How is the market price of a real estate lease set when a business leases property to a related party at an unduly low rent, and when does a failure to file a return count as 'fraud or other wrongful act'? — Decision 2017Du69977

Question

Article 41(1) of the Income Tax Act allows the tax office to compute a resident business operator's income without regard to acts or computations that improperly reduce the tax burden through transactions with related parties, and Article 98(2)(ii) of its Enforcement Decree lists providing money, other assets or services to a related party free of charge or at a low rate as such a case. Where a business rents real estate to a related party for an unreasonably low price, the question is how the market price of the real estate leasing service is calculated.

The decision also raises what counts as 'fraud or other wrongful act' or 'wrongful act' under the former Framework Act on National Taxes, where such conduct in failing to file a tax base return by the statutory deadline triggers a surcharge of 40 per cent of the calculated tax. Here the taxpayers placed shares in a company in others' names and reported the arrangements in the form of share purchases, and the tax offices imposed gift tax including that surcharge.

Material to check

The statutes are Article 41 of the Income Tax Act, under which the tax office may disregard a resident's acts or computations that improperly reduce tax on dividend, business or other income through transactions with related parties, and Article 98 of its Enforcement Decree, which defines related parties and lists the cases of improper reduction, including providing money, assets or services to a related party free or at low rates. The decision also cites Article 13(1)(iv) of the former Value-Added Tax Act (before its complete amendment by Act No. 11873 of 7 June 2013), Articles 50(1) and 52(1) of its former Enforcement Decree (before its complete amendment by Presidential Decree No. 24638 of 28 June 2013), Article 47-2(2)(i) of the Framework Act on National Taxes in the version before its amendment by Act No. 11124 of 31 December 2011 and Article 47-2(2) in the version before its amendment by Act No. 11873 of 7 June 2013, which the decision calls together 'the former Framework Act', and Article 27(2)(vi) of its former Enforcement Decree (before its amendment by Presidential Decree No. 23592 of 2 February 2012); those former provisions are named here as the decision cites them. The gift tax assessments were made under Articles 60(3) and 63(1)(i)(d) of the former Inheritance and Gift Tax Act and Articles 54(1) and 56(1)(i) of its former Enforcement Decree.

The decision is Supreme Court Decision 2017Du69977 (8 July 2021), which set aside parts of the Seoul High Court's judgment of 15 September 2017 (2016Nu77355) and remanded them. On the meaning of 'fraud or other wrongful act' it cites Decision 2015Du44158 (13 April 2017) and Decision 2018Du36004 (13 December 2018); the texts of those two decisions could not be opened, and nothing more is said about them here.

Possible readings

On the first holding, the decision reads the current provisions on the denial of improper computations together with the former Value-Added Tax Act provisions this way: where a resident business operator rents real estate to a related party for an unreasonably low price, the market price of the real estate leasing service, which is the standard for the denial of improper computations under the Income Tax Act and the tax base under the Value-Added Tax Act, is the price the operator continuously charged persons other than related parties in circumstances similar to the transaction, or the price generally traded between third parties. If no such price exists or the market price is unclear, the amount calculated by a method prescribed by law, such as a value appraised by an appraisal corporation under the Act on Public Notice of Real Estate Prices and Appraisal, applies.

On the second holding, 'fraud or other wrongful act' or 'wrongful act' in the former Framework Act on National Taxes and its related provisions means a deceitful or other wrongful positive act that makes the assessment and collection of national taxes impossible or markedly difficult. Simply failing to file a return required by tax law, or filing a false return, without circumstances showing an intention actively to conceal, does not fall within it.

A third reading concerns the deemed gift of property held in another's name. Where the person entrusting the name creates the appearance that a share sale or the like took place when placing the shares in the nominee's name, and reports to the tax office on the basis of contracts and account transaction records matching that form, the decision treats this as merely an act that customarily accompanies the entrustment of shares. Unless there are special circumstances, such as conduct reaching the degree of making the assessment and collection of the gift tax borne by the nominee impossible or markedly difficult, it does not amount to 'fraud or other wrongful act' for the surcharge for improper failure to file gift tax.

What the decisions held

On the VAT and comprehensive income tax assessments against Plaintiff 1, the decision set the assessments aside and remanded them. The tax offices had taken the market price of the leasing service to be the sublease rents Jinmison Development Co., Ltd. received, except that for the 4th and 5th floors while it ran the motel the market price was taken as the monthly rent of KRW 11,500,000 that Plaintiff 1 had previously received, and had added the difference to Plaintiff 1's supply value and income. The decision found from the record that, unlike before, the lease provided that the tenant would handle facility repairs and maintenance, bear taxes and utility charges for the building, and resolve disputes with tenants and take all responsibility for them, so the agreed rent reflected the costs and responsibilities assumed in Plaintiff 1's place. The sublease rents, which equalled the rent Plaintiff 1 had previously received, could therefore not simply be taken as the market price without regard to those costs and responsibilities, and the court below had misunderstood the law on market price in the denial of improper computations for low-priced real estate leases.

On the surcharges for improper failure to file gift tax against Plaintiffs 2 to 7, the decision also set the surcharge portions aside and remanded them. The reasons and the record showed that the appearance created, that Plaintiffs 2 and 3 paid in their capital contributions with their own funds and Plaintiffs 4 to 7 likewise paid the share purchase prices with their own funds, was merely an incidental act customarily following the entrustment of shares; that Plaintiffs 2 to 7, who merely bore gift tax as a result of the nominee arrangement, could hardly be said to have committed wrongful positive acts such as the name entrustment itself with the purpose of evading that tax; and that no other positive act making assessment or collection impossible or markedly difficult appeared. So no 'fraud or other wrongful act' could be found, and the court below, which treated the funding transactions at the time of the name entrustment as such conduct, had misunderstood the law.

The decision dismissed the remaining appeals of Plaintiffs 4 to 7. On their argument that closing the lodging business put them in the case of 'a change in the main business type' under Article 17-3(1)(iii) of the former Enforcement Rule of the Inheritance and Gift Tax Act, so that the weighted average of net profits and losses for the last three years could not be used to value the shares, the court below held that subleasing had been the main business even before the closure, and the decision agreed, finding no misunderstanding of the law. Plaintiffs 2 and 3 had appealed only as to the surcharge portion of their gift tax assessments.

Points left open

The decision does not fix the market price of the leasing service itself; that is left to the court on remand. It states the order of methods — continuing prices with non-related persons in similar circumstances or prices generally traded between third parties, and only where these do not exist or the price is unclear, an appraised value — but it does not say which comparable price applies to this building, nor how the costs and responsibilities assumed by the tenant are to be reflected in the calculation.

The decision also leaves the outer edge of 'special circumstances' unsettled. It says that unless circumstances exist such that the assessment and collection of the nominee's gift tax became impossible or markedly difficult, creating the appearance of a share sale and reporting accordingly is not a wrongful act, but it does not identify what conduct would cross that line, and the two decisions it cites on the point could not be read for this brief.

When to reconsider

This brief would need revision if a judgment on remand fixes the market price of the leasing service or its calculation method, if a later Supreme Court decision states what 'special circumstances' make a nominee trust's accompanying acts a 'fraud or other wrongful act', or if Article 47-2 of the Framework Act on National Taxes, Article 41 of the Income Tax Act or Article 98 of its Enforcement Decree is amended.

Statutes referred to

• 소득세법 제41조
• 소득세법 시행령 제98조
• 구 부가가치세법 제13조
• 구 부가가치세법 시행령 제50조, 제52조
• 구 국세기본법 제47조의2
• 구 국세기본법 시행령 제27조

Decisions referred to

• 대법원 2021. 7. 8. 선고 2017두69977 판결 · Decision ledger

Verification status

All texts were read at the National Law Information Center on 24 October 2026. The decision was read in its published holdings, summary and reasons, and Article 41 of the Income Tax Act and Article 98 of its Enforcement Decree in their current text, while the other cited articles were available only as former versions and the two cited decisions only by number.