DR & AJU successfully represented a representative director in a lawsuit seeking the revocation of the tax authority’s disposition rejecting the request for correction of general income tax on gains from the exercise of employee stock options.
In this case, a major shareholder who had control over the company engaged in a stock transaction involving the transfer of corporate control with a private equity firm. The client, who was the representative director, exercised employee stock options to acquire the company’s shares and immediately sold those shares at the same price applied in the major shareholder’s stock transfer transaction. The client calculated the gains from exercising the stock options by treating the transfer price as the market price of the shares at the time of exercise. Based on such calculation, the client reported and paid general income tax. Subsequently, the client filed a request for correction of general income tax in the amount of approximately KRW 13 billion, on the ground that the transfer price should not be deemed the market price at the time of exercising the stock options. However, the tax authority regarded the transfer price as the market price at the time of exercising the stock options, and issued a disposition rejecting the correction request. Following the tax appeal process, the client then filed a lawsuit seeking revocation of the disposition.
Representing the client, we persuasively argued that the transfer price was a price applied in the major shareholder’s stock transaction involving the transfer of the corporate control, and although the client’s transfer price corresponded to the actual transaction price, it did not correspond to the market price, which refers to the price applied to general transactions of the company’s shares. The court accepted our argument and ruled to revoke the entire disposition to reject the request for correction of general income tax.
This outcome is practically significant as it confirms that, in cases where a senior executive exercises stock options and immediately transfers the acquired shares, the market price at the time of exercising the options, which is sued as the basis for calculating gains from the exercise of the stock options, is the price applied to general stock transactions, without any control premium being added.
