Newsletter | August 2015, Issue 2
	TAX
	Supreme Court affirms High Court’s decision rejecting the characterization of consideration on share transfer as loan
	The Plaintiff, a Korean company, transferred shares in its subsidiary to a related party, and received 5% of the total consideration on the share transfer on the date of the share purchase agreement (the “SPA”).  One month later, the Plaintiff received another 5%, and then received the remaining balance after two years from the date of the SPA with interest at the rate of 5% p.a. In the SPA, the parties had agreed to the three separate payment dates, while title to the shares would transfer when the second payment is due.
	The tax authorities argued that the remaining balance of the consideration on the share transfer is in substance a loan.  Therefore, the tax authorities imposed corporate income tax to the Plaintiff by adding the difference between the deemed interest income on the loan (computed at the statutory rate) and the actual interest income recognized to taxable income.  In addition, certain portions of the Plaintiff’s interest expense was denied as cost associated with making a “non-business related” loan to its affiliate.
	The High Court ruled that the divesture of the subsidiary through the share transfer was indeed related to Plaintiff’s business, as it was part of an effort to focus on its core business.  The High Court also ruled that the remaining balance was agreed to be paid two years after entering into the SPA.  Thus, the court found it difficult to accept the argument that the remaining balance of the consideration on the share transfer should be viewed as a loan from the second payment date (for the reason that title to the shares passed at the time of the second payment).  The Supreme Court affirmed the High Court’s decision.
	The outcome of the case is significant, because the courts respected the intent of the parties as stipulated in the SPA despite longer than usual payment period for the share transfer and the transfer of title to the shares before the full payment.
	Kim & Chang successfully represented the Plaintiff in this case by presenting legal arguments to overcome the Defendant’s claim of denial of unfair transaction (domestic transfer pricing rule) and non-business related loan.
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