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1. What is the deemed acquisition tax?
When a majority shareholder becomes a shareholder by acquiring stocks of a corporation, the majority shareholder is deemed to directly acquire real estate, etc. of the corporation in proportion to his/her shareholding ratio, and is therefore liable for acquisition tax (Article 7, Paragraph 5 of the Local Tax Act).
In other words, if you acquire more than 50% of the stocks of a company that holds real estate or other acquisition taxable items, you can exercise voting rights at the general shareholders' meeting and control the management of the company through the acquisition of the stocks, so the acquisition of stocks is considered to have the same economic effect as acquiring the real estate of the company, and acquisition tax must be paid.
2. Taxpayer liable for acquisition tax
The definition of a majority shareholder liable to pay acquisition tax is as follows (Article 46, Paragraph 2 of the Local Tax Basic Act).
“A person who actually exercises rights related to a corporation when the total number of shares owned by the shareholder and his/her special related person exceeds 50/100 of the total number of issued shares or the total amount of capital contribution of the corporation.”
However, if one becomes a majority shareholder by acquiring stocks issued at the time of incorporation, this is not considered acquisition and therefore no acquisition tax is payable.
In addition, even if stocks are transferred between controlling shareholders, or if a person who is a relative or other special relationship with an existing controlling shareholder but was not a shareholder of the corporation receives part of the stocks from an existing controlling shareholder and becomes newly included as a controlling shareholder, the transfer is not subject to the deemed acquisition tax as long as there is no change in the ratio of total stocks or shares held by all controlling shareholders.
3. Tax base for deemed acquisition tax
When calculating the deemed acquisition tax of a controlling shareholder, the taxable standard is, in principle, the amount calculated by multiplying the accounting book value of the acquisition taxable assets of the relevant corporation by the percentage of equity acquired by the controlling shareholder. According to many precedents, the accounting book value, which is the basis of the taxable standard, reflects capital expenditures incurred after acquisition, such as the capitalization amount of borrowed interest, the amount of revaluation increase, etc., or even if the company does not arbitrarily reflect depreciation, the amount is mostly recognized as is unless it is significantly unreasonable due to falsehood, omission, etc. This seems to be because shareholders evaluate the corporation through the corporation's books when acquiring stocks, so it is not unreasonable to regard it as acquiring the value of the assets recorded in the corporation's books.
However, in recent case law, there are cases where the reserve for land, which is an asset deduction item, is not reflected in the tax base for deemed acquisition tax. This is because, unlike the accumulated depreciation amount due to wear and tear of assets, the reserve for inventory valuation is an estimate of cash flow by mixing multiple assumptions that may occur in the future, so the amount can increase or decrease depending on changes in the original assumptions, and therefore, it is difficult to regard the accounting book value reflecting the reserve for inventory valuation as the objective value of the real estate due to its nature.
4. Conclusion
If a person becomes a majority shareholder by acquiring more than 50% of the stocks of a corporation, the property subject to acquisition tax held by the corporation is deemed to have been acquired by the majority shareholder, and thus, a deemed acquisition tax payment obligation arises. Therefore, if it is expected that a person will become a majority shareholder, it is necessary to prepare for an additional outflow of funds called deemed acquisition tax in addition to the stock acquisition price.
However, in the case of real estate-holding corporations, there are many cases where they do not recognize depreciation or recognize revaluation surplus due to the incentive to increase the value of real estate in order to obtain bank loans. However, the tax authority recognizes adjustments in the direction of increasing assets (depreciation not recorded and revaluation surplus) as the standard amount for acquisition tax as the accounting book value, but tends not to easily recognize adjustments in the direction of decreasing assets (inventory asset valuation allowance).
Accordingly, in order to reduce the burden of the deemed acquisition tax, one can consider becoming a majority shareholder by gradually acquiring shares, such as acquiring 40% of the company's shares and simultaneously purchasing convertible bonds that can secure an 11% stake upon conversion and converting them upon maturity, so that depreciation is reflected as much as possible in the accounting book value.
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