[2] Whether the substance over form principle under Article 14(1) of the former Framework Act on National Taxes also applies to withholding taxes on the domestic source interest income under Article 98(1)3 of the former Corporate Tax Act (affirmative), and whether the person who pays the domestic source dividend income is liable to withhold corporate taxes on the basis of the actual person to whom the income actually accrues (affirmative in principle)

1. Regarding ground of appeal No. 1

A. The principle of substantial taxation under Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010; hereinafter the same) refers to a person to whom the property is attributed, not a nominal owner on the ground of type or appearance, if there is another person to whom it substantially reverts, unlike the nominal owner, with respect to the subject of taxation, such as income, profit, property, and transaction. Therefore, where the nominal owner of the property is not capable of controlling and managing it, and there is another person who actually controls and manages it through the control, etc. over the nominal owner, and where the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, the income on the property shall be deemed to have been attributed to the person who actually controls and manages the property and shall be a person to whom it is liable (see Supreme Court en banc Decision 2008Du8499, Jan. 19, 201). This principle applies to the interpretation and application of a tax treaty having the same effect as the Act.

B. citing the reasoning of the first instance judgment, the lower court acknowledged the facts as indicated in its reasoning, and determined that, in light of the purpose of the establishment of the Plaintiffs’ establishment and the background leading up to the establishment of the senda (Ireland) Limited (hereinafter “Senda”), the current status and decision-making process of the directors and employees of the senda, and the transaction structure of the instant securitization bonds and the risk burden of the senda, etc., a person who actually controls and manages the instant interest income shall be deemed a new bank (hereinafter “Senda”), a Japanese corporation, a Japanese corporation, not a Domina (hereinafter “Senda”), rather than a Domina), and on the ground that the disparity between such form and substance may be deemed to have arisen from the purpose of tax avoidance, a person liable to pay the corporate tax withheld from the interest income of this case, who actually belonged

C. Examining the relevant provisions, legal principles and records, the lower court did not err in its judgment by misapprehending the legal doctrine on the interpretation and application of Article 11 of the Convention between the Republic of Korea and Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Transfer Income, contrary to what is alleged in the grounds of appeal

2. Regarding ground of appeal No. 2

A. Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) provides that a foreign corporation shall withhold 25/100 of the amount paid as corporate tax on income for each business year of the pertinent corporation, notwithstanding the provisions of Article 97, where a person who pays income under Article 93(1)3 of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) is a person who pays income not substantially related to a domestic place of business or does not belong to a domestic place of business (hereinafter “domestic source interest income”). However, in cases where a Contracting State imposes tax on a resident of the other Contracting State, the tax rate on such interest income shall be limited to 10% of the total amount of interest.

The principle of substantial taxation under Article 14(1) of the former Framework Act on National Taxes applies to withholding taxes on domestic source interest income under Article 98(1)3 of the former Corporate Tax Act. Thus, barring any special circumstance, a person who pays domestic source interest income is obligated to withhold corporate taxes on the income based on the person to whom the income actually accrues after investigating whether the person to whom the income actually accrues, unlike the name to which the income actually accrues, exists: Provided, That where a person who pays domestic source interest income is unable to know the existence of another person to whom the income actually accrues through faithfully investigating the data secured in the course of transaction or payment of the income amount, the person who pays domestic source interest income cannot be deemed as liable to withhold corporate taxes on the basis of the person to whom the income actually accrues (see, e.g., Supreme Court Decision 2011Du3159, Apr. 11,

B. The court below held that the plaintiffs' failure to perform their withholding duty on the interest income of this case cannot be deemed to have justifiable grounds, on the grounds that the directors of the new bank did not know the fact that the new bank was an employee of the new bank, through the materials which were faithfully examined and secured in the course of paying the interest income of this case in the Senda, in light of the following: (a) the directors of the new bank were signed on various agreements as representatives of the new bank; (b) four directors of the senda held concurrently by the new bank; (c) the directors of the senda held concurrently by the new bank; and (d) the non-party was the representative director of the plaintiffs; and (e) the Korea Ssenda, an asset management company of the plaintiffs, reported periodically the plaintiffs' financial status to the employees of the new bank.

C. Examining the above provisions and relevant legal principles and records in light of the above legal principles, the court below did not err in its judgment by misapprehending the legal principles as to the duty of withholding from a person who pays interest income in Korea, as otherwise alleged in the ground of appeal.

3. 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 Lee Ki-taik (Presiding Justice)