Pharmaceutical Company CEO Loses Appeal in Second Trial Over 4 Billion Won Stock Gift Tax Dispute

A domestic pharmaceutical company CEO who filed an appeal after being imposed with tens of billions of won in gift tax on the grounds of having a special relationship that allowed the transfer of shares from the largest shareholder and the exchange of undisclosed information lost the appeal trial.

According to the legal community on the 2nd, the Seoul High Court Administrative Division 11 (Chief Judge Choi Suhwan) overturned the first trial ruling that favored Kim, the CEO of a domestic pharmaceutical company, in the appeal trial of the cancellation lawsuit against the imposition of 4 billion won in gift tax by the Seoul Yangcheon Tax Office, ruling against the plaintiff.

The appellate court judged that Kim fell under the category of 'special related persons' as defined by the former Inheritance Tax and Gift Tax Act (Inheritance and Gift Tax Act). The court stated, "At the time of transfer, the investment company, which was the largest shareholder, held more than half of the total issued shares of the pharmaceutical company," and added, "At the time of acquiring the shares, Kim was the CEO of the pharmaceutical company controlled by the investment company through investment, thus qualifying as an 'employee,' so under the relevant laws and enforcement ordinances, both parties are in a special relationship."

According to the former Inheritance and Gift Tax Act and related enforcement ordinances, when the largest shareholder who can use undisclosed information transfers shares to or allows a special related person to acquire shares for consideration, and the shares are listed on the securities market within five years, a certain portion of the profit gained by the special related person is subject to gift tax. This is to correct the issue of irregular wealth inheritance or controlling affiliates without tax burden by exploiting large listing gains using insider information.

Kim established a pharmaceutical company in Korea in 1998 but received investment funds from a foreign investment company to secure substantial operating capital. The investment company set the condition that "Kim's side transfers all issued shares to the investment company, but if the company's management improves, 10% of the shares will be returned. The investment company will not be involved in the pharmaceutical company's management."

Subsequently, the pharmaceutical company's management condition improved, and in 2005, an option contract was created granting Kim the right to repurchase the pharmaceutical company's shares. Kim exercised the option, conducted a par value split, and a free capital reduction to repurchase the shares in 2007, and the pharmaceutical company's shares were listed on KOSDAQ in 2010.

The tax authorities imposed 4.1 billion won in gift tax in 2018 on the listing gains, on the grounds that Kim received shares from the investment company, which was a special related person and the largest shareholder.

Kim's side filed a lawsuit in objection. During the trial, they argued, "The company's listing was entirely due to Kim's efforts and decision-making. There was no undisclosed information indicating that the listing was scheduled."

Last year, the first trial ruled in favor of Kim. Even if the investment company was the largest shareholder, it was necessary to separately examine whether undisclosed information could be used, and it was judged that the 'special relationship' between the two parties, which was the premise for imposing gift tax, was not proven.

The tax authorities appealed the first trial ruling and won in this appeal trial.

This content was produced with the assistance of AI translation services.