In a case where: (a) as a limited partnership in the United States, private equity fund Gap acquired convertible bonds issued by the domestic corporation Eul through the Eul corporation established in Malaysia; and (b) in the process of converting the said convertible bonds into stocks, Eul was paid dividends to Eul; and (b) Byung withheld corporate tax on Eul as beneficial owner; (c) the tax authorities withheld corporate tax; and (d) imposed corporate tax on Byung pursuant to Article 12(2)(a) of the Convention between the Republic of Korea and the United States of America on the Avoidance of Double Taxation and the Prevention of Evasion of Taxes on Income and the Promotion of International Trade and Investment, the case affirming the judgment below rejecting Gap's assertion on the grounds that the said Convention cannot be deemed as the corporation prescribed in Article 12(2)(b).

Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007); Articles 93 and 98(1) of the former Corporate Tax Act (amended by Act No. 7005 of Dec. 30, 2003); Articles 12(2)(a) and (b) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Evasion of Taxes on Income and the Encouragement of International Trade and Investment;

Seoul High Court Decision 200Na14488 delivered on August 1, 200

Head of Guro Tax Office

Seoul High Court Decision 2011Nu4758 decided August 23, 2011

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

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. The substance over form principle under Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 8830, Dec. 31, 2007; hereinafter the same applies) refers to a person to whom the income, profit, property, transaction, etc. belongs, if there is any other person to whom the income, profit, etc., belongs differently from the nominal owner, the nominal owner of the property is not the person to whom the income, etc., belongs, but the person to whom the income, etc., belongs, is not the person to whom the property, and there is another person who actually controls and manages the property 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 such principle shall be the person to whom the income, etc., belongs (see Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012).

Meanwhile, in a case where an unincorporated association, foundation or other organization of a foreign country is a profit-making organization that obtains domestic source income provided in Article 119 of the former Income Tax Act (amended by Act No. 7006 of Dec. 31, 2003) or Article 93 of the former Corporate Tax Act (amended by Act No. 7005 of Dec. 30, 2003; hereinafter the same) and distributes it to its members, if it can be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable to pay corporate tax on domestic source income. If it cannot be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable to pay corporate tax on the income distributed to each of its members, and the income tax or corporate tax shall be imposed on each of its members depending on its member's status. In this context, as to whether it can be deemed a foreign corporation under the former Corporate Tax Act, the specific requirements of the foreign corporation should be determined by the Supreme Court Decision 201Du5141401, Feb. 14, 2014

B. citing the reasoning of the judgment of the court of first instance, the court below acknowledged the facts as stated in its holding, and determined that WPEP and WPV were reasonable in light of the purpose of establishing 50% of England Hrings L.PPPPP (hereinafter “WP”) in Enburg Equicus L.P. (hereinafter “WP”) and Warburg International L.P. (hereinafter “WPI”) respectively, by investing 50% of 50% in Enburgs International L.P. (hereinafter “WV”) in Enburcs International L.C. (hereinafter “WP”) within Enbgland Hrings LWS (hereinafter “S”) and its actual role in the company’s corporate tax evasion or its actual role in the company’s acquisition through Nonparty 3, 1998, and that the former company was merely an employee of the company’s investment partner and its actual business partner’s company’s investment partner and its actual business partner’s investment purpose.

C. In light of the above legal principles and records, we affirm the above judgment of the court below as just, and there is no error in the misapprehension of legal principles as to the interpretation and application of Article 4 of the Convention between the Government of the Republic of Korea and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, etc.,

2. Regarding ground of appeal No. 2

A. The principle of substantial taxation under Article 14(1) of the former Framework Act on National Taxes applies to withholding tax on domestic source income under Article 98(1) of the former Corporate Tax Act. Thus, barring any special circumstance, a person who pays domestic source income is obligated to withhold corporate tax on the income based on the person to whom the income actually accrues, after investigating whether there is a person to whom the income actually accrues, different from the name of the person to whom the income actually accrues. However, a person who pays domestic source income bears the duty to withhold corporate tax on the income upon a request of the tax authority for public interest, such as securing early tax revenue and promoting tax collection efficiency, while no other investigation authority granted by the tax authority, such as the right to ask for questioning and inspection, is held in view of the fact that the person who pays domestic source income, even through the materials which are faithfully investigated and secured in the course of transaction or payment of income, cannot be deemed to have a duty to withhold corporate tax on the income based on the person to whom the income actually accrues (see Supreme Court Decision 2011Du3

B. In light of the fact that the court below decided upon the acquisition of the instant convertible bonds by the non-party company following the consultation with the plaintiff and WP, the non-party company was established following the completion of the above consultation, and the plaintiff filed a pre-assessment review with the Commissioner of the National Tax Service on December 28, 2006, and acknowledged the fact that the non-party company was a nominal company with no substance. Thus, it is reasonable to deem that at the time of the payment of the instant dividend income, the plaintiff was aware of the fact that the actual owner was WPE and WPI, and thus, it cannot be deemed that the plaintiff violated the principle of proportionality to impose withholding tax on the instant dividend income.

C. In light of the above legal principles and records, the above judgment of the court below is just and there is no error in the misapprehension of legal principles as to the limitation of the duty of withholding, as otherwise alleged in the ground of appeal.

3. Regarding ground of appeal No. 3

A. Article 12(2)(b) of the Convention between the Republic of Korea and the United States of America (hereinafter “the United States”) on the Avoidance of Double Taxation and the Prevention of Tax Evasion and the Promotion of International Trade and Investment (hereinafter “Korea-U.S. Tax Treaty”) provides that, in the event the recipient of dividends is a “corporation”, the tax rate imposed on the dividends shall not exceed 10% of the voting stocks issued by the paying corporation during a certain taxable year of the paying corporation prior to the date of dividend payment and the total period of the immediately preceding taxable year, in principle, in a case where the receiving corporation owns at least 25% of the voting stocks issued by the paying corporation during the immediately preceding taxable year and the total amount of the voting stocks issued by the paying corporation during the pertinent taxable year, the total amount of dividends shall not exceed 10% of the total amount of dividends.

나. 원심은, 한·미 조세조약 제2조는 그 조약에서 사용하는 용어의 의미에 관하여 제1항 (d)에서 “인(person)이라 함은 개인(individual), 파트너십(partnership), 법인(corporation), 유산재단(estate), 신탁재단(trust) 또는 기타 인의 단체(any body of persons)를 포함한다”고 규정하고, (e)의 (ⅱ)에서 “미국법인(United States corporation) 또는 미국의 법인(corporation of the United States)이라 함은 미국 또는 미국의 제 주 또는 콜럼비아 특별구의 법에 따라 설립되거나 또는 조직되는 법인(corporation), 또는 미국의 조세목적상 미국법인으로 취급되는 법인격 없는 단체(any unincorporated entity treated as a United States corporation for United States tax purpose)를 의미한다”고 규정하는 등 한·미 조세조약은 법인(corporation)과 파트너십(partnership)을 명백히 구분하고 있고, 미국 국내법상으로도 법인(corporation)과 파트너십(partnership)은 그 설립 내지 등록준거법을 달리하고 있는 점 등에 비추어 보면, 비록 이 사건 배당소득의 수취인인 WPEP와 WPVI가 구 법인세법상으로는 외국법인으로 취급되어 법인세 납세의무자가 된다고 하더라도 한·미 조세조약 제12조 제2항 (b)가 규정한 법인(corporation)으로는 볼 수 없다는 이유로, 이 사건 배당소득에 관하여 위 조항에서 정한 10%의 제한세율이 적용되어야 한다는 원고의 주장을 배척하였다.

C. Examining the above provisions and the records in light of the relevant provisions, the above judgment of the court below is just and there is no error in the misapprehension of legal principles as to the concept of corporation under Article 12 (2) (b) of the Korea-U.S. Tax Treaty, as otherwise alleged in the ground of appeal.

4. 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.

Justices Lee In-bok (Presiding Justice)