Supreme Court: "Unfair 10.2 Billion Gift Tax on Former ShillaJen CEO's Uncle... Reconsideration Ordered"

"'Second Largest Shareholder's Related Party' BW Also Subject to Gift Tax" Second Trial Verdict Overturned and Remanded

The Supreme Court ruled that the gift tax of over 10 billion won imposed by the tax authorities on shares acquired by the uncle of former ShillaJen CEO Moon Eun-sang through bonds with warrants (BW) was unjust.

[Image source=Yonhap News]

According to the legal community on the 12th, the Supreme Court's 3rd Division (Presiding Justice Noh Jeong-hee) overturned the lower court's ruling against the plaintiff in the appeal trial of the gift tax imposition cancellation lawsuit filed by Moon's uncle and remanded the case to the Seoul High Court.

Moon's uncle, Mr. Cho, subscribed to detachable bonds with warrants issued by ShillaJen in 2014. Between 2016 and 2017, he exercised the warrants and acquired 1,428,570 shares of ShillaJen stock at a price of 3,500 won per share.

The Seoul Seongdong Tax Office reported in February 2018 that Mr. Cho earned about 16.6 billion won in profit from this transaction and imposed approximately 10.2 billion won in inheritance tax by applying the revised Inheritance and Gift Tax Act of 2015. The relevant provision stipulates that profits gained by a 'special relation' of the 'major shareholder' through convertible bonds are taxable. It states that taxation applies even if the 'economic substance' is similar.

At the time, Moon was the CEO and the second-largest shareholder of ShillaJen, and Mr. Cho was Moon's uncle (a special relation). Although Moon was not the largest shareholder, the tax authorities judged that taxation was possible considering that he was the CEO and second-largest shareholder, which was economically similar.

Regarding this, Mr. Cho's side argued, "It should be seen as setting a 'limit' so that gift tax is not imposed if one is not a special relation of the major shareholder, and it does not apply even if the economic substance is similar," and filed a lawsuit to cancel the tax.

The first and second trials delivered conflicting judgments on the 'similarity of economic substance.' The first trial canceled all gift tax imposition, stating, "If the law is applied this way, the scope of gift tax would expand indefinitely to general investors exercising warrants, leading to arbitrary taxation by tax authorities, undermining legal stability in tax law relations and excessively infringing on taxpayers' predictability."

On the other hand, the second trial reversed the decision, ruling that the economic substance was indeed similar and that the gift tax imposition was justified. The court stated, "Moon clearly was to become the largest shareholder after exercising the warrants received together with his uncle Mr. Cho, so his status was similar to that of the largest shareholder."

However, the Supreme Court overturned the second trial ruling, stating that the relevant legal provision clearly limits gift tax imposition only to 'special relations of the major shareholder.' The Supreme Court explained, "The provision should be seen as setting the scope and limits of gift tax by restricting the taxable subjects and range. Unless there are special circumstances such as separate regulations taxing profits gained by persons who are not special relations of the major shareholder, gift tax cannot be imposed."