Article 10(1) of the Convention between the Republic of Korea and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Dividend Income (hereinafter “Korea-Japan Tax Treaty”) provides that the dividends paid by a corporation which is a resident of a Contracting State to residents of the other Contracting State may be taxed in that other Contracting State, and Article 10(2) of the same Treaty provides that the corporation paying the dividends under the above paragraph(1) may also be taxed in the Contracting State, which is a resident, under the law of that Contracting State; however, if the beneficial owner of the dividends is a resident of the other Contracting State, the tax imposed shall not exceed the following: (a) the beneficial owner of the dividends owns at least 25 percent of the total amount of the dividends if the beneficial owner owns at least 25 percent of the voting stocks issued by the corporation for six months immediately preceding the end of the fiscal period in which the dividends accrue; and (b) and in other cases, 5

The purpose of the above provision is to allow both the resident state taxation and the source country taxation on the dividend income, but it is to recognize the source country taxation only within the limit of the limited tax rate in order to minimize double taxation and promote international investment. In particular, if a corporation owns not less than 25% of the voting stocks issued by the corporation that pays the dividend income, it may be deemed that it is necessary to apply the limited tax rate of less than 5%, i.e., the limited tax rate at a lower than the general case.

According to the reasoning of the judgment below, the court below held that since the beneficial owner of the dividend income of this case is merely a requirement to possess the stocks issued by a corporation which pays the dividend income to the beneficial owner under Article 10 (2) (a) of the Korea-Japan Tax Treaty and does not explicitly stipulate that the beneficial owner shall own the stocks directly, the meaning of the "ownership" of the above provision cannot be reduced and interpreted by the "direct ownership" alone, based on the premise that the meaning of the "direct ownership" of the above provision can not be interpreted by the "direct ownership", based on the premise that the plaintiffs' 100% investors of Malaysia who are investors of 10% of the dividend income of this case is merely a formal owner of the dividend income of this case, and so long as the beneficial owner of the dividend income of this case is deemed a 10% investors of the above invested corporation, the court below held that the corporate tax rate of 5% of the dividend income of this case should be applied to the dividend income of this case, on the ground that the corporate tax rate of 5% of this case is unlawful.

In light of the above provisions and relevant legal principles and records, such determination by the court below is just, and there is no error in the misapprehension of legal principles as to the meaning and interpretation of "ownership" under Article 10 (2) (a) of the Korea-Japan Tax Treaty, as alleged in the grounds of appeal.

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 Lee In-bok (Presiding Justice)