Hartjin Co., Ltd. (LLC, Attorneys Jeon Young-young et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office (Attorney Kim Jae-gu et al., Counsel for the plaintiff-appellant)

August 17, 2012

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of collecting corporate tax of KRW 2,313,482,560 for the business year 2006 against the Plaintiff on January 3, 201 shall be revoked.

1. Details of the disposition;

A. On February 28, 1996, the Plaintiff established “Jinro International Limited (H.K.)” (hereinafter “Saro Hong Kong”) in accordance with the Hong Kong Act, and acquired all the shares issued in the course Hong Kong.

B. The career Hong Kong issued the floating interest rate of USD 80,000 (FRN) twice on June 24, 1996 and July 20, 1997, as indicated in Table 1, as follows:

C. Around June 2003, the payment guarantee creditor reported USD 86,778,320.19 to the plaintiff as reorganization claim ($ 64,70,000 of principal + interest USD 22,78,320.19) in the company reorganization procedure against the plaintiff, and the plaintiff was deemed as the payment guarantee obligation.

D. From among the payment guarantee creditors, “Merri Lynch International” was notified to the Plaintiff around May 2004, and “Core Finc Roc Ro Roc Roc Group” around November 2004, respectively, of the payment guarantee creditors: “The Plaintiff transferred the payment guarantee claim to the MMMMM System and Co., Ltd., and the International Limited.”

E. From among the payment guarantee creditors, the National Bank, “Goldman Sachs International,” “Goldman Sachs International,” and “The LLC,” notified the Plaintiff of the payment guarantee on July 2005, “MMMMMMSS and Co., Ltd., “The International Limited, around August 2005,” “Stone U.S. International Trusted,” “Stone U.S. International Trusted” around September 2005, respectively, that “The Plaintiff transferred the payment guarantee claim to the Plaintiff around September 2005,” respectively. The details of the payment guarantee claim that the ATREL acquired are as follows:

F. After obtaining the confirmation of non-taxation exemption from the Defendant, the Plaintiff paid USD 86,778,320.19 to the ACRL without withholding corporate tax on March 16, 2006 (hereinafter “instant payment”).

G. On January 3, 2011, the Defendant imposed corporate tax of KRW 2,313,482,560 for the business year 2006, as indicated in Table 1, on the ground that “the instant payment amount is a domestic source interest income, and the payment guarantee creditors are beneficial owners” (hereinafter “instant disposition”).

H. The Plaintiff filed an appeal on March 30, 201, but was dismissed by the Tax Tribunal on December 16, 201.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 7, evidence Nos. 9 through 13 (including provisional number), Eul evidence No. 1, the purport of the whole pleadings

608, 270, 405, 270, 2778, 297, 270, 279, 267, 305, 297, 267, 279, 367, 407, 297, 279, 207, 279, 406, 197, 279, 207, 279, 207, 40, 197, 197, 207, 40, 206, 190, 190, 190, 478, 197, 205, 206, 305, 206, 306, 196, 197, 959, 101, 359, 91, 306, 106, etc.,

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

(1) The instant payment is a performance of the guaranteed obligation entirely separate from the principal obligation, and is not a cost for the use of money, and does not constitute interest income. Therefore, the instant disposition against the subject of non-taxation is unlawful.

(2) Even if the instant payment is interest income, the proviso of Article 93(1)1 of the Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter “former Corporate Tax Act”) provides that “the interest on a loan directly borrowed by an overseas business place of a domestic corporation shall be decided at the source country on the basis of the place of use of the relevant loan.” There is no reason to treat differently since the overseas business place of the domestic corporation and the overseas business place of the domestic corporation are the same as the existence of the legal personality, and there is no reason to treat differently. Since the career Hong Kong is the Plaintiff’s overseas subsidiary and the instant payment is the amount equivalent to the interest on the loan in the career Hong Kong, it is unlawful to take into account that the instant payment is not a domestic source income.

(3) Even if the instant payment is a domestic source interest income, since the ACRL is a beneficial owner, it is exempt from taxation pursuant to the Convention between the Republic of Korea and Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Transfer Income (hereinafter “Korea-ASEAN Tax Treaty”), and the instant disposition is unlawful.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

(1) As to the interest income corresponding

Article 93 (1) 1 of the former Corporate Tax Act provides that "interest income paid by a foreign corporation from a domestic corporation (excluding income under subparagraph 8 of the same paragraph) under the provisions of Article 16 (1) of the Income Tax Act and interest and trust interest income shall be income generated from Korea." Article 16 (1) of the Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006) provides that "(i) interest and discount amount of bonds or securities issued by the State or a local government, (ii) interest and discount amount of bonds or securities issued by a domestic corporation, (iii) interest and discount amount of domestic deposits (including installment savings, installments, deposits and postal transfers), (iv) interest paid from an investment trust (referring to an investment trust with interest as prescribed by the Presidential Decree) received in the Republic of Korea, (vi) interest and discount amount of bonds or securities issued by a domestic branch of a foreign corporation or a domestic business office, (iii) interest and discount amount of bonds or securities issued by the former Corporate Tax Act, and (i) interest or excess repayment from a domestic business association.

(2) As to the corresponding domestic source income

Article 93 subparag. 1 (a) of the former Corporate Tax Act provides that "interest income received from the State, local governments, residents, domestic corporations, or foreign corporations, or from the domestic place of business of a non-resident is not domestic source income." Article 11(5) of the OECD Model Tax Convention provides that "if the payer of interest is a resident of a Contracting State, the interest shall be deemed to accrue from the Contracting State. However, regardless of whether the payer of the interest is a resident of a Contracting State, the interest shall be deemed to have a domestic place of business related to the occurrence of the obligation which is the cause of payment of the interest, and if the interest is borne by that domestic place of business, the interest shall be deemed to have accrued from that domestic place of business." Since the source country of the interest income shall be determined based on the resident or domestic corporation's domestic place of business, the source country of the interest income directly borrowed and used by the resident or domestic place of business shall not be deemed to have been a domestic place of business of the Plaintiff's parent company, which is the parent company of Hong Kong Model Tax Treaty or its domestic place of business."

(3) As to beneficial owners

(A) Definition

Article 11(1) of the Korea-U.S. Tax Treaty provides that "interest accruing from the source of a Contracting State acquired by a resident of the other Contracting State and owned by a beneficial owner shall be taxed only in that other Contracting State." Thus, to be excluded from corporate tax withholding, ACRL must be the beneficial owner of the payment of this case. However, since there is no definition of the concept of the Korea-U.S. Tax Treaty or the Korea-U.S. Tax Act with respect to the beneficial owner, there is no need to be controversy as to

The concept of “beneficial owner” is derived from the Trust Act of the United Kingdom. Under the English Trust Act, a beneficiary has a legal right to enjoy profits from trust property although he/she does not have external ownership of trust property. Such concept of beneficial owner has been developed as a concept that takes economic aspects into account in order to realize taxation consistent with the substance, and has been expanded to “a person who has the right to enjoy the negligence of trust property or dispose of such negligence for his/her own interest.” As such, the beneficial owner is not a person who has the right to take substantial economic disposition (such as the acquisition, alteration and extinguishment of the right) and the risk related thereto, but is an economic owner to whom such income actually reverts. This concept of beneficial owner was interpreted as an abuse of Article 1 of the OECD Tax Treaty and Article 10 of the OECD Convention on the Prevention of Tax Evasion, and Article 21 of the OECD Treaty on the 1977.

(B) Determination criteria

In the OECD Model Tax Treaty Notes, the OECD Model Tax Treaty was amended in order to prevent abuse of the treaty at the time of the amendment of the OECD Model Tax Treaty in 1992, ① It provides for the limited tax rate under the tax treaty to the relevant corporation only when the resident state of the relevant corporation owns the relevant corporation, taking into account the ownership or control relationship of the relevant corporation). ② The Act on the Exclusion of Double Benefits from Taxation (Eclus, the method of excluding the limited tax rate under the tax treaty to the corporation benefiting from the tax exemption in the resident state), ③ the Act on Access to Taxation (the method of excluding the limited tax rate under the tax treaty to the corporation benefiting from the relevant tax treaty in the case of a corporation benefiting from the domestic source state of the relevant income; ④ the Act on the Access to Taxation (the method of allowing the relevant corporation to benefit from the domestic source of the relevant tax treaty in the case of a corporation benefiting from the domestic source of the relevant income when it is substantially related to the interest rate under the relevant tax treaty to the relevant corporation benefiting from the domestic source of business.

(C) A beneficial owner of the instant payment

1) In full view of the purport of the entire pleadings in the statements Nos. 2, 3, and 4, the following facts can be acknowledged.

① The ARESL’s shareholders; ARES’s shareholders; the ratio of shares and the composition of bond holders; the ratio of claims is the same as indicated in Schedule 2 <2> the ATRESL’s establishment purpose; ARESL was established according to the company reorganization plan of Hong Kong in the course of the Hong Kong approved by the Hong Kong court on July 27, 2004; (3) the company reorganization plan states that “a special purpose corporation is established in Ireland, taking into account domestic taxes in the Republic of Korea”; (4) the company reorganization plan states that “a special purpose corporation is established in Ireland; (3) there was no profit generation in the audit report for the business year 2004; there was no asset holding other than the payment guarantee claim; (205, 2006 audit report; and (4) there was no administrative obligation related to business activities, such as tax reporting; and (5) there was no dissolution of the ASSL’s director at the company supervision office in Ireland; and (2) there were 206 members of the AESL among the remaining shareholders;

The creditors of this case included within the main sentence 181, 190 Goldman Sachs 181, 190, 360, 370, 361, 352.5, 40, 442, 447.59, 181, 190, 190, 187, 30, 305, 30, 360, 361, 40.5, 30, 50, 67, 30, 40, 50, 67, 50, 50, 30, 50, 50, 50, 50, 60, 50, 50, 30, 50, 50, 7,000, 7,106, 106, 84, 196, 84, 196, etc.,

2) In light of the above facts, when applying the criteria set forth in the Note to the OECD Model Tax Treaty, it is reasonable to view that the ACRL was an abuse of treaty, considering the fact that the payment guarantee creditors held 100% of the ATRL’s equity interest, the payment guarantee creditors are non-residents in Ireland, and the payment of the instant case is all introduced, so it cannot be viewed as a beneficial owner if it is based on the Investment City Access Act or the Passage Access Act. Even if the instant payment is subject to taxation in Ireland, the Plaintiff did not file a tax return in the business year 2006 when the payment guarantee creditors did not file a tax return for the purpose of tax avoidance against interest income, considering the fact that the ACRL was established for the purpose of tax avoidance by using the Korea-Japan Tax Treaty. Accordingly, the Plaintiff’s assertion under the Korea-Japan Tax Treaty is not a beneficial owner, and therefore, the Plaintiff’s assertion is without merit.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment Omission of Related Acts]

Judge Cho Jin-hun (Presiding Judge)