[1] In case where a Germany-invested organization, which corresponds to a “foreign corporation” under the Corporate Tax Act of Korea, does not bear a comprehensive tax liability in Germany, which is the resident country, the scope of application 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

[2] The case holding that in a case where Party A, a German limited partnership, established Party B and owns all outstanding shares, and Company B, a limited liability company in Korea, paid the income accrued from rental income and transfer margin, etc. after purchasing real estate in Korea, as dividends, and paid withheld corporate tax by applying a 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, but the tax authority imposed corporate tax collection on Company B by applying the tax rate of 25% under Article 98 (1) 3 of the former Corporate Tax Act by deeming the beneficial owner of the dividend income as Party A, the above beneficial owner of the dividend income should be deemed Party A, not Company A

[1] Article 4(1) of the Tax Treaty assumes that a resident state bears the comprehensive tax liability based on the domicile, residence, location of the head office or principal office or other criteria similar thereto. Thus, if the resident state does not have such comprehensive tax liability, the tax treaty cannot be applied to the income derived from the source state. Articles 1 and 4(1) 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”) also stipulate that the tax treaty apply only to the resident state with the comprehensive tax liability in the resident state. The Korea- Germany Tax Treaty does not stipulate any provision on whether the so-called “foreign corporation” is subject to the tax treaty as a resident, but does not require the comprehensive tax liability within the scope of German tax treaty to the extent that the German corporation and the resident state of Germany bear the comprehensive tax liability within the scope of the income acquired by its constituent members under the said comprehensive tax treaty. However, even if the German corporation and the resident state of Germany are not subject to the said tax treaty.

[2] The case holding that in case where Gap, a German limited partnership, established Eul, and owns all outstanding shares of Eul, a limited company in Germany, and Eul, established Byung, a limited company in Korea, and Eul paid income generated from rental income and transfer margin as dividends, etc. after purchasing real estate in Korea, Byung paid corporate tax withheld at source by applying a 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”), but the tax authority deemed Gap as the beneficial owner of the above dividend income to be the company, and thus imposed corporate tax collection disposition on Byung by applying the tax rate of 25% under Article 98 (1) 3 of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008), the court below erred by misapprehending the legal principles as to the substantive owner of Gap's dividend income and its management interest income, and it can be deemed as Gap's actual owner.

[1] Articles 2(1)2 and (4) (see current Article 2(5)), 93 subparag. 2, and 98(1)3 of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Articles 1, 4(1), 10(1), and 10(2)(a) and (b) 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 / [2] Articles 2(1)2 and (4) (see current Article 2(5)), 93 subparag. 2, and 98(1)3 of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Article 2(1)3 of the former Corporate Tax Act; Article 98(1)3 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

Other companies specializing in securitization (Attorneys Son Ji-yol et al., Counsel for the plaintiff-appellant)

The Head of the District Tax Office (Law Firm ELBP Partners, Attorney Lee Do-young, Counsel for the defendant-appellant)

Seoul High Court Decision 2012Nu28362 decided March 27, 2013

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. Regarding ground of appeal No. 1

A. Article 2(1)2, etc. of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) provides that a foreign corporation is liable to pay corporate tax only when there is a domestic source income with respect to the foreign corporation. Articles 2(4) and 98(1) provide that a person who pays a certain amount of domestic source income to a foreign corporation, such as Article 93 subparag. 9, shall be liable to withhold the relevant corporate tax. Articles 93 subparag. 2 and 98(1)3 provide that the withholding tax rate for the dividend income that is the domestic source income of the foreign corporation shall be 25%.

Meanwhile, Article 10(1) 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 “The dividends paid by a corporation which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State,” and Article 10(2) provides that “However, with respect to such dividends, the corporation paying the dividends may also be taxed in the Contracting State, which is a resident, in accordance with the laws of that State: Provided, That if the beneficial owner of the dividends is a resident of the other Contracting State, the taxes imposed as above shall not exceed: (a) Item (a) provides that “5% of the total amount of the dividends shall not exceed the following:

B. citing the reasoning of the judgment of the court of first instance, the lower court: (a) established TM HembH&C (hereinafter “TMW”) on January 5, 2003, which is a German limited partnership company, TMWHbH (hereinafter “TMW”); (b) held all outstanding shares; (c) established TMWHHH on February 21, 2003; and (d) held all outstanding shares of the Plaintiff on April 18, 2003; (b) purchased the ○○ building on April 18, 2003 from 2006 to 208; and (c) recognized the Plaintiff as the beneficial owner of TM 20% of the corporate tax under the former Tax Treaty, which was established by the application of the limited tax rate of TM 20 to 30% of the dividend income accrued from the lease of the ○ building at source, etc. to 2006 to 2008 to 2008.

Furthermore, the lower court determined that the beneficial owner of the instant dividend income shall be deemed the nominal owner of the instant dividend income, and the Plaintiff’s tax law shall apply to the instant dividend income, as long as it directly owned by the German residents and investors under the instant tax treaty, on the grounds that: (i) TMWH entertainment is a limited company established lawfully under the German law, and falls under the subject of independent rights and obligations independent from TMW, such as the conclusion of an investment management contract and the payment of fees, as well as the payment of investment fees, and (ii) TMWH entertainment was directly re-investment in the real estate located in Japan; (iii) TMWH entertainment entertainment did not have contractual or legal obligations to automatically pay the instant dividend income to the investors; and (iv) TMW has established a limited liability company for each investment case and had it acquire local real estate by its limited liability company, on the grounds that it is reasonable for the economic reasons such as securing the flexibility of the disposal of financial and investment assets; (ii) preventing investor information exposure; and (iii) ensuring the legal regulations on investors.

C. However, the lower court’s determination is difficult to accept for the following reasons.

(1) The substance over form principle under Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 8840 of Dec. 31, 2007, and Article 14(1) of the same Act (amended by Act No. 9911 of Jan. 1, 2010; hereinafter the same) where there is a separate person to whom the actual income, profit, property, transaction, etc. belongs differently from the nominal owner, the nominal owner should be the person to whom the property belongs rather than the nominal owner. Thus, where the nominal owner is not capable of controlling and managing the property, and there is another person who actually controls and manages it through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of evading taxes, the income on the property shall be deemed reverted to the person who actually controls and manages the property, and the person to whom the property belongs shall be the person to whom the tax payment is made (see Supreme Court en banc Decision 2008Du84999, Jan. 19, 19, 20120).

On the other hand, the tax treaty assumes the person liable for comprehensive tax payment in accordance with the domicile, residence, location of the head office or principal office or other standards similar thereto in the resident state. Thus, in principle, if the person liable for comprehensive tax payment in the resident state is not the person liable for such comprehensive tax payment, the tax treaty cannot be applied to the income accrued in the country of origin. Articles 1 and 4(1) of the Korea- Germany Tax Treaty also stipulate that the tax treaty is applicable only to the resident liable for comprehensive tax payment in the resident state. The Korea- Germany Tax Treaty does not stipulate any provision on whether the so-called “foreign corporation” is subject to the tax treaty as a resident, but does not include any provision on whether the so-called “foreign corporation” is the person liable for comprehensive tax payment in Germany and Germany, and thus, even if the German corporation’s investment and taxation organization falling under the “foreign corporation” under the Korean Corporate Tax Act does not bear comprehensive tax liability in Germany, the scope of the scope of the comprehensive tax liability under the German tax treaty cannot be deemed to be applicable only to the person liable for comprehensive tax payment in Germany- Germany, foreign corporation and its constituent members.

(2) According to the reasoning of the lower judgment and the evidence duly admitted by the lower court, ① TMWH has been established solely for the purpose of the management of income from the acquisition, lease, sale, etc. of the German limited liability company established by TMW to each Asian country by case of investment, and there was no business activity in Germany where the head office is located in Germany. ② TMWH base was not only for TMW and location, contact address, director, and personal resources of the same company but also for funds for acquiring the Plaintiff’s issued stocks were provided from TMW. From April 2006 to December 2008, all of the dividends received from the Plaintiff excluding German capital gains from the Plaintiff were paid to TMW immediately, and around July 2008, the Plaintiff’s general meeting of shareholders was resolved to sell the ○○ building at the Plaintiff’s general meeting of shareholders; ③ It is not a member of the German company’s comprehensive business relationship with the Plaintiff’s members under the Corporate Tax Act, but also for TMG’s comprehensive business relationship with the Plaintiff’s members.

In light of the circumstances and purpose of the establishment of TMWH entertainment, the human and material organization and details of business activities of TMWH entertainment, and the degree of control and management of TMW and TMWH entertainment income, TMW entertainment did not have the ability to control and manage the Plaintiff’s issued stocks or the instant dividend income, and TMW did not directly control and manage the instant dividend income through the control, etc. over TMWH entertainment. Under the Corporate Tax Act of Korea, if TMW directly obtains the instant dividend income under the Corporate Tax Act of Korea, the difference between the name and substance arises solely from the purpose of tax evasion. As such, the beneficial owner of the instant dividend income can be deemed not to be TMW, but to be the actual owner of the instant dividend income. Moreover, insofar as TMWH entertainment is merely the nominal owner of the instant dividend income, it cannot be deemed to have committed a legal act or a temporary reinvestment in the name of the relevant business owner, and thus, it cannot be deemed to have any other obligation to do so by doing so under the law.

(3) Nevertheless, the lower court determined that the instant disposition was unlawful by deeming the beneficial owner of the instant dividend income as TMWH entertainment. In so doing, it erred by misapprehending the legal doctrine on the scope to which the principle of substantial taxation under Article 14(1) of the former Framework Act on National Taxes applies.

2. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)