of inheritance of a family business under Article 18(2)1 of the former Inheritance and Gift Tax Act (see Article 19(2) of the former Enforcement Decree of the Inheritance and Gift Tax Act).”

3) In full view of the language, content, form, system, etc. of the above provisions, the phrase “the decedent shall continue to hold the pertinent shares, which are inherited property, for at least ten years” cannot be deemed as a requirement for applying the deduction for inheritance of a family business pursuant to Article 18(2)1 of the former Inheritance Tax and Gift Tax Act. The reasons are as follows.

A) In the case of managing an unlisted company in the form of an unlisted corporation, Article 15(3)1(a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act on the possession of shares of the inheritee among the requirements for deduction of family business to the effect that “the decedent is the largest shareholder of a small or medium enterprise, etc. and his/her related party should continue to hold not less than 50/10 of the total number of shares issued and outstanding for not less than 10 years.” Thus, the requirement of the above Enforcement Decree should be met, and further, it cannot be deemed that “the decedent should continue to hold shares, which are inherited property,

B) Article 15(3)1(a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 27835, Feb. 7, 2017) provides that “Where the decedent is the largest shareholder, etc., and the decedent and his/her related party together with shares, etc., should continue to hold at least 50/10 of the total number of outstanding shares of the relevant company.” However, upon being amended by Presidential Decree No. 27835, Feb. 7, 2017, “at least 10 years” was clearly stated for the period during which the decedent continues to hold.

However, even before the amendment, the above provision of the Enforcement Decree is related to the requirements for holding stocks, etc. in total between the decedent and his/her specially related persons, and the Supreme Court held that, in order to constitute a family business prescribed in Article 18(2)1 of the former Inheritance Tax and Gift Tax Act, the decedent requires that he/she hold stocks, etc. in excess of a certain ratio continuously for ten years or longer (see Supreme Court Decision 2013Du17206, Mar. 13, 2014, etc.). Thus, the amendment of the above Enforcement Decree is clearly intended to clarify that the period of holding stocks, etc. exceeds a certain ratio of 10 years, in accordance with the definition of the "family business" under Article 18(2)1 of the former Inheritance Tax and Gift Tax Act, it is difficult to view that "in order for the decedent to continuously hold the relevant stocks, which are inherited property, for 10 years or longer, the heir of a family business that is subject to deduction is entitled to receive the value of stocks of the above corporation at least 20 years."

C) According to the proviso of Article 15(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, “where inheritance commences due to the death of the largest shareholder, etc. (excluding the heir who has received the inheritance of a family business) at the time of the inheritance of a family business,” the deduction for inheritance of a family business pursuant to Article 18(2)1 of the former Inheritance Tax and Gift Tax Act is not applicable to “where the largest shareholder, etc. is several persons, the deduction for inheritance of a family business is intended only to apply to only one decedent who first succeeds to the shares, etc. for inheritance of a family business. However, Article 15(1)1(a) of the former Enforcement Decree provides that the proportion of shares, etc. held by the decedent and his/her specially related persons should be calculated by aggregating shares, etc. held by the decedent to the extent that the decedent can control the company, and the purport of the former Inheritance Tax and Gift Tax Act provides for special taxation for inheritance of a specific family business is to maintain the integrity of a small and medium enterprise and promote economic power, even if shares held by a specially related person for inheritance for at least 10 years.

4) According to the facts acknowledged earlier, Nonparty 1 received the instant shares held by Nonparty 2 who had a special relationship for more than 10 years and succeeded to the Plaintiff with the shares of Patom Company held before the inheritance due to the death of Nonparty 1, and thus, the instant shares constitute the shares subject to the deduction of inheritance of a family business. Accordingly, the instant disposition made on a different premise should be revoked as it is unlawful.

3. Conclusion

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

[Separate] Relevant Acts and subordinate statutes: omitted

Judges Lee Jong-young (Presiding Judge)