A merging corporation (the surviving corporation), Company L, tried to merge a merged corporation (the dissolved corporation), Company N, but Company L had already acquired 51% of Company N’s equity one year before the date of the merger registration. Nonetheless, according to the Corporate Tax Act, in the event that a merging corporation acquires stocks combined due to a merger within two years prior to the registration date of the merger, the value of the combined stock shall be deemed granted with money. Accordingly, the merger of this case was considered an unqualified merger, whereby it was predicted that Company N would bear the corporate tax of approximately KRW 13.9 billion and Company N’s shareholders would bear the tax on earnings of deemed dividend equivalent to KRW 22.3 billion.

To solve such a problem at the time of the merger, DR & AJU consulted the client on a new merger method in which the existing merging corporation (surviving company), Company L, became the merged corporation (dissolved company) while the existing merged corporation (dissolved company), Company N, became the merging corporation (surviving company). In this way, DR & AJU achieved the merger, which met all the requirements for a qualified merger under the Corporate Tax Act. Accordingly, the transfer value was considered as the net book value of assets, which allowed Company L to receive a tax-deferred benefit that requires having no capital gains or losses from the transfer. Moreover, the shareholders of Company L were also able to receive a tax-deferred benefit that requires having no earnings of deemed dividends since the value of the stocks was deemed as the previous book value. The corporate value was KRW 106 billion for the merging corporation, Company N, and KRW 144 billion for the merged corporation, Company L. The merging corporation changed its name to Company L after completing merger registration on August 21, 2018.

DR & AJU has protected its client’s interests through a change of thinking on the basis of its plentiful work experience, and this case will have significance as an important precedent for mergers between companies in the future.