[2] Requirements for recognizing that a foreign corporation’s permanent establishment exists in the Republic of Korea and the method of determining whether such establishment constitutes “essential and important business activities”

[3] Requirements to recognize that a foreign corporation has a permanent establishment in Korea through its subsidiary agent

[2] In light of the language, structure, and purport of Article 94(1) and (4) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010); and Articles 8(1), 9(1), and 9(3) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment, a permanent establishment of a foreign corporation in the Republic of Korea should be deemed to exist in a foreign corporation’s permanent establishment through a fixed place of business, such as a building, facility, or equipment, in the Republic of Korea with the authority to dispose of or use the foreign corporation, and should be determined by comprehensively taking into account the nature and scale of the business activities, as well as the weight and role of the entire business activities.

[3] Article 94(3) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that “If a foreign corporation has no domestic place of business and operates a business with the authority to conclude contracts on its own behalf and repeatedly exercises such authority in the Republic of Korea, even if it does not have a domestic place of business, the place of business of the foreign corporation shall be deemed to have a domestic place of business in its place of business.” Article 9(4) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade

In order for a foreign corporation to have a permanent establishment in the Republic of Korea through its subsidiary agent, the agent shall exercise the right to enter into a contract in the name of the foreign corporation at all times in the Republic of Korea, and his powers shall be essential and important for business activities beyond those of preliminary or auxiliary.

1. Regarding ground of appeal No. 1

A. Article 9(1) of the former National Tax Collection Act (amended by Act No. 11605, Jan. 1, 2013) provides, “Where the head of a tax office intends to collect national taxes, he/she shall issue a tax notice stating the taxable year, tax item, amount of tax, basis for calculation thereof, deadline for payment, and place for payment of national taxes to a taxpayer.” In addition, Articles 70 and 97(1) of the former Corporate Tax Act (amended by Act No. 11607, Jan. 1, 2013) provide, “where a foreign corporation with a domestic place of business has determined or corrected the tax base and amount of corporate tax on income for each business year, he/she shall notify the foreign corporation thereof, as prescribed by Presidential Decree.” The main sentence of Article 109(1) of the Enforcement Decree of the Corporate Tax Act provides, “Where the head of the district tax office having jurisdiction over the place of tax payment notifies the tax base and amount of tax pursuant to Article 70 of the Act, he/she shall notify the tax base and amount determined.”

These provisions are based on the constitutional principles of due process and the basic principles of the Administrative Procedures Act in the territory of taxation, and by having the tax authority take a careful and reasonable taxation, thereby ensuring fairness in tax administration, notifying taxpayers of the details of the taxation disposition in detail, and granting convenience in filing an appeal. Therefore, a foreign corporation, which is a higher investor, has a permanent establishment in Korea as a taxpayer under the substance over form doctrine, should be deemed to be merely a Do government, and a foreign corporation, which is a higher investor, has a domestic establishment as a taxpayer under the substance over form doctrine. In the course of determining the tax base and tax amount of corporate tax, if a detailed notification of the determination of the initial withheld tax amount in detail was provided by the method of deducting or appropriating the refund amount from the final tax amount of a higher investor, and issuing a written resolution on determination stating the taxable year, the basis for calculating the amount of tax, etc., the higher investor, as a tax disposition, can be deemed to have been made, and thus, can file

B. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

1) Lone Star Fund is a partnership-type private equity fund that mainly raises funds through private placement and creates profits through acquisition of financial institutions or general companies whose asset value was low, purchase of non-performing loans, and investment in real estate, etc. In the mid-190s, Nonparty 1 (English name omitted) formed Lone Star Fund I through V in the middle of the 1990s. On the completion of each investment, Lone Star Fund was established in the form of constituting a new fund.

2) Plaintiff Hudco Partnership Korea (hereinafter “Plaintiff Hudco Partnership”) is a juridical person established under the laws of Bada in order to provide Lone Star Fund’s subsidiaries in Korea with investment opportunities to its executives and employees. Plaintiff Lone Star Fund (S.), Lone Star Fund (U.S.), L.P. (hereinafter “Plaintiff Lone Star”) is a limited partnership established under the laws of the United States Deteawa (U.S.) and invested by the U.S. investors as limited partners. Plaintiff Lone Star Fund (S.), L.P. (hereinafter “Plaintiff Lone Star”) is a limited partnership (L2) established under the laws of the Republic of Korea and invested by the U.S. investors in the Republic of Korea as limited partners. Plaintiff Donco Partnership (hereinafter “Plaintiff Hudco Partnership”) is an investment partner of Lone Star Fund (hereinafter “Foreign Bank”) and L.P. (hereinafter “Plaintiff Daone”) is an investment partner of Lone Star Fund.

3) The Plaintiffs, in succession, withheld KRW 9.9% of the shares of Lone Star Global Holdings 2, Dolbal Holdings 2, Ltd. hereinafter “SGH”), or limited partnerships, and Luxembourg’s LF-KB Capital Investment Co., Ltd. (LF-EB Capital.) Belgium (hereinafter “Belgium”) established under the laws, Belgium 1 (hereinafter “Belgium”), and withheld KRW 70.9% of the shares of 70,000,000,000,000 KRW 750,000,000,000,000 KRW 705,000,000,000,000 KRW 861,000,000,000,000 KRW 70,000,000,000,000,0000,000,000 KRW 765,065,000,00.

4) The tax authority collected KRW 0,00,00,000 from 0,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,0000,000,000,000,000,0000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,00,000,00,00,00,00,00,00,00.

5) In addition, Plaintiff Hud Co., Ltd., Plaintiff 6 Lone Star Partners, Plaintiff Lone Star, and Plaintiff Lone Star Community, in succession with Plaintiff 6 Lone Star Holdings L.P.), or limited partnerships, and LSI, a holding company established under the Belgium Act, through Belgium, withheld all of 9.9% of the equity interest in 40 and 50% of the equity interest in 46 Lone Star Holdings SPS SPS (hereinafter “H”) and 45% of the equity interest in 95, and the tax authority did not separately withhold 65% of the equity interest in 96, 205, 208, 205, 46, 46, 56, and 96, 56, 205, 46, and 96, 56, 206, 46, and 56, respectively, in accordance with the tax treaty.

6) On July 7, 2008, the Defendant: (a) notified the director of the Seoul Regional Tax Office’s tax investigation results; (b) the instant Belgium corporations, the owners of the shares such as the foreign exchange bank, are merely Do government corporations established for the purpose of tax avoidance; (c) the beneficial owner of the dividend income of the said shares (hereinafter “instant dividend income”) and capital gains (hereinafter “the instant capital gains”); and (d) the Plaintiffs, the permanent establishment in Korea, acquired the instant income; and (e) deemed that the instant dividend income had been actually reverted to the Plaintiffs; (b) the Plaintiff’s corporate tax was imposed on the Plaintiff Huco Partners; and (c) the remaining portion of the instant dividend income received from the Plaintiff 9 to the Plaintiff 4th refund tax payment notice instead of the Plaintiff 4th refund tax amount; and (d) the Plaintiff 9 to the Plaintiff 4th refund tax refund notice or the Plaintiff 4th refund tax amount of the Plaintiff excluding the Plaintiff 5’s refund tax amount.

7) Meanwhile, on July 7, 2008, the Defendant, upon receiving a corporate tax decision as above, appropriated KRW 61,890,006 of the corporate tax refund for the business year 2006 at the request of 2004, 2005 corporate tax, and did not separately notify the Plaintiff Hudco Partnership regarding the corporate tax for the business year 2006. Following the Defendant, pursuant to the purport of the Supreme Court Decision 2010Du5950 Decided January 27, 2012, the Defendant revoked ex officio the disposition imposing income tax on the remaining Plaintiffs except the Plaintiff Hudco Partnership, and decided to revise the tax base and amount to impose corporate tax again. However, with respect to Plaintiff 4 through 9, the Defendant did not notify the tax payment notice as in the previous case without issuing a correction resolution only on February 13, 2012.

C. Examining these facts in light of the legal principles as seen earlier, the Defendant deemed that the instant Belgium corporations, the nominal recipient of the instant income, are merely the Belgium corporations, and that the Plaintiffs actually acquired the instant income by establishing a domestic permanent establishment, and thus, in the process of determining the tax base and tax amount of corporate tax, the Defendant notified the Plaintiffs of the decision by either deducting or appropriating the refund, etc. of the tax withheld at source from the determined tax amount for the business year 2006 corporate tax of Plaintiff Hudco Partners and the corporate tax of Plaintiff 4 through 9 from the determined tax amount, and by issuing the decision resolution in detail stating the taxable year, tax amount, and calculation basis of the relevant corporate tax to the said Plaintiffs, the said Plaintiffs should be deemed to have received the said tax assessment,

In the same purport, the lower court is justifiable in rejecting the Defendant’s principal safety defense to the effect that the part of the instant lawsuit seeking revocation of the disposition imposing corporate tax for the business year 2006 and the part seeking revocation of the disposition imposing corporate tax by Plaintiff 4 or 9 seeking revocation of the disposition imposing corporate tax is unlawful. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the existence of the disposition imposing corporate tax, etc.

2. Regarding ground of appeal No. 2

A. Article 94(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that “if a foreign corporation has a fixed place where it carries out all or part of its business in the Republic of Korea, it shall be deemed that it has a domestic place of business.” Article 94(4) provides that “a certain place used to carry out business activities of a preparatory and auxiliary nature for the implementation of the business shall not include a domestic place of business as provided in paragraph (1).” In addition, Article 8(1) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Treaty”) provides that “The industrial or commercial profit of a resident of a Contracting State shall be exempted from taxes by the other Contracting State, unless the resident is engaged in industrial or commercial activities within the other Contracting State’s permanent establishment.”

In light of the language, structure, and purport of the foregoing provision, in order to deem that a permanent establishment of a foreign corporation exists in the Republic of Korea, an employee of the foreign corporation or a person under its instruction through a fixed place of business, such as a domestic building, facility, or equipment, with the authority to dispose of or use the foreign corporation, is required to perform essential and important business activities, not preliminary or auxiliary business activities. Whether a permanent establishment of a foreign corporation constitutes an essential and important business activity should be determined by comprehensively taking into account the nature and scale of the business activity, the weight and role in the entire business activity (see Supreme Court Decision 2009Du19229, 19236, Apr. 28, 20

B. citing the reasoning of the judgment of the first instance, the lower court acknowledged the facts as indicated in its reasoning, and determined that: (i) it is difficult to readily conclude that Nonparty 2, Nonparty 3, and Nonparty 4, etc. were in the process of acquiring stocks of Lone Star Fund’s agent, and (ii) it is difficult to view that Nonparty 2, 3, and 4, etc. were in the process of acquiring stocks of an insolvent company and participating in the management of Lone Star Fund’s corporate entity by taking account of the fact that it was difficult for the Plaintiffs, who were general partners of Lone Star Partnership (hereinafter “Lone Star”) or Lone Star Global Global quid (hereinafter “Lone Star”); (iii) it was difficult to view that Nonparty 2, 4, etc. were in the process of acquiring stocks of Lone Star Fund’s agent and participating in the process of its management; and (iv) it was difficult to view that Nonparty 1’s corporate entity was in the process of acquiring stocks of an insolvent company and participating in the process of its management.

C. Examining the records in light of the aforementioned provisions and legal principles, the lower court’s aforementioned determination is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the requirements

3. Regarding ground of appeal No. 3

A. Article 94(3) of the former Corporate Tax Act provides that “If a foreign corporation does not have a domestic place of business and operates a business repeatedly with the authority to conclude contracts on its own behalf in the Republic of Korea, it shall be deemed that the place of business of the foreign corporation has a domestic place of business in its place of business.” Article 9(4) of the Korea-U.S. Tax Treaty provides that “A deemed permanent establishment through a dependent agent shall be deemed a place of

In order for a foreign corporation to have a permanent establishment in the Republic of Korea through its subsidiary agent, the agent shall exercise the right to enter into a contract in the name of the foreign corporation at all times in the Republic of Korea, and his powers shall be essential and important for business activities beyond those of preliminary or auxiliary.

B. The lower court, citing the reasoning of the first instance judgment, acknowledged the facts as indicated in its reasoning, and determined that, even if Nonparty 2 was the domestic manager of Lone Star Fund IV, and Nonparty 2 and Nonparty 3 exercised the authority to negotiate in the process of acquiring Lone Star Fund IV and to sign the contract by delegation from Lone Star Fund IV, such act was deemed to have been conducted in the capacity of representative director or executive officer of LSK, HAK, which concluded a business entrustment contract with LSG as a separate legal entity with LSP, as a separate legal entity, and there is no evidence to prove otherwise that they had the authority to conclude a contract on behalf of the Plaintiffs in the Republic of Korea, and thus, it cannot be deemed that there was a permanent establishment in Korea of the Plaintiffs at their place of business.

C. Examining the record in light of the aforementioned provisions and relevant legal principles, the lower court’s aforementioned determination is justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the requirements, etc. for deemed permanent establishment of foreign corporations. Meanwhile, although the Defendant asserted that LSAK and HAK are subordinate agents of the Plaintiffs instead of Nonparty 2 and Nonparty 3, it is nothing more than the assertion raised only in the final appeal, and even if examining the record, it cannot be deemed that LSAK and HAK are subordinate agents ordinarily exercising the right to conclude a contract under the name of the Plaintiffs in Korea.

4. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Yong-deok (Presiding Justice)