Introduction

The Tax Tribunal of Korea (TAS) recently issued a notable ruling in a case involving the termination of a share purchase agreement due to a seller’s default. The Tribunal dismissed the tax authority’s allegations of “collusion between parties” and recognized the taxpayer’s right to a post-event correction (refund) of capital gains tax and securities transaction tax. Represented by Sung-eun Cho, Managing Partner at Sehan LLC, this case establishes clear judicial standards for when a court’s “Recommendation for Reconciliation” serves as a valid ground for tax correction under the Framework Act on National Taxes.

Arguments of the Tax Authority: Formal Deficiencies and Allegations of Tax Evasion

The competent tax office (the Disposition Agency) denied the taxpayer’s request for a refund, raising the following objections:

Lack of Explicit Terms: The court’s “Recommendation for Reconciliation” did not explicitly state that the “agreement is terminated,” thus failing to prove a change in the taxable transaction.
Allegation of Collusion: The fact that the seller (the defendant) immediately admitted the plaintiff’s claims in court suggested a “collusive agreement” solely intended to secure a tax refund.
Failure to Restore Status Quo: The tax authority argued that since the shares were not physically returned to the seller, the termination of the contract could not be legally recognized.

The Tribunal’s Ruling: Focus on Substantial Legal Relations and Inevitable Circumstances

The Tax Tribunal rejected the authority’s formalistic interpretation and fully accepted the arguments presented by Sehan LLC.

Substantial Interpretation of the Court’s Decision: The Tribunal noted that the taxpayer had clearly expressed the intent to terminate the contract through the lawsuit, and the court subsequently ordered the return of the shares. Even without the word “termination,” an order to return shares inherently presumes the termination of the underlying contract. Thus, it constitutes a “settlement with the same effect as a final judgment” under Article 45-2(2)1 of the Framework Act on National Taxes.
Rejection of Tax Evasion Allegations: Before filing for termination of the share purchase agreement, the taxpayer had spent years attempting to collect the payment through lawsuits and execution proceedings (attachment and collection orders). The Tribunal ruled that the decision to terminate the contract was a legitimate effort to minimize losses after realizing that payment was impossible due to prior attachments by other creditors, rather than a collusive act for tax evasion.
Recognition of “Inevitable Circumstances” regarding the Return of Shares: The Tribunal acknowledged that the physical return of shares was hindered by external factors, such as attachments by third parties and the seller’s insolvency and flight overseas. It concluded that there were inevitable reasons for the failure to restore the status quo, and such circumstances should not deprive the taxpayer of their right to a correction.

Conclusion and Implications

This ruling reaffirms that the requirements for post-event correction should be interpreted by considering the overall context of the litigation, the taxpayer’s substantial efforts to enforce the contract, and the specific unavoidable hurdles in restoring the status quo. This case serves as a meaningful precedent for protecting the rights of taxpayers who suffer double financial loss due to a counterparty’s default.

Lead Counsel: Sung-eun Cho (Managing Partner, Sehan LLC). With 18 years’ experience in corporate and tax litigation, Sung-eun Cho provides innovative legal solutions to protect taxpayer rights in complex disputes involving corporate governance and tax controversies.