In a case where Gap corporation, a domestic corporation, received a request for correction of corporate tax base and tax amount by including losses incurred in the course of running a business approved as one of the inter-Korean economic cooperation projects in the Geum River District in North Korea, but the tax authority rejected the request, the case affirming the judgment below which held that the corporate tax law can be deducted in calculating the corporate tax base on the ground that the provision of the above losses is applied in the interpretation of

Articles 60(1) and 66(1), 66(2)1 and 66(4) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010);

Esson City Pacific Co., Ltd. (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Head of Cheongju Tax Office (Law Firm Corporation, Attorneys Soh Ho-chul et al., Counsel for the plaintiff-appellant)

Daejeon High Court (Cheongju) Decision 2011Nu342 decided May 10, 2012

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

The grounds of appeal are examined.

1. As to the avoidance of double taxation on income between South and North Korea, Article 22(1) of the Agreement on the Prevention of Double Taxation (hereinafter “Agreement”) provides that “In the event a resident in the region has paid or is obligated to pay taxes on income received from the other party, one party shall be exempted from the tax on such income. However, with respect to interest, dividend, and usage fees, one party may deduct the same from the tax amount paid or to be paid by the other party.”

2. After finding the facts as stated in its holding, the court below reasoned that the agreement of this case constitutes a basis for restricting the tax authorities's right to impose tax on the income earned from North Korea, and on the premise that the agreement of this case does not have any separate provision for dealing with losses in cases where losses occurred in the other party's region. Thus, the court below held that in calculating the Plaintiff's corporate tax base for the business year 2008, the Plaintiff may deduct the losses of this case in calculating the Plaintiff's corporate tax base for the business year 2008, on the ground that the Plaintiff, a domestic corporation, should be subject to the Corporate Tax Act of Korea in the

Furthermore, the lower court rejected the Defendant’s assertion, namely, Article 22 of the Agreement, based on the method of avoidance of double taxation, and thus, it is a principle that the other party’s interest was incurred in the region of the other party, as well as in the case where losses were incurred, and it is not considered by waiver of the right to taxation in Korea, and thus, the instant losses cannot be reflected in the Plaintiff’s tax base for the

① Article 22 of the instant agreement provides that “Where the other party has paid or is obligated to pay taxes on the income earned from the other party,” there is no room for double taxation governed by the said provision as there is no tax itself in the event of a loss.

② If Article 22 of the Agreement does not allow taxpayers to deduct deficits in North Korea from their domestic source income on the ground that Article 22 of the same Agreement adopted the method of income exemption, the taxpayers would rather increase the tax burden, and thus, are contrary to the basic purpose of the Agreement for the Prevention of Double Taxation.

③ Article 8 of the Geum River and Mountain Villages Act provides that “No tax shall be imposed on the development and business activities of a tourist zone conducted by a developer.” However, there is no provision to deduct any loss carried forward. Therefore, even if considering the loss incurred at a permanent establishment of North Korea’s calculation of the tax base under the Corporate Tax Act of the Republic of Korea, double benefit shall not be granted

3. Examining the relevant provisions, legal principles, and records, the lower court’s determination is acceptable, and contrary to the allegations in the grounds of appeal, the lower court did not err by misapprehending the legal principles on the instant agreement and the avoidance of double taxation, etc.

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 Ko Young-han (Presiding Justice)