[2] In a case where Gap corporation entered into a license agreement with Eul corporation located in Hungary for use with respect to the domestic distribution of foreign currency, etc. and paid user fees to Eul corporation, the case holding that the agreement between the Government of the Republic of Korea and the Government of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income was not denied in accordance with Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income, and the tax authority deemed the actual beneficial owner of royalty income to be a foreign corporation of the Netherlands corporation Eul and imposed corporate tax on Gap corporation by applying the “Convention between the Government of the Republic of Korea and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income” under Article 14(1)

On the other hand, the principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes applies to the interpretation and application of tax treaties having the same effect as the Act, unless there are special provisions excluding such principle. Therefore, even if a nominal owner of royalty income falls under a beneficial owner, such application may be denied if it is recognized as abuse of treaties pursuant to the principle of substantial taxation under the Framework Act on National Taxes. In other words, where a nominal owner of property is not capable of controlling and managing property, a person who actually controls and manages such property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the substance arises from the purpose of tax evasion, the application of tax treaties according to the nominal name shall be denied and the income on property shall be deemed reverted to the person who actually controls

[2] In a case where Company A entered into a license agreement with the Government of the Republic of Korea and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to domestic distribution of foreign currency, etc. with Company B, and paid user fees to Company B, the case holding that the lower court’s determination that: (a) based on the fact that the tax authority deemed that the Plaintiff was a parent company of the Netherlands C and the Kingdom of the Republic of Korea and imposed corporate tax withheld on Company A by applying the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income; and (b) based on the fact that there is sufficient evidence to view that the Plaintiff’s establishment of the corporation, business activities and details of the relevant work; (c) the receipt of user fees pursuant to the agreement with Company B and the relevant expenses; and (d) the use and profit-making relationship between the Government of the Republic of Korea and the Government of the Republic of Korea (hereinafter “Korea-Hungary Tax Treaty”), and that there is sufficient ground to view that the Plaintiff was a resident-owned and material owner of the aforementioned tax treaty.

1. Case summary and key issue

A. Case summary

(1) On May 31, 201, the Plaintiff entered into a license agreement with Hungary (hereinafter “VIH”) that is a global entertainment content group, which is a Hungary’s located in the Hungary Group, a film producer, and music channel MT, with respect to the domestic distribution of the Hungary film, etc. from around that time to December 2011, and paid a royalty of approximately KRW 13.5 billion (hereinafter “instant royalty”).

(2) In accordance with Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treaty”), the Plaintiff did not withhold corporate tax on the instant royalty.

(3) However, the Defendant: (a) deemed that VH was merely a so-called conduit company established for the purpose of tax avoidance; and (b) deemed that the de facto beneficial owner of the pertinent royalty income is the parent company of the Netherlands of the Netherlands, and instead, applied the Convention between the Government of the Republic of Korea and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Government of the Republic of Korea and the Kingdom of the Netherlands (hereinafter “Korea-Hungary Tax Treaty”), instead of applying the Korea-Hungary Tax Treaty on May 2, 2014 and July 1, 2014, imposed KRW 2.391 billion (including additional taxes) on the Plaintiff (hereinafter “instant disposition”).

B. Issues

The main issue of the instant case is whether Article 12(1) of the Korea-Hungary Tax Treaty applies with respect to the instant royalty.

2. Regarding ground of appeal No. 1

A. (1) Article 12(1) of the Korea-Hungary Tax Treaty provides, “The royalty paid to a resident of the other Contracting State who is a beneficial owner of the royalty shall be imposed only in that other Contracting State, if the resident is the beneficial owner of the royalty.” Accordingly, even if the royalty income corresponding to the domestic source income under the Corporate Tax Act of Korea is paid to a resident of Hungary who is the beneficial owner of the royalty, it shall not be imposed in Korea. In full view of the history and context of the provision of the above treaty, the context thereof, etc., the beneficial owner refers to a case where the person who received the royalty income has a beneficial owner who has no legal or contractual obligation to transfer the royalty income again. Determination of whether the person is a beneficial owner ought to be made by taking into account all the circumstances, such as the content and status of the business

(2) Meanwhile, the principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes applies to the interpretation and application of a tax treaty having the same effect as the Act, unless otherwise expressly provided for in the interpretation and application thereof (see, e.g., Supreme Court Decision 2010Du11948, Apr. 26, 2012). Therefore, even if a nominal owner of royalty income falls under a beneficial owner, such application may be denied if it is recognized as abuse of a treaty pursuant to the principle of substantial taxation under the Framework Act on National Taxes. In other words, where a nominal owner of an asset is not capable of controlling and managing property, and there is another person who substantially controls and manages it through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, the application of a tax treaty under the nominal owner shall be denied and the income on such property shall be deemed reverted to the person who actually controls and manages the relevant property. However, where such disparity does not exist, the income on the nominal owner of the income belongs to the nominal owner (see, etc.

B. According to the reasoning of the lower judgment and the record, the following circumstances are revealed.

(1) From a ten-year period prior to the establishment of VH, LAcom Group operated a broadcasting channel and other business in Hungary. Around 2010, Hungary took into account the low wage excellent human resources of Hungary, relatively low rent, and investment incentives of the Hungary government, and established VH separately in accordance with the provisions of the Hungary Broadcasting Act prohibiting domestic broadcasting channel operators from engaging in overseas broadcasting channels and overseas distribution businesses. Since then, VH actively engaged in relevant business, such as film (frequency production), global management services (GBS), medium-dong and East European Media Network (VMN-CEE) sector.

(2) At the film distribution business division, VH engaged in the business activities of distributing the Maart film and receiving user fees from Hungary, Japan, Italy, Israel, Spanish as well as Korea. Under Hungary’s law, Hungary paid the normal corporate tax and was subject to external audit of financial statements. The global effective tax rate of the Macom Group is approximately 30-32%.

(3) The net sales of VH amounting to approximately KRW 214.8 billion in 201, KRW 40.2 billion in 201, KRW 303.5 billion in 201, and KRW 303.5 billion in 2013, and KRW 6.6 billion in personnel expenses for 19 employees in the film distribution division for three years.

(4) VH established a separate film distribution business division to perform duties such as recruitment of human resources, establishment of office and space expansion, conclusion of contracts for granting new distribution rights, and introduction of a debt management system. The major decision-making was conducted through the holding of the board of directors within Hungary. The management of VH is irrelevant to VGN, and it does not overlap with human composition.

(5) As to the licensing agreement between VH and VGN, the Board of Governors discussed in detail. The text of the contract between the Plaintiff and VIH was also examined by the legal team of VIH, and all of the officers and employees of VIH directly performed the business related to film distribution to the Plaintiff (specific film content, film quality, sound quality, caption, etc.) and the business related to the receipt and management of royalties.

(6) From among the total net sales of approximately KRW 9,22.4 billion in 2011 to 2013, VH used approximately KRW 233.5 billion for the cost of business activities, such as personnel expenses and sales cost (advertisement, printing cost, sales cost, and other contract cost). The dividend to shareholders was about KRW 388.7 billion in total, approximately KRW 42.2% in total, and the remaining funds were lent to an affiliated company (VacomOveras HS CV) to receive normal interest [BUBR (Bud Capital Stock Exchange (Bud Capital Stock Exchange) + 0.625% in total).

(7) Even thereafter, VH continues to expand its business activities and actively engaged in business activities, such as investing in broadcasting and film-related businesses of Lomaia and Israel. As of January 2016, VIH’s officers and employees as of 26 persons in the film distribution sector, GBS partial 102 persons, and VIMN-CE 80 persons in the film distribution sector.

C. We examine the above facts in light of the legal principles as seen earlier.

(1) First, we examine whether VH constitutes a beneficial owner of royalty income under Article 12(1) of the Korea-Hungary Tax Treaty.

In full view of all the circumstances such as the developments leading up to the establishment of the VH, the details of the business activities and current status, the details of the performance of the duties related to the conclusion of the contract with the Plaintiff, the receipt of relevant fees, and the details of the relevant expenses and the details of the use and profit-making relationship, including the details of the use and profit-making relationship, etc., it is reasonable to deem that the VGN had enjoyed the right to use and profit-making income of the instant royalty income without bearing any legal or contractual obligation to transfer it to VGN, etc. Accordingly, it is sufficient to deem that the resident of the Korea-Hungary Tax Treaty as a beneficial owner of

(2) Next, we examine whether the application of the Korea-Hungary Tax Treaty with respect to the pertinent royalty income under the principle of substantial taxation under the Framework Act on National Taxes can be denied.

In full view of the business history of the LAcom Group, the organization of each business division of VIH and its long-term active business activities, human resources and material facilities, and the details of control, management, and disposal of profits from use, etc., it is reasonable to deem that VAH was practically controlled and managed the right to distribute its name and the royalty income therefrom, like other owned property, as a corporation with a considerable substance of operating a normally media-related business with obvious business objective in Hungary. It is reasonable to deem that VA was a corporation with considerable scale of business that actually controlled and managed the right to distribute its name and the royalty income therefrom. It cannot be deemed that VAH distributed a considerable portion of distributable profits available for dividends to VGN, the parent company of the Netherlands, at the time of its establishment, or that both countries of the film distribution right and the film distribution right transferred from VGN, as the source country and the tax treaty, are not taxed in terms of the source country with respect to royalty income.

As such, inasmuch as the instant royalty paid by the Plaintiff is deemed to substantially revert to VI as the nominal owner of the contract, on the ground that there exists no disparity between the nominal owner and the substance, the application of the Korea-Hungary Tax Treaty to the instant royalty income cannot be denied even if based on the principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes.

D. Nevertheless, the lower court determined that the instant disposition was lawful by deeming the beneficial owner of the instant royalty income as VGN solely on the grounds of the tax reduction aspect, etc. In so doing, the lower court erred by misapprehending the legal doctrine on the meaning of beneficial owner under Article 12(1) of the Korea-Hungary Tax Treaty, the principle of substantial taxation under Article 14 of the Framework Act on National Taxes, and the determination of the beneficial owner thereby, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal on this point is with merit.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jo Hee-de (Presiding Justice)