Stock Gift Tax 4 Billion Won Appeal Lawsuit... Court Rules "Government Must Prove 'Special Relationship'"

[Asia Economy Reporter Kim Daehyun] A domestic pharmaceutical company CEO who received shares from the largest shareholder according to an agreement won the first trial of an administrative lawsuit challenging the tax authorities' imposition of tens of billions of won in gift tax. The court ruled that gift tax cannot be imposed unless it is proven that the largest shareholder who transferred the shares was in a special relationship that allowed access to undisclosed information.

According to the legal community on the 27th, the Seoul Administrative Court, Administrative Division 6 (Presiding Judge Lee Jooyoung) ruled in favor of plaintiff A, the CEO of a pharmaceutical manufacturing company, in the first trial of a lawsuit to cancel the imposition of approximately 4 billion KRW in gift tax by the Yangcheon Tax Office.

Earlier, A established pharmaceutical company B in 1998 and received investment funds from a venture capital firm under the condition that "all issued shares of B are transferred to the investment firm without involvement in control or management, and if the management situation improves, 10% of the shares will be repurchased by A's side."

Subsequently, B's management condition improved, and in 2005, an option contract was drawn up granting A the right to repurchase 10% of B's shares. Through exercising the option, stock splits, and free capital reductions, A came to hold a total of 468,017 shares by 2007. B's shares were listed on KOSDAQ in 2010.

In this regard, the tax authorities, after conducting a stock change investigation, judged that A acquired shares from the investment company, which was a special related party and the largest shareholder, and in 2018, issued a gift tax notice for a total of 4,094,410,000 KRW on the gifted portion.

The first trial ruled in favor of A, stating that "the imposition of gift tax is illegal as it does not meet the tax requirements." The court first found that the tax authorities' assumption that the investment company was a special related party at the time A acquired the shares was incorrect. It was determined that the investment company, as a financial investor, only checked management performance and was not in a position to use undisclosed management-related information beyond simply being the largest shareholder.

The court stated, "The donor requirement is a fact of the tax imposition condition, so the tax authorities must prove it in principle," and added, "The stock transfer in this case was due to A achieving management performance and seems unrelated to the listing. There is no circumstance to believe that discussions or information related to the (listing) existed at the time of share acquisition."

The tax authorities appealed this ruling.

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