(b) Whether the expenses paid as premium before a domestic branch begins business activities falls under the expenses stipulated in Article 8 (3) of the Korea-U.S. Tax Convention;

(c) the procedures and methods for cost deduction under Article 8(3) of the Korea-U.S. Tax Convention;

B. It is reasonable to view that the expenses that the head office of the bank paid to a third party bank in order to reduce various difficulties arising from the new establishment in the commencement of business activities in the Republic of Korea at the United States where the head office is the location of the principal office of the bank constitutes the expenses reasonably related to the domestic source income of the bank as provided in Article 8(3) of the Korea-U.S. Tax Convention, provided that the head office of the bank was paid for the purpose of the Seoul branch.

(c) The Korea-U.S. Tax Convention provides that the expenses reasonably related to domestic source income under Article 8(3) shall only be permitted regardless of the place of occurrence, and does not have any provision regarding the procedure and method of the specific cost deduction. Thus, unless this does not go against the purport of the above provision, they shall be in accordance with the national laws and regulations of the Contracting Parties.

The costs of appeal are assessed against the plaintiff.

1. Summary of the reasoning of the judgment below

A. The facts duly established by the court below are as follows.

The plaintiff bank is a foreign corporation with a permanent establishment in the Republic of Korea. On July 31, 1989, at the United States of America where its head office is located, the plaintiff bank takes over the same Seoul branch from the non-party Hawsa Bank (hereinafter referred to as the "non-party 2") with an additional amount of USD 1,300,000 (gold KRW 867,620,000) other than its asset value. After calculating the above amount in the account of "Specal carge" in the account of expenses of the head office, the "Specargege" in the above frame 1989, the amount of USD 940,395 ($ 627,620,000) out of the above framework amount, the amount of KRW 205,000 in the calculation of losses for the business year concerned, the amount of KRW 260,500 in the calculation of losses for the business year concerned, and the amount of the above amount of KRW 160605,707,2060.

Although the defendant should include the depreciation amount as deductible expenses in the account books of the plaintiff bank pursuant to Article 16 subparagraph 12 of the Corporate Tax Act and Article 48 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14468 of Dec. 31, 1994; hereinafter the same shall apply), it is improper that the plaintiff bank's inclusion of the depreciation amount in deductible expenses by the report adjustment without appropriating the above depreciation amount as deductible expenses in the account books, and it is improper that the plaintiff bank denied the inclusion of the deductible expenses by the business year reported and adjusted as above, and the plaintiff bank imposed the disposition of this case on November 6, 1992. < Amended by Presidential Decree No. 14468 of Dec. 192>

B. On the premise of the aforementioned factual basis, the lower court determined as follows: (a) the Plaintiff’s assertion that the Plaintiff’s total amount of KRW 627,620,00 was naturally recognized as deductible expenses for calculating taxable income pursuant to Article 8(3) of the Korea-U.S. Tax Convention, on the grounds that the Plaintiff’s principal office of the bank was part of KRW 867,620,000, which was reasonably related to the Plaintiff’s domestic source income generated from the Plaintiff’s bank; (b) as well as expenses directly incurred from the Plaintiff’s principal office, the amount of KRW 627,620,00 should be reasonably determined as operating rights; (c) in light of Article 16(1) of the Corporate Tax Act and Article 8(3) of the Enforcement Decree of the Korea-U.S. Tax Convention, the lower court reasonably allowed the Plaintiff’s principal office of the bank to take over the Seoul branch of the same bank; and (d) determined that the amount of KRW 627,620,00,00 reasonably determined operating expenses within the scope of depreciation under the Corporate Tax Act.

2. In determining the industrial or commercial profits of a permanent establishment, Article 8(3) of the Korea-U.S. Tax Convention provides that expenses related to the reasonable profits, including expenses for business management and general management, shall be allowed, regardless of whether they accrue within or outside the Contracting State in which the permanent establishment is located, which is not the standard of income but the standard of income, and in calculating the taxable income of the permanent establishment, the amount of business income in the Contracting State shall be taxed on a net income basis other than the standard of income, and in calculating the taxable income of the permanent establishment, the amount of the expense shall be the place where the expense was incurred, i.e., if the expense was incurred for the purpose of the permanent establishment, regardless of whether it occurred in the country in which the permanent establishment was located (see Supreme Court Decision 85Nu83 delivered on January 31, 198

However, according to the facts and records duly established by the court below, 627,620,00 won of the expense of this case was paid to the non-party bank in the United States where the principal office of the plaintiff bank is located in the Republic of Korea in order to reduce various difficulties arising from new establishment in the commencement of business activities within the Republic of Korea. Thus, it is reasonable to deem that the principal office of the plaintiff bank was paid for the purpose of the Seoul branch, and it constitutes expenses reasonably related to the domestic source income of the plaintiff bank Seoul branch under Article 8 (3) of the Korea-U.S. Tax Convention.

Nevertheless, the lower court’s rejection of the Plaintiff’s assertion by determining otherwise cannot be deemed to have erred by misapprehending the legal doctrine on Article 8(3) of the Korea-U.S. Tax Convention.

3. However, the court below, as an additional determination as to the plaintiff's above assertion, held that even if the above amount of KRW 627,620,00 is intangible fixed assets permitted to be depreciated under the Corporate Tax Act, as alleged by the plaintiff, the depreciation costs not appropriated as deductible expenses at the time of settlement of accounts pursuant to Article 16 of the Corporate Tax Act and Article 48 (1) of the Enforcement Decree of the same Act cannot be included in deductible expenses (the revised return seems to be erroneous in writing). Thus, the plaintiff's above assertion also is without merit.

As seen above, the Korea-U.S. Tax Convention provides that the expenses reasonably related to domestic source income under Article 8 (3) shall be allowed to be deducted regardless of the place of occurrence, and there are no provisions concerning the procedure and method of deduction of expenses. Thus, unless this does not go beyond the purport of the above provision, it shall be in accordance with the domestic laws and regulations of the Contracting Parties. Article 54 (1) of the Corporate Tax Act provides that the total amount of domestic source income of a foreign corporation with a permanent establishment in Korea shall be calculated by applying the provisions of Articles 9 through 21 under the conditions as prescribed by the Presidential Decree. Article 54 subparagraph 8 of the former Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 14080 of Dec. 31, 1993) provides that the operating right shall be treated as losses in calculating the amount of intangible fixed assets as losses under the conditions as prescribed by the Corporate Tax Act related to depreciation, and it shall include the amount of depreciation of fixed assets in the account settlement statement for each business year in the account settlement of profits and losses.

However, according to the facts duly established by the court below, the plaintiff bank is holding the Seoul branch which is a permanent establishment in Korea and the amount of KRW 627,620,00 of the expense of this case distributed by the main office is substantially the acquisition value of the business rights, but it does not include the amount of KRW 52,301,666, 125,524,000 and 125,524,000 in deductible expenses at the settlement of accounts for the business year 190 and 1991, as deductible expenses, without including the amount of KRW 52,301,666, 125,524,00 and 125,524,000 in the income statement when calculating the income amount generated from domestic sources in the corresponding business year. Thus, the measure that the defendant denied the inclusion of deductible expenses for each business year

As such, this case’s expense is the principal expense, but the expenses reasonably related to the domestic source income of the Seoul branch of the Plaintiff bank are allowed to be deducted pursuant to Article 8(3) of the Korea-U.S. Tax Convention, which may not be included in deductible expenses in calculating the amount of domestic source income of the Plaintiff bank for each business year. However, since the Korea-U.S. Tax Act takes a final settlement principle in the case of depreciation, the Plaintiff bank must conduct accounting for the amount of depreciation in Korea, as seen above, in order for the Plaintiff bank to receive the deduction of the aforementioned expenses from depreciation, it is derived from the failure to conduct accounting in accordance with the Korean-U.S. Tax Convention, and such interpretation does not necessarily exceed the purport of Article 8(3).

The judgment of the court below to the same purport is just, and there are no errors in the misapprehension of legal principles as to Article 3(1) of the Regulation of Tax Reduction and Exemption Act, the principle of no taxation without representation, and Article 8(3) of the Korea-U.S. Tax Convention.

Therefore, although the judgment below erred as seen above, the conclusion of rejecting the plaintiff's claim is just and the above error does not affect the conclusion of the judgment. Ultimately, the argument is without merit.

4. Therefore, the appeal is dismissed and all 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 Lee Jae-soo (Presiding Justice)