​If a majority shareholder of a company takes over or acquires the bonds with stock warrants of the company (including warrants if they are detachable) in excess of the number of bonds that the shareholder would be allotted in proportion to the number of shares in his/her possession under equal conditions, the profit arising from the difference between the market price and the exercise price of the conversion value would be subject to taxation as gift tax, pursuant to Article 40(1)1(ii) and 2(ii) of the Inheritance Tax and Gift Tax Act).

Nevertheless, the above Article provides so because it deems that “the case of a takeover or acquisition from an underwriting pursuant to Article 9(12) of the Capital Markets Act” is equivalent to the case of a takeover or acquisition of the bonds with stock warrants, thus subject to taxation. In this regard, where a company issues bonds with warrants as private equity funds and facilitates financing from securities companies, etc., and the majority shareholder purchases warrants only detached from bonds with warrants as per the request of the financing securities company, there had been historically a long debate between taxpayers and the tax authorities over whether a gift tax can be imposed on the profit obtained by the majority shareholder’s exercise of the bond with warrant based on the theory that the securities company corresponds to “the underwriter” as prescribed in the law and the majority shareholder has acquired warrants from such “underwriter.”

The Supreme Court’s judgment from this case put an end to the long-disputed debate above. DR & AJU actively proposed the contextual and systematic interpretation of the relevant Article at issue as well as the interpretation on the nature of an underwriter to argue that in order for someone to be an underwriter, such person must be authorized for acts of subscription, private equity, or sale of securities from the issuing company, and where a third party is imposed to acquire securities, such acquisition act should constitute subscription, private equity, or sale of securities that is for the benefit of the issuing company that is delegating such authority. The Supreme Court adopted DR & AJU’s argument as presented and determined that in order for someone to fall under the definition of the “underwriter” pursuant to Article 9(12) of the Capital Markets Act, such person is “someone who acquires convertible bonds, etc. with the purpose to propose to a third party to purchase certain convertible bonds for the benefit of the issuing company.”

Therefore, the lesson from this case is that, where a company wishes to raise financing from a securities company by issuing private equity funds such as bonds with warrants and where the majority shareholder has to acquire certain warrants in relation to the financing, the majority shareholder should seek a legal professional’s advice in understanding the details of the terms and conditions of the relevant contract to ensure it would not be unfairly taxed from this transaction.