법무법인(유한) 율촌 | Yulchon LLC

Yulchon successfully persuaded the Seoul Administrative Court to hold that even if gains are realized from a BW transaction, such gains are not subject to gift tax if the transaction has a justifiable cause under the relevant business practice.

With the introduction of comprehensive taxation of gift tax in 2003, even if the transaction is between unrelated parties, if the transaction price differs from the market price recognized by the Inheritance and Gift Tax Act (the "IGTA") and a party realizes gains exceeding that prescribed by the IGTA via such transaction, the tax authorities have imposed gift tax on such gains. In this case as well, the Plaintiff purchased BW at a price lower than the normal market price from a foreign fund, and realized capital gains of over KRW 10 billion via transfer of the new shares acquired by exercise of the BW; based on the ground that the Plaintiff's gains are subject to gift tax as prescribed by Article 42 of the IGTA, the tax authorities imposed a gift tax of over KRW 3 billion against the Plaintiff.

Article 42(3) of the IGTA provides a way of defense in which if a justifiable cause under the relevant business practice in a transaction between unrelated parties is recognized, the relevant gains would not be subject to gift tax even if the requirements for taxation of gift tax are prima facie satisfied. Accordingly, the recognition of a "justifiable cause under the business practice" was fiercely disputed in this case.

In defense of the taxpayer, Yulchon first set forth elaborate legal arguments on the criteria of "justifiable cause under the business practice" based on the legislative intent of Article 42(3) of the IGTA as well as its legal and economic significance. In addition, Yulchon substantiated in detail factual circumstances justifying the recognition of "justifiable cause under the business practice" for the transaction at issue by explaining that there was an unavoidable reason for the foreign fund's transfer of the BW to the Plaintiff at a lower price. As a result of Yulchon's strong legal arguments and solid factual grounds, Yulchon succeeded in persuading the court to render a decision in favor of the Plaintiff.

Yulchon's victory is significant because it puts a halt on the tax authority's current practice (adopted since the introduction of the comprehensive taxation of gift tax) that imposes a gift tax as long as the formal requirements have been satisfied.