[1] The meaning and method of determining “actual management place” under Article 1 subparag. 1 and subparag. 3 of the former Corporate Tax Act, one of the criteria for classifying a domestic corporation and a foreign corporation / In a case where a corporation whose actual management place was located in a foreign country only carried out a detailed act of executing its short-term business activities in the Republic of Korea, whether a corporation may be deemed to have transferred its actual management place to the Republic

[2] Requirements to establish a permanent establishment in Korea, and requirements to determine whether an Singapore corporation has a permanent establishment in Korea through its subsidiary agent, and the method of determining whether it constitutes “essential and important business activities” in this context

[1] Article 2(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that a foreign corporation, as a matter of principle, shall be liable to pay corporate tax only for domestic source income. Article 1 subparag. 1 provides that “domestic corporation” means a corporation with its headquarters, main office, or actual business management place in the Republic of Korea,” and Article 1 subparag. 3 provides that “foreign corporation” means a corporation with its head office or main office in a foreign country (limited to a case where its actual business management place is not located in the Republic of Korea).

The term “actual management place”, one of the criteria for classifying a domestic corporation and a foreign corporation, refers to a place where important management and commercial decisions are actually made in order to conduct a corporation’s business. The term “material management place” refers to determining and managing a corporation’s long-term management strategy, basic policy, corporate finance and investment, management and disposal of major property, core income-generating activities, etc. The place where a corporation’s actual management place is ordinarily held; the place where the board of directors or other equivalent decision-making body’s meetings are ordinarily held; the place where a high-ranking manager and other important officers perform ordinary business; the place where a high-ranking manager ordinarily performs daily management; and the place where accounting documents are ordinarily recorded and kept. However, the actual management place of a corporation is required to have a certain time and place continuity in light of the nature of the decision-management act. Thus, if a corporation, which had already established in a foreign country, has already established and decided a basic plan for its overall business activities overseas and has performed only a short-term implementation activity in the Republic of Korea, it cannot be readily concluded that a corporation has transferred its actual management place.

[2] In order to establish a permanent establishment of a Singapore corporation in Korea, an employee or a person under instructions of Singapore corporation, through a fixed place of business, such as domestic buildings, facilities, or equipment with the authority to dispose of or use, shall perform essential and important business activities, not preliminary or auxiliary business activities. In order for Singapore corporation to be deemed to have a permanent establishment in Korea through a subordinate agent, the agent shall exercise the authority to conclude a contract at all times and shall have the authority to do so, beyond preliminary or auxiliary business activities. Here, whether business activities are “essential and important” should be determined by comprehensively taking into account the nature and scale of business activities, the importance and role of the entire business activities in Korea, as well as the inherent and ancillary or auxiliary business activities performed domestically through a fixed place or agent. Therefore, if an Singapore corporation is not an essential and important place or agent, it cannot be deemed that the Singapore corporation has a permanent establishment at home.

[1] Articles 1 subparag. 1, 1 subparag. 3, and 2(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010) / [2] Articles 5(1), 5(3)(e) and (5)(a) and 7(1) of the Convention between the Government of the Republic of Korea and the Government of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income

[2] Supreme Court Decision 2009Du19229, 19236 Decided April 28, 201 (Gong2011Sang, 1066)

Twit-Link Pteti (Attorneys Kim Su-soo et al., Counsel for the defendant-appellant-appellee)

The Head of the District Tax Office (Law Firm LLC, Attorneys Gangnam-gu et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2013Nu18584 decided May 22, 2014

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. As to the ground of appeal on the actual place of business management

A. Article 2(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that a foreign corporation shall, in principle, be liable to pay corporate tax only for domestic source income, unlike domestic corporations. Article 1 Subparag. 1 provides that “domestic corporation” means a corporation with its headquarters, main office, or actual business management place in the Republic of Korea, and Article 1 Subparag. 3 provides that “foreign corporation” means a corporation with its head office or main office in a foreign country (limited to a case where its actual business management place is not located in the Republic of Korea).

The term “actual management place”, one of the criteria for classifying a domestic corporation and a foreign corporation, refers to a place where an important management and commercial decision is actually made in order to conduct a corporation’s business. The term “material management and commercial decision necessary to conduct a corporation’s business” means determining and managing a long-term management strategy, basic policy, corporate finance and investment, management and disposal of major property, core income-generating activities, etc. of the corporation. Whether the place of actual management of the corporation is a place where the meeting of the board of directors or a relevant decision-making body is ordinarily held, the highest manager and other important executive officers of the corporation must be determined individually on a specific case-by-case basis, comprehensively taking into account all the circumstances, such as the place where the company performs ordinary business affairs, the place where the senior manager and other important executive officers are ordinarily engaged in the business affairs, and the place where accounting documents are ordinarily recorded and kept. However, the actual management place of the corporation is required to have a certain time and place continuity in light of the characteristics of the decision-making and management act. Thus, if a corporation already located in a foreign country, has established and performed only the specific business activities within the Republic.

B. The lower court acknowledged the following facts: (a) the Plaintiff established pursuant to the Singapore Company Act and whose head office was in Singapore purchased bonds issued by a domestic company from the Hong Kong Branch (hereinafter “CS bonds”) and received income in the Republic of Korea during the business year 2009: (b) the Defendant rendered the instant disposition imposing corporate tax for the business year 2009 on the Plaintiff on July 2, 2010, deeming the Plaintiff’s actual place of business management to be domestically; (c) the Plaintiff obtained considerable sales while running the business with a unique hotel in Singapore from March 2, 2000 to March 2, 2008; (d) the Plaintiff continued negotiations on the terms and conditions of trading of the CS bonds in Hong Kong and settled payments thereof; (e) the Plaintiff’s members of the board of directors were permanent residents of Singapore, residents of the United States; and (e) the Plaintiff’s board of directors were not only the Plaintiff’s domestic and foreign business entity’s e-mail related to the Plaintiff’s investment bonds but also the Plaintiff’s investment-related domestic and foreign business entity’s 200.

C. Examining the records in light of the aforementioned provisions and legal principles, such judgment of the court below is just, and contrary to what is alleged in the grounds of appeal, the court below did not err by misapprehending the legal principles regarding the method of determining the place of actual management of the corporation, or by exceeding the bounds of

2. As to the ground of appeal on the permanent establishment in Korea

A. The main text of Article 7(1) of the Convention between the Government of the Republic of Korea and the Government of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter “Korea- Singapore Tax Treaty”) provides that “for an enterprise’s profits, only in a Contracting State shall be taxed unless the enterprise runs a business in the other Contracting State through a permanent establishment located in the other Contracting State, unless the enterprise runs a business in the other Contracting State.” Article 5(1) provides that “for the purpose of this Convention, the term “permanent establishment” means a fixed place of business in which the business of the enterprise is operated entirely or partially.” Article 5(3)(e) provides that “The term “a fixed place of business in the other Contracting State is not included in a permanent establishment for the purpose of advertising for the enterprise or for the purpose of providing information, scientific research or similar activities with a similar nature.” Meanwhile, Article 5(5) of the Korea- Singapore Tax Treaty provides that “Where the enterprise performs a business in the other Contracting State without the authority of the enterprise in its name, it shall be deemed as follows:

In order to establish a permanent establishment in the Republic of Korea, an Singapore corporation’s employees or persons under its instruction, through a fixed place of business, such as domestic buildings, facilities, or equipment with the authority to dispose of or use, shall perform essential and important business activities, not preliminary or auxiliary business activities (see Supreme Court Decision 2009Du19229, 19236, Apr. 28, 201). In order for Singapore corporation to be deemed to have a permanent establishment in the Republic of Korea through its subordinate agent, the agent shall exercise the right to conclude a contract on a regular basis, and the authority shall be more essential and important than those of preliminary or auxiliary business activities. The issue of whether it is an “essential and important business activities” should be determined by comprehensively taking into account the nature and scale of the business activities, the importance and role of the business activities in the entire Republic of Korea, etc. Therefore, if it is not an essential or preliminary business activities conducted domestically through the domestic fixed place or agent, it shall not be deemed a permanent establishment or its subordinate agent in the Republic of Korea.

B. The lower court determined that the Plaintiff cannot be deemed to have established a permanent establishment in Korea as a permanent establishment or a subordinate agent under the Korea- Singapore Tax Treaty on the grounds that even if the Plaintiff, a domestic corporation entrusted by the Plaintiff, performed the duty of collecting CSR claims in Korea and Nonparty 2, an unregistered officer, etc., performed the duty of reporting or disclosing the duty of collecting CSR claims in Korea, it cannot be deemed as the Plaintiff’s inherent and important business activities related to CSR claims investment, and the evidence submitted by the Defendant alone cannot be recognized to the effect that the Plaintiff was either a permanent establishment in Korea or a subordinate agent.

C. Examining the records in light of the above provisions and legal principles, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to the meaning and scope of "essential and important business activities", which are the requirements of permanent establishment or subordinate agent under the Korea- Singapore Tax Treaty, or in violation of the principle of free evaluation of evidence in violation of logical and empirical rules, as otherwise

3. Conclusion

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 Kwon Soon-il (Presiding Justice)