Acquiring Dormant Corporations to Obtain Metropolitan Real Estate... Court Rules "Heavy Taxation Imposition Justified"

A court ruling has determined that imposing a heavy acquisition tax on a corporation that acquired a ‘dormant corporation’ with no business performance and obtained real estate in a metropolitan area is justified.

According to the legal community on the 11th, the Administrative Court of Seoul, Administrative Division 5 (Presiding Judge Kim Sun-yeol) ruled against real estate trust corporation A in a lawsuit filed against the Yeongdeungpo District Office seeking cancellation of the acquisition tax and other imposed charges.

In November 2016, Corporation A acquired 100% of the issued shares of Company B, a computer system development and sales company (first acquisition), then changed its trade name, altered its business purpose to real estate development, and replaced its registered executives. In July 2017, Corporation C acquired 100% of Company B’s issued shares from Corporation A (second acquisition).

In February 2019, Corporation A entered into a trust contract with Company B and developed parcels of land acquired by Company B within Yeongdeungpo District. Subsequently, Corporation A constructed buildings on the related real estate and completed ownership preservation registration on December 24, 2020.

The Yeongdeungpo District Office imposed acquisition tax and additional taxes totaling over 800 million KRW on Corporation A, judging it subject to heavy taxation under the Local Tax Act.

The Enforcement Decree of the Local Tax Act defines a dormant corporation as one that has had no business performance for two years prior to the acquisition date and has replaced more than half of its executives within one year after the acquisition date.

Furthermore, the Local Tax Act stipulates that if a dormant corporation is acquired and real estate in a metropolitan area is obtained through that corporation within five years, a heavy acquisition tax shall be imposed. It also mandates applying the heavy tax rate to trust property acquired by a trustee under the Trust Act. The Enforcement Decree specifies that the acquisition purpose of the trust property, the establishment, installation, or relocation timing of the corporation or office, etc., shall be judged based on the trustor.

Corporation A filed a petition for adjudication with the Tax Tribunal in September 2021, but after it was dismissed, they filed an administrative lawsuit.

The court ruled in favor of the Yeongdeungpo District Office. It determined that Company B was indeed a dormant corporation at the time of the first acquisition in November 2016.

The court stated, “If a company is conducting normal business activities, it would naturally incur necessary minimum expenses such as salaries and rent. However, according to the income statement of the company in question, there was no expenditure on employee salaries from January 2014 to December 2016.”

It continued, “Although Corporation A had the intention to purchase related real estate and promote development projects before acquiring the company in question, it took the form of acquiring this company, which had no business performance for a while, belatedly, and created the appearance that the company was conducting business activities before and after, indicating an intention to evade the heavy tax regulations on real estate acquisition in metropolitan areas after the corporation’s establishment. Therefore, it is reasonable to conclude that the company was a dormant corporation at the time of the first acquisition,” concluding, “It is difficult to interpret that the company was not a dormant corporation at the time of the first acquisition.”

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