The early trial 2015-west-5120 ( October 25, 2016)

Whether treasury stocks are excluded when calculating the ratio of voting stocks to apply the limited tax rate under the Korea-Japan Tax Treaty.

It is reasonable that treasury stocks should be excluded from the calculation of the requirement for 25 percent ownership of voting stocks under Article 10(2)(a) of the Korea-Japan Tax Treaty.

Article 10(2) of the Korea-Japan Tax Treaty

2016Guhap6970 Revocation, etc. of Disposition of Corporate Tax Collection

00 Securities et al.1

00. Head of tax office

National Flag

December 15, 2016

201.01.20

U.S. P. P. P. P.S.

- Part 2

sales agreement

2016Guhap6970 Revocation, etc. of Disposition of Corporate Tax Collection

Plaintiff, 00 Securities et al.1

Law Firm Doz.

Defendant,00 Head of tax office

Litigation Performers;

December 15, 2016

on January 20, 2010

1. On July 16, 2015, the Defendant revoked each of the dispositions of KRW 681,55,463, corporate tax for the business year 2006 against Plaintiff Samsung Securities Co., Ltd., KRW 766,749,89, corporate tax for the business year 2007, KRW 899,013,808, corporate tax for the business year 2008, KRW 937,138,300, corporate tax for the business year 2009, KRW 979,735,491, corporate tax for the business year 2010.

2. On June 29, 2016, the Defendant’s rejection of each of the claims for correction of KRW 1,064,823,40 for corporate tax for the business year 2012, and KRW 1,064,397,430 for corporate tax for the business year 2013 shall be revoked.

3. The costs of lawsuit shall be borne by the defendant.

As set forth in the text.

1. Details of the disposition;

A. The Plaintiff Samsung Stock Co., Ltd. (hereinafter “Plaintiff Samsung Stock”) is a withholding agent for the dividend income (hereinafter “instant dividend income”) that Plaintiff Samsung Stock Co., Ltd. (hereinafter “SSwon”) paid to Plaintiff Ccom Co., Ltd. (hereinafter “Plaintiff Ccom”) as a shareholder to Plaintiff Ccom Co., Ltd. (hereinafter “Plaintiff Ccom”).

B. The ratio of the Plaintiff’s voting shares to the Espons owned by the Plaintiff’s Ccom for each business year is as follows.

C. As to the instant dividend income paid to Plaintiff Samsung Securities from 2006 to 2010, the Plaintiff Samsung Securities paid corporate tax withheld at source to the Defendant by applying Article 10(2)(a) 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 Income (hereinafter “Korea-Japan Tax Treaty”).

D. On November 2010, the Defendant decided that “the 15% tax rate shall apply to the dividend income in the instant case” and decided that the difference between the 15% tax rate and the 5% tax rate already withheld and paid to Plaintiff Samsung Securities shall be collected from 2006 to 2010 from the Korea Tax Treaty. Accordingly, on November 23, 2010, Plaintiff Samsung Securities applied for the mutual agreement procedures to the National Tax Service of the Republic of Korea, the National Tax Service of the Republic of Korea, and Plaintiff Samsungcom, the Japanese National Tax Service on December 24, 2010, and on February 22, 2011, the mutual agreement procedures were commenced in Japan and in Japan with respect to the dividend income applied to Plaintiff Samsungcom, but the mutual agreement procedures were concluded without any conflict between the Republic of Korea and Japan on December 10, 2014.

E. After that, on July 16, 2015, the Defendant rendered a disposition of collecting KRW 4,690,612,260 (including additional tax) totaling the corporate tax for the business year from 2006 to 2010 as follows (hereinafter the Defendant’s collection disposition against the Plaintiff on July 16, 2015, which remains after the revocation of the additional tax portion by the Tax Tribunal.)

F. As to the instant dividend income paid after 2011, the Plaintiff Samsung Securities determined to pay the withholding tax by applying the 15 percent limited tax rate (including local taxes) under Article 10(2)(b) of the Korea-Japan Tax Treaty, and paid the dividend income for each business year of 2012 and 2013 to the Plaintiff Sejong, the Plaintiff withheld corporate tax applying the 15 percent limited tax rate and paid it to the Defendant as follows:

G. On December 29, 2015, Plaintiff Sejong District Tax Treaty: (a) deemed that Article 10(2)(a) of the Korea-Japan Tax Treaty applies to the Defendant on the grounds that the limited tax rate of KRW 1,597,820,80 for the business year 2012 was reduced to KRW 532,97,97,40; (b) revised the amount of KRW 1,597,394,830 for the corporate tax withheld for the business year 2013 to KRW 532,97,97,40 for the reduction to KRW 532,97,830 for the difference; and (c) the Defendant did not comply with the request for correction by June 29, 2016 for the imposition of the limited tax rate of KRW 1,064,397,430 for the difference; and (d) the Defendant did not comply with the request for correction and correction of the tax base and the tax amount of the Plaintiff.

H. On October 13, 2015, Plaintiff Samsung Securities filed a request with the Tax Tribunal for a trial against the initial collection disposition. On April 25, 2016, the Tax Tribunal rendered a decision to exclude the total of 426,419,290 won from the initial collection disposition on the grounds that there are justifiable grounds for not performing the duty to withhold to Plaintiff Samsung Securities, thereby correcting the relevant tax amount and dismissing the remainder of the appeal. Meanwhile, on July 8, 2016, Plaintiff Samsung Bonds filed a request with the Tax Tribunal for a trial against the instant disposition of refusal on the instant disposition of refusal.

[Reasons for Recognition] Unsatisfy, entry in Gap evidence 1, 7, 13 (including each number), the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiffs' assertion

Since treasury stocks do not have voting rights, 25 percent of the “voting stocks” under Article 10(2)(a) of the Korea-Japan Tax Treaty should be determined by excluding treasury stocks. Since the ratio of the voting stocks held by the Plaintiff spon against spon in the business year 2006 through 2010 exceeds 25 percent when spon excluding treasury stocks, the limited tax rate on the dividend income of this case is 5 percent under Article 10(2)(a) of the Korea-Japan Tax Treaty. Therefore, each of the dispositions of this case on the premise that the limited tax rate to be applied in this case is 15 percent under Article 10(

B. Relevant statutes

It is as shown in the attached Form.

(c) Fact of recognition;

1) According to the correction notice of the Plaintiff’s Scom on October 31, 2006 by the head of the tax office in Japan, the director of the tax office of the Sinju District Tax Office determined that the limited tax rate of 5% shall be applied to the Plaintiff’s dividends 584,014,134, and 134, which the Plaintiff’s Ccom received from Scom on March 25, 2005, on the grounds that the Plaintiff’s Ccom owns at least 25 percent of the voting shares of the Scom during the six-month period prior to the end of the business year 2014.

2) On June 12, 2006, Plaintiff Samsung Securities requested the correction of the applicable tax rate from 2003 to 5% for the dividend income paid from 2006 to the Plaintiff Samsung Securities. Plaintiff Samsung Securities, upon the interpretation of the Japanese tax authority and the said request by Plaintiff Samsungcom, filed a tax withholding rate for the dividend paid from 2003 to 2006 under Article 10(2)(a) of the Korea-Japan Tax Treaty. According to the above revised tax return, Plaintiff Samsung Securities issued the withholding tax receipt for the dividend paid from 2006 to 5% under Article 10(2) of the Korea-Japan Tax Treaty. Plaintiff Samsung Securities issued the withholding tax receipt for the dividend paid from 15% to 5%, and Plaintiff Samsung Securities refunded KRW 1,780,562,730, the difference between the applicable tax rate of 15% and the limited tax rate of 5% to Plaintiff Samsung Securities (=1,619,375,729, 1671, 107).

[Reasons for Recognition] Unsatisfy, each entry in Gap evidence 4 through 6 (including branch numbers), the purport of the whole pleadings

D. Determination

In light of the following circumstances, in light of the evidence as seen earlier and the overall purport of Gap evidence No. 14 and the entire arguments, it is reasonable that treasury stocks should be excluded from the calculation of 25 percent ownership requirements for "voting stocks" under Article 10(2)(a) of the Korea-Japan Tax Treaty, and thus, each of the dispositions of this case on different premise is unlawful.

1. The Korea-Japan Tax Treaty does not provide for the definition of voting stocks. With respect to the terms not defined in the tax treaty, Article 3(2) of the Korea-Japan Tax Treaty provides that, for the purposes of the tax to which this Convention applies, unless the context otherwise requires: (a) a Contracting State has the meaning prescribed by the law at the time of that Contracting State; and (b) a term “voting stocks not defined in the Korea-Japan Tax Treaty” shall have the meaning in the applicable tax law of that Contracting State superior to the meaning given in the other laws of that Contracting State for the purposes of the tax to which this Convention applies, unless the context otherwise requires. Accordingly, the term “voting stocks not defined in the Korea-Japan Tax Treaty” shall have the meaning defined in the domestic law of that Contracting State in principle

(2) On the other hand, there is no clear definition of "voting stocks" under the tax law of the Republic of Korea. However, Article 368(3) of the Commercial Act provides that "no person who has a special interest in the resolution of the general meeting shall exercise voting rights" and Article 369(2) of the Commercial Act provides that "no person shall exercise voting rights" and "no person shall exercise voting rights" shares are divided into non-voting shares and non-voting shares, and its own shares constitute non-voting shares.

(3) In addition, Article 368(1) of the Commercial Act provides that the resolution of the general meeting shall be made in the number of a majority of the voting rights of the shareholders present and at least 1/4 of the total number of the issued and outstanding shares, except as otherwise provided in this Act or in the articles of incorporation. Article 371(1) of the Commercial Act provides that the number of non-voting shares under Article 369(2) shall not be included in the total number of issued and outstanding shares with respect to the resolution of the general meeting. As such, while the Commercial Act does not include treasury shares in the total number of issued and outstanding shares at the time of calculating the quorum of the general meeting of shareholders, shares of those who have special interests in the resolution of the general meeting under Article 368(3) of the Commercial Act shall be included in the total number of issued and outstanding shares, but it shall not be included in the number of voting rights of the shareholders present at the general meeting under Article 371(2)

④ Article 10(2)(a) of the Korea-Japan Tax Treaty interpreted that the term “voting stocks” as referred to in Article 10(2)(a) of the Korea-Japan Tax Treaty refers to the “stocks with voting rights in the English team, in the English language of the said Treaty, and in the English and Japanese language, the term “voting stocks” as referred to in Article 10(2) of the Korea-Japan Tax Treaty shall be interpreted as “the stocks with voting rights shall be excluded from the calculation of 25% voting stocks under Article 10(2) of the Korea-Japan Tax Treaty

⑤ Meanwhile, Article 12(2) of the Tax Treaty concluded between Japan and the United States in 1971 (hereinafter referred to as the "former Tax Treaty") provides that at least 10 percent of the voting shares of a corporation shall be held as a requirement for the application of the limited tax rate on dividend income. This part of the Tax Treaty provides that at least 10 percent of the voting shares of a corporation shall be held as a requirement for the application of the limited tax rate on dividend income, and that at least 10 percent of the voting shares of a corporation shall be held as 'the voting shares of a corporation' shall be excluded from the voting shares of a corporation' under the former Tax Treaty, and the exclusion of the voting shares of a corporation from the voting shares shall be made through the exercise of voting rights. Thus, this part of the Tax Treaty provides that the above interpretation provides that "no more than 10 percent of the voting shares of a corporation shall be held as 'the voting shares of a corporation' shall be interpreted as "no more than 10 percent of the voting shares of a corporation."

(6) The purport of Article 10(2)(a) of the Korea-Japan Tax Treaty is to allow both the resident country’s taxation and the source country’s taxation on the dividend income. However, in order to minimize double taxation and facilitate international investment, the taxation on the source country is recognized only within the limited tax rate. In particular, if the beneficial owner of the dividend owns not less than 25 percent of the voting stocks issued by the corporation that pays dividends, it may be deemed that the said need arises and that the said rate is lower than the general tax rate (see, e.g., Supreme Court Decision 2012Du24573, May 24, 2013). Furthermore, since a corporation that holds not less than 25 percent of the voting stocks issued by the dividend payment corporation controls the above dividend payment corporation, it is likely that double taxation problems will be resolved through a low limited tax rate, and if it is interpreted that it includes treasury stocks, it may result in the lack of benefits even if it actually controls the limited tax rate in Korea.

3. Conclusion

Therefore, the plaintiffs' claims of this case shall be accepted for all reasons, and it is so decided as per Disposition.