On August 20, 2020, the Supreme Court upheld the High Court’s decision, and affirmed shares acquired by an offshore SPC cannot be subject to the “deemed gift” provision under the Inheritance and Gift Tax Law (the “IGTL”) and thus the gift tax assessment of approximately KRW 160 billion should be canceled in its entirety.  

Case Overview 

A Chairperson and major shareholder of a large company established an offshore SPC, and subsequently the SPC acquired shares of a domestic company in its name (or in the name of a foreign financial institution based on the custody agreement).  The Korean tax authorities asserted that the share acquisition by the SPC was subject to the “deemed gift” provision under the IGTL since in essence the Chairperson had true ownership of the shares and simply used the SPC as a nominee owner by transferring such shares to the SPC as a gift.  Accordingly, the tax authorities assessed gift tax to the Chairperson of approximately KRW 160 billion, which the Trial Court agreed and ruled in favor of the tax authorities.  The Chairperson appealed such decision to the High Court and newly appointed Kim & Chang as its legal representative from the High Court proceeding.  

After extensive debate and deliberation, the High Court ruled the fact that the shareholder (i.e., Chairperson) has control and manages the SPC does not necessarily mean the SPC is a nominee, or the Chairperson is the true owner of the shares.  Thus, the High Court decided the gift tax assessment was illegitimate and should be canceled.  Recently, the Supreme Court also upheld the High Court’s decision on grounds that the tax authorities have a burden of proof on whether there was a nominee relationship/agreement between the involved parties.

This is the leading “nominee vs. owner” case, in which the Supreme Court clarified that the tax authorities, and not the taxpayer, have to effectively prove whether the parties entered into a nominee arrangement.  This outcome will have a significant impact on subsequent cases concerning the same issue.

Our Representation

After the taxpayer lost at the Trial Court (represented by another Korean law firm), Kim & Chang re-analyzed the issue from various angles and developed creative and new arguments after a thorough research of other relevant Supreme Court cases also involving an offshore SPC.  This approach was successful as both the Supreme Court and High Court accepted our arguments and ruled in our favor.

The issue at hand involved multiple areas of the law, including, taxation principles, nominee vs. owner principles, and rules relating to domestic shares held in custody by a foreign financial institution.  In order to effectively handle an issue that was spread across several areas, we put together a team of experts from our tax, litigation and finance practices, and closely worked together throughout the litigation to deliver the best possible outcome.