[Constitutional Court Decision]
The Constitutional Court has ruled that the provision allowing a reduction in gift tax for children inheriting small or medium-sized enterprises from their parents, but excluding this special treatment if the business is not succeeded, does not violate the Constitution.
On July 17, the Constitutional Court unanimously ruled constitutional in the case (2020Hun-Ba557) filed by Mr. A, who claimed that Article 30-6, Paragraphs 1 and 2 of the former Restriction of Special Taxation Act were unconstitutional.
The Court stated, "The provisions granting special gift tax treatment for business succession and the provisions excluding such treatment if the business is not succeeded do not violate the principle of no taxation without law, the principle of parliamentary reservation, the principle of non-delegation, or the principle of tax equality, and therefore do not violate the Constitution." However, the Court dismissed the part regarding the exclusion of the special treatment when the business is succeeded but not actually managed, stating that it was not relevant to the case at hand.
[Case Summary]
In 2010, Mr. A received a 30% stake in a small or medium-sized enterprise from his father and, in accordance with Article 30-6, Paragraph 1 of the former Restriction of Special Taxation Act, reported and paid gift tax by deducting 500 million won from the value of the gifted assets and applying a 10% tax rate. In 2016, Mr. A was appointed as the company's CEO. However, the tax office excluded the special treatment and imposed an additional gift tax of over 400 million won, citing that Mr. A had not taken office as CEO within five years from the date of the gift.
Mr. A argued that "delegating the requirements for business succession to a Presidential Decree violates the principle of no taxation without law and the principle of parliamentary reservation." He also claimed that "while a beneficiary who does not engage in the business after succession can still receive the special treatment if there is a justifiable reason, a beneficiary who does not succeed the business cannot receive the benefit even with a justifiable reason, which violates the principle of equality."
[Court's Judgment]
The Court did not accept the argument that delegating the requirements for business succession to a Presidential Decree was unconstitutional.
The Court stated, "The legislative purpose of the special gift tax regime for business succession is to support the continued operation of family businesses by ensuring that the necessary technical and managerial know-how is passed down to future generations, thereby maintaining business continuity and invigorating the economy. The method of business succession delegated to a Presidential Decree by Article 30-6, Paragraph 1 of the former Restriction of Special Taxation Act concerns detailed and technical matters that may change depending on economic conditions and the business environment."
The Court further explained, "Business succession is generally understood to mean the transfer of ownership or management rights of a small or medium-sized enterprise, and it is sufficiently predictable that the Presidential Decree would set a requirement to become CEO within five years from the date of the gift. Therefore, it cannot be considered a violation of the principle of no taxation without law or the principle of non-delegation." The Court also rejected the claim of violation of the principle of equality.
The Court stated, "In the special gift tax regime for business succession, fulfilling the requirement of succession through transfer of management rights is of great significance. If the beneficiary violates post-succession management obligations, the special treatment is maintained if there is a justifiable reason. However, if the business is not succeeded in the first place, it is not clearly arbitrary or irrational to exclude the special treatment even if there is a justifiable reason."
The Court concluded, "The part of Article 30-6, Paragraph 1 of the former Restriction of Special Taxation Act concerning 'cases where business succession is carried out as prescribed by Presidential Decree' and the main text of Paragraph 2 concerning 'cases where business succession is not carried out as prescribed by Presidential Decree' are both not in violation of the Constitution."
However, regarding the exclusion of the special treatment when the business is succeeded but not actually managed, the Court stated, "This does not apply to the present case and therefore does not constitute a prerequisite for the trial," and dismissed that part.
An Jaemyung, Law Times Reporter
※This article is based on content supplied by Law Times.
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