In accordance with Article 10(2)(a) of the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, even if a source country has paid a tax on dividend income at a 5% limited tax rate, the tax amount considered to have been paid to the source country shall be deemed to have been 10% of the total dividend amount in accordance with the latter part of Article 5(1) of the Protocol between the Government of the Republic of

The latter part of Article 5(1) of the Protocol B between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “the latter part of the said Article”) adopts Article 10(2) of the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-China Tax Treaty”), and uniformly determines the amount of tax deemed to have been paid by the Contracting Parties in the tax treaty itself. In other words, Article 10(2)(a) of the Korea-China Tax Treaty provides that in cases of a company (excluding partnership) in which the beneficial owner of dividends owns not less than 25% of the company’s capital dividend payment and for the promotion of international investment, only the source country with respect to dividend income within the limit of 5% lower than the total dividend amount applicable to general cases, the said provision recognizes the effect of the said tax rate to be uniformly applied.

As such, as the method of granting special tax benefits by deeming the deductible tax rate as well as the applicable scope and time limit are clearly limited according to the intent of the Contracting State of the Korea-China Tax Treaty, it is difficult to view that the meaning of the latter part of the above provision changes from the domestic law of the source State to the tax rate on the dividend income received by the investment companies of the resident state.

In light of the structure, contents, etc. of the provision on mutual aid for foreign tax amount deemed as above, even if the source country paid a tax on dividend income with 5% limited tax rate under Article 10(2)(a) of the Korea-China Tax Treaty, it is reasonable to regard the tax amount deemed as paid to the source country in accordance with the latter part of the said provision as 10% of the total dividend amount.

Article 57(1)1 and (3) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 10(2)(a) of the Agreement between the Government of the Republic of Korea and the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Government of the Republic of Korea and the Government of the People’s Republic of China; Article 5(1) of the Protocol II of the Agreement between the Government

El branch Co., Ltd. (Law Firm Jeongan et al., Counsel for the defendant-appellant)

The director of the Nam-gu Tax Office (Law Firm Han & Yang LLC, Attorneys Kim Yong-tae et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2016Nu62711 decided August 18, 2017

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. Article 57(1)1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that where a domestic corporation’s tax base for each business year includes income generated from sources in foreign countries, and the amount of foreign corporate tax paid or to be paid on such income exists, the amount of foreign corporate tax may be selected by deducting the amount of foreign corporate tax from the amount of corporate tax for the pertinent business year within the scope of credit limit. Article 57(3) of the same Act provides that the amount equivalent to the amount of corporate tax reduced or exempted on the relevant income generated from foreign countries in a foreign country in the other country to the tax treaty shall be deemed the amount of foreign corporate tax which is the object of

Article 23(3) of the Agreement between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which was concluded in 194 (hereinafter “Korea-China Tax Treaty”), was replaced by Article 5(1) (hereinafter “instant provision”) of the Protocol Between the Government of the Republic of Korea and the Government of the People’s Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income, which was concluded in 206. The instant provision was replaced by the preamble of Article 23(1) (a) of the Korea-China Tax Treaty (amended by Article 23(1) of the Korea-China Tax Treaty (Article 4 of the Protocol), and is deemed to have been included in taxes that would have been paid if there was no other relevant provision regarding measures to reduce taxes, exempt taxes, or promote economic development. In the latter part of the latter part, “Article 10(2) of the said Treaty shall be deemed to have been applied mutatis mutandis.”

As can be seen, the latter part of Article 10(2) of the Korea-China Tax Treaty adopts the method of deeming a foreign tax amount to be paid in a Contracting Party under the tax treaty as 10% of the total amount of dividend, etc. In other words, Article 10(2)(a) of the Korea-China Tax Treaty provides, “in the case of a company (excluding partnership) in which the beneficial owner of dividend pays dividends directly owns not less than 25% of the company’s capital, the beneficial owner of dividend pays dividends,” the latter part of Article 10(2)(a) of the Korea-China Tax Treaty recognizes the taxation of the source country on dividend income only within the limit of 5% of the total dividend amount, which is the limited tax rate applied in general cases, which is lower than 10% of the total dividend amount, which is the limited tax rate applied in general cases. In such a case, the latter part of the latter part of the instant provision stipulates that the tax amount paid in a lump sum should be calculated

As such, as the method of granting special tax benefits by deeming the deductible tax rate as well as the applicable scope and time limit are clearly limited according to the intent of the Contracting State of the Korea-China Tax Treaty, it is difficult to view that the meaning of the latter part of the instant provision changes from the domestic law of the source State to the tax rate on the dividend income received by the investment companies of the resident state.

In light of the structure, contents, etc. of the provision on mutual aid for foreign tax amount deemed as above, even if the source country paid a tax on dividend income with a limited tax rate of 5% under Article 10(2)(a) of the Korea-China Tax Treaty, it is reasonable to regard the tax amount deemed as paid to the source country in accordance with the latter part of the instant provision as 10% of the total dividend amount.

2. According to the reasoning of the first instance judgment cited by the lower court, the following facts are revealed.

A. In the business year 2010, the Plaintiff directly owned 100% of the shares of the instant subsidiary established in China received the instant dividends from the instant subsidiary with the surplus funds since 2008, and subsequently paid the tax amount calculated according to the limited tax rate of 5% under Article 10(2)(a) of the Korea-China Tax Treaty to China, and filed a return on and paid corporate tax by deducting the said tax amount from the foreign corporate tax amount under Article 57(1)1 of the former Corporate Tax Act (hereinafter “direct foreign corporate tax amount”).

B. On March 26, 2014, the Plaintiff applied the instant dividend to the Defendant at a rate of 10% set forth in the latter part of the instant provision minus 5% of the direct foreign tax payment rate, deeming that the amount of the foreign tax credit increased by 5%, the Plaintiff filed a claim for the correction of the tax amount by applying the additional tax credit amount to KRW 2,706,059,530 (hereinafter “instant tax amount”) in relation to the return of corporate tax for the business year 2010.

C. On April 3, 2014, the Defendant rendered the instant disposition rejecting the Plaintiff’s claim for correction on the ground that “If the Chinese domestic law rate was lower than the 5% limited tax rate as stipulated in Article 10(2)(a) of the Korea-China Tax Treaty since 2008, the Plaintiff did not take measures for tax reduction or exemption, and thus, imposed the instant dividend by applying the said 5% limited tax rate to the said dividends, the tax credit deemed to be paid abroad under the said Treaty cannot be applied.”

3. Examining these facts in light of the aforementioned provisions and legal principles, the instant tax amount, which is the difference between the tax amount calculated by 10% and the tax amount directly paid to China, the source country of origin, pursuant to the latter part of the instant provision, shall be deemed eligible for tax credit under Article 57(3) of the former Corporate Tax Act.

4. Nevertheless, on the premise that the latter part of the instant provision may only be applied where there exists a separate provision of tax reduction or exemption under the tax law of the source country providing benefits exceeding the limited tax rate under the Korea-China Tax Treaty, the lower court determined that the instant disposition was lawful, which determined that the instant tax amount cannot be deemed as subject to foreign tax credit. In so determining, the lower court erred by misapprehending the legal doctrine on the interpretation of the latter part of the instant provision, thereby adversely affecting

5. The plaintiff's appeal is with merit, and the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices

Justices Kim Chang-suk (Presiding Justice)