'Comprehensive Exchange' Acquiring All Shares Must Pay Taxes Under Merger Regulations

[Asia Economy Reporter Heo Kyung-jun] The Supreme Court has made its first ruling that a comprehensive stock exchange, in which one company acquires all the shares of another company, is similar to a merger and therefore the merger regulations should be followed when calculating gift tax benefits.

The Supreme Court's Third Division (Presiding Justice Noh Jeong-hee) overturned the lower court's ruling that dismissed the appeal filed by Mr. B, the largest shareholder of entertainment agency A, against the Samsung Tax Office's gift tax assessment cancellation lawsuit, and remanded the case to the Seoul High Court on the 18th.

C, a tent manufacturing company listed on the KOSDAQ, entered into a comprehensive stock exchange agreement in 2005 to acquire all 86,500 shares of company A, issuing 36.4625 shares of C per one share of A to be delivered to A's shareholders. Accordingly, in 2006, C allocated approximately 1.09 million new shares to Mr. B, who held about 30,000 shares (34.8%) of A.

The tax authorities assessed the value of Mr. B's gifted assets at approximately 15.7 billion KRW, claiming that the price of A's shares was overvalued compared to the market price in 2010, and imposed about 12 billion KRW in gift tax. Mr. B filed a lawsuit in response.

The dispute in the trial centered on whether to apply the general regulations on stock valuation or the calculation method for merger gains when determining the 'value before and after change,' which forms the basis for calculating gift tax benefits arising from the comprehensive stock exchange.

The first and second trials sided with the tax authorities, applying the 'general regulations' that typically deal with individual stock transfers or gifts. However, the Supreme Court ruled that a comprehensive stock exchange is economically similar to a merger and that the merger regulations should be applied analogously.

The court stated, "Merger regulations calculate the valuation amount by a reasonable method to prevent unreasonable results where gift tax is imposed due to unforeseen stock price fluctuations at the time of contract," and concluded, "It is necessary to apply the merger regulations analogously when calculating gift tax benefits in the case of a comprehensive stock exchange."