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Judgment Regarding Cancellation of Imposition of Registration Tax, etc. (Case No. 2007Du26629)

2009.01.02

1. Summary of Facts 
 
Star Holdings, a Belgium corporation, purchased the stocks of the Plaintiff (a corporation established in 1996 under the name of ‘C&J Trading Co., Ltd.’, but currently not in business), and on the same day changed Plaintiff’s name to ‘Star Tower Co., Ltd.’ (which again changed to its current name, Gangnam Finance Center Co., Ltd. in 2006). After terminating the employment of all former directors and auditors, the Plaintiff appointed new directors and auditors, drafted new articles of incorporation, and completed the registration reflecting such changes. 
 
The Plaintiff increased its capital to KRW 5,368,750,000 around June 2001 and completed the registration thereof. Around August 2001, Plaintiff purchased from Hyundai Development Company a piece of land located in 737 Yeoksam-dong Gangnam-gu, Seoul as well as the building on such land (hereinafter the “real property of this case”), completing the registration for the real property of this case. In registering the above-mentioned capital increase and the real property of this case, Plaintiff applied a general tax rate and reported and paid its registration tax and local education tax accordingly. 
 
 
2. Tax Imposition 
 
The Defendants (the administrative offices) imposed the registration tax and local education tax on the Plaintiff on May 29, 2006, applying a heavier tax rate than the one previously reported and paid by the Plaintiff. Their reason for such heavy taxation was that the Plaintiff should be deemed a newly formed corporation, since (1) all of its corporate stocks that remained unprofitable after the closing down of its business was transferred, (2) the corporate name and all of its directors and auditors were changed, and (3) the Plaintiff was no longer identical to the previous corporation. The Defendants thus regarded the transactions above as a capital increase and acquisition of real property within five (5) years of incorporation in a metropolis (Local Tax Act, Article 138) and thereby applied the heavy tax rate. 
 
 
3. Summary of Decision 
 
According to the ‘principle of taxation’ provided in the Constitution of Korea, an expanded construction of that principle for mere administrative convenience is not allowed, notwithstanding the necessity of tax imposition. Taxpayers are entitled to select one law over others for the purpose of pursuing their economic interests in conducting their business. Furthermore, a separate and specific prohibition clause is required in order for the administrative office of taxation to negate the effectiveness of such conduct under the ‘principle of actual taxation.’ 
 
According to Korean Civil Law and Commercial Law regarding incorporation, both an act of incorporation and registration of incorporation are generally required for the incorporation to be complete. Therefore, incorporation cannot be effected without registration, and once incorporation has been accomplished through such registration, there cannot be a new incorporation through the same registration unless such corporation becomes extinct. 
 
Under the legal principles discussed above, it is impermissible to construe the tax regulation expansively or analogically without reasonable cause and to impose heavy registration tax on the Plaintiff by deeming the Plaintiff’s conduct as ‘incorporation’ under the Local Tax Act. This is true even if it is necessary to regulate the Plaintiff’s conduct that is considered an evasion of heavy registration tax. Any action to the contrary will require a separate provision which is different from the aforementioned general legal principles (or a specific legal provision that invalidates the Plaintiff’s conduct of avoiding tax).

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