‘Spouse Gifted’ Shares Transferred and Cancelled After Corporation Transfer… Court Rules “Not a Tax Evasion Transaction”

The court ruled that it cannot be conclusively determined as a sham transaction for tax evasion solely because the company canceled the shares after they were transferred to the company by the spouse as a gift.

Seoul Administrative Court.

According to the legal community on the 1st, the Administrative Court of Seoul, Administrative Division 6 (Presiding Judge Na Jin-yi) ruled in favor of Mr. A in a lawsuit filed against the Jamsil Tax Office head seeking cancellation of the comprehensive income tax imposition.

In November 2020, Mr. A gifted 1,000 shares of a toy company to his spouse, Ms. B, who is the CEO of the company. Ms. B assessed the market value of the shares at 604 million KRW and paid a gift tax of 388,000 KRW. Subsequently, in December 2020, Ms. B transferred the gifted shares to the company for 610 million KRW, and on the same day, the company canceled these shares. The company paid Ms. B approximately 609 million KRW in share transfer proceeds in January and February of the following year, and Ms. B deposited 590 million KRW into her fund account.

The tax authorities judged this transaction as a sham transaction to avoid deemed dividend income and issued a revised comprehensive income tax notice of approximately 240 million KRW to Mr. A. Deemed dividend income refers to economic benefits received by investors through corporate capital cancellation, etc. Although not formally dividends, they are taxed as if they were dividends in substance.

Mr. A filed an administrative lawsuit, arguing that "the gifting, transfer, and cancellation of shares each have independent economic purposes and substance, and were conducted according to the genuine intentions of the parties."

The court ruled in favor of Mr. A. The bench stated, "It is difficult to evaluate that Mr. A directly transferred the shares to the company, and there is no evidence to support this." Furthermore, "The share transfer proceeds from this transaction were paid to Ms. B, who transferred them to her fund account, so the proceeds appear to belong to Ms. B," and "there is no evidence to suggest that the share transfer proceeds belonged to Mr. A."

The court also concluded, "It cannot be definitively stated that the gifting and transfer of shares formed an irrational form or appearance solely for the purpose of avoiding the burden of deemed dividend income tax, just because tax savings were achieved through the spousal gift deduction system, the gift value evaluated by the supplementary evaluation method under the Inheritance and Gift Tax Act and the share transfer proceeds were close, resulting in Ms. B bearing almost no capital gains tax, or because consulting was received from a consulting company."

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