[1] The meaning of “beneficial owner” under Article 10(2)(a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, and the standard for determining whether

[2] The case holding that Article 10 (2) (a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital paid to the tax authority for withheld corporate tax by applying the limited tax rate of 5% under Article 10 (2) (a) of the said Treaty, where a German limited liability company Gap, which is a German investment fund, acquired 100% of shares issued by Byung, a corporation of the Republic of Korea, which is a listed and public investment model fund established in accordance with the German Investment Act, as the investment fund of the Fund Eul, and Byung paid the income accrued from the lease of a building to Gap company as dividends, the case holding that Article 10 (2) (b) of the said Treaty shall apply to the case where the tax authority imposed a limited tax rate of 15% on the beneficial owner of dividend income, and the tax authority notified Byung company Byung to pay the above corporate tax by designating the beneficial owner of Byung as the second taxpayer in light of all the circumstances.

[1] Article 4 of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”) provides that “a resident of a Contracting State” for the purposes of this Agreement refers to a person liable to pay taxes in that State pursuant to the law of that State, according to his/her address, domicile, location of the head office or principal office, or other standards of a similar nature.” Article 10(2)(a) of the Korea- Germany Tax Treaty provides that, where a recipient is a beneficial owner who is a resident of the other State, and directly owns 25% or more of the shares of the corporation that pays dividends, the taxation of the source State on dividends shall not exceed 5% of the total amount of dividends. Accordingly, when a Korean corporation pays dividends to a beneficial owner as a German resident, the withholding tax on dividend income shall be limited to the maximum rate of 5% notwithstanding the provisions of the Corporate Tax Act. When comprehensively taking account of the history of introducing the provisions of the above Treaty and the context thereof, etc.

[2] Where German limited liability company Gap acquired 100% of the shares issued by Byung corporation, a corporation of the Republic of Korea, which is a listed and public model investment fund established under the German Investment Act, as the investment fund of Eul, and Byung paid income generated from the lease of building to Gap corporation as dividends (hereinafter “dividend income”) and Gap paid corporate tax withheld at source by applying the limited tax rate of 5% under Article 10(2)(a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”), and Gap remitted the remaining amount to Eul corporation’s account established for the Fund, on the premise that the beneficial owner of the dividend income is Eul, and the tax authority notified Byung corporation of the pertinent corporate tax withholding rate of 15% by applying the limited tax rate of 10(2)(b) of the Korea- Germany Tax Treaty to Byung corporation’s general investors and dividend income, and notified Byung company Gap to pay the above corporate tax by designating Gap corporation as the secondary investment company’s dividend income and dividend income.

[1] Articles 4(1) and 10(2)(a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital; Article 2(1)2 of the former Corporate Tax Act (Amended by Act No. 16008, Dec. 24, 2018; see current Article 3(1)2 and (5) (see current Article 3(4)); Article 93 subparag. 2 and 98(1)2 of the former Corporate Tax Act; Articles 14(1) and 39 subparag. 2 of the former Framework Act on National Taxes (Amended by Act No. 11845, May 28, 2013; / [2] Article 4(1), Article 10(2)(a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital; Article 28 subparag. 14(2) of the former Act

EmbH (Deka 1mmmmmmbH) (Attorney Ba-man, Counsel for the defendant-appellant)

Head of Central Tax Office

Seoul High Court Decision 2015Nu42918 decided January 29, 2016

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 4(1) main text of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”) provides that “for the purposes of this Agreement, “resident of a Contracting State” means a person liable to pay taxes within that State in accordance with the law of that State according to address, domicile, location of the head office or principal office or other standards of a similar nature.” Article 10(2)(a) of the Korea- Germany Tax Treaty provides that, where a recipient is a beneficial owner who is a resident of the other State, and directly owns 25% or more of the shares of the corporation paying dividends, the taxation of the source State on dividends shall not exceed 5% of the total amount of dividends. Accordingly, when a Korean corporation pays dividends to a beneficial owner as a German resident, the withholding tax on the dividend income shall be limited to the maximum rate of 5% notwithstanding the provisions of the Corporate Tax Act. When comprehensively taking account of the history of introducing the provisions of the above Treaty and its context, the beneficial owner shall be determined as follows.

2. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

(1) On November 1966, the Plaintiff is a German limited liability company established for the purpose of creating and managing an investment fund pursuant to the German Investment Act (Investment Act) regarding collective investment schemes. (Name omitted (hereinafter “○○ Fund”) is a listed and public model investment fund established by the Plaintiff pursuant to the German Investment Act (hereinafter “Investment Act”) around 2002, the Plaintiff is a fund that distributes profits earned by investing in the global real estate to ordinary investors, among the listed and public model investment funds established by the Plaintiff in accordance with the German Investment Act. The name Dongdong Este Ltd. (hereinafter “Sdong”) is a corporation of the Republic of Korea that carries out real estate rental business by owning △△△△△△ building (hereinafter “instant building”).

(2) The Plaintiff acquired 100% of the shares issued by ○○ Fund (hereinafter “instant shares”). From September 2008 to June 2012, 201, the Plaintiff paid approximately KRW 25 billion to the Plaintiff as dividends (hereinafter “instant dividend income”), and paid the withheld corporate tax to the Defendant by applying the limited tax rate of 5% under Article 10(2)(a) of the Korea- Germany Tax Treaty, and then remitted the remainder to the ○○○ Bank account (hereinafter “instant account”).

(3) Under the premise that the beneficial owner of the instant dividend income is the ○○ Fund, the Defendant: (a) applied the limited tax rate of 15% on the ground that the ○ Fund failed to meet the requirements for the limited tax rate of 5% under Article 10(2) Item (a) of the Korea- Germany Tax Treaty; and (b) rendered each collection disposition notifying the corporate tax for the business year of 2008 through 2010 and the business year of 2012 (hereinafter “instant collection disposition”). Furthermore, pursuant to Article 39 Subparag. 2 of the former Framework Act on National Taxes (amended by Act No. 11845, May 28, 2013), the Defendant deemed the Plaintiff to be the person who actually exercises the right to the instant shares; (b) designated the Plaintiff as the secondary taxpayer of the Madong-ri Tax Treaty and notified the Plaintiff of the payment of corporate tax for the business year of 208 through 2010 and the business year of 2012 (hereinafter “instant disposition”).

(4) The Plaintiff, on behalf of ○○ Fund, on which the assets belonging to the Fund, including the instant stocks and the instant dividend income, could not be owned in its own name, owned the investment assets in the Plaintiff’s name, disposed of the investment assets belonging to ○ Fund or owned and exercised rights derived therefrom. The Plaintiff made a management decision on the lease of the instant building as a shareholder of 100% of Magdong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong-dong (hereinafter “○○ Fund”) and opened the instant account for ○ Fund. Such rights and duties of the Plaintiff were in accordance with the German Investment Act. The instant dividend income was transferred to the instant

(5) The Plaintiff included the instant dividend income in the income of ○○ Fund and filed a tax return with the German tax authority, and ○○ Fund was exempt from corporate tax and business tax on the instant dividend income, which was in accordance with the German Investment Tax Act (Investmenting Telecommunications).

3. We examine the above facts in accordance with the legal principles as seen earlier.

(1) In full view of the Plaintiff’s purpose and business history as seen earlier, ○○ Fund’s investors and investors of the instant fund, the developments leading up to the establishment of the instant account, the Plaintiff’s performance of duties on the instant ○ Fund, the payment of the instant dividend income therefrom, and the German laws and regulations on the Plaintiff and ○○ Fund, etc., the Plaintiff, a German resident, functioned as a single collective investment scheme with the instant ○○ Fund, and the Plaintiff and the instant ○○ Fund, without any legal or contractual obligation to transfer the instant dividend income to the ordinary investors of the instant ○ Fund, etc., should be deemed to have enjoyed beneficial rights as a beneficial owner. Accordingly, the instant dividend income paid to the Plaintiff on the grounds that the instant dividend income was paid to the German corporation, which is a person directly holding the instant stocks, and thus, the limited tax rate of 5% under Article 10(2) Item (a) of the Korea- Germany Tax Treaty ought to be applied. Ultimately, the instant disposition of imposition on the instant dividend income is unlawful.

(2) In full view of the evidence adopted, the lower court determined that the instant disposition, premised on the fact that ○○ Fund constitutes a foreign corporation, was unlawful, on the ground that it cannot be deemed that the ○○ Fund was a juristic person, not an organization granted under the German law, and cannot own property in its name, and it did not have a decision-making body or an operating body, and thus, it cannot be deemed that it constitutes an entity subject to separate rights and obligations independent of its members under the Korean judicial (judicial).

(3) Although the reasoning of the lower court’s explanation on this part is inappropriate, the lower court’s revocation of the instant disposition on the ground that it was unlawful is justifiable. In so doing, it did not err by misapprehending the legal doctrine on succession to the defects in the instant collection disposition and the instant disposition of taxation, the standard for determining foreign corporations, and the beneficial owner or direct possession under Article 10(2)(a) of the Korea- Germany Tax Treaty, thereby adversely affecting the conclusion of

4. Therefore, the appeal is 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 Min You-sook (Presiding Justice)