Cho-2015-Gu-4071 (Law No. 10, 2018)

The disposition of withholding at source by deeming that the beneficial owner of the issue dividend does not directly control the Plaintiff’s stocks is legitimate.

In light of the fact that the parent company deemed as a beneficial owner of the issue dividends has controlled the Plaintiff’s stocks by Domination of the subsidiary companies, etc., it is deemed that the lower limited tax rate on the issue dividends cannot be applied. Therefore, there was no other error in imposing the Plaintiff the source tax by applying the limited tax rate of 15% on the issue dividends.

Actual taxation to international trade under Article 2-2 of the Adjustment of International Taxes Act;

Article 29 of the Adjustment of International Taxes Act

2018Guhap24386 Corporate Tax Collection Request for cancellation

○○ Incorporated Company

○ Head of tax office

September 18, 2019

November 13, 2019

1. All of the plaintiff's claims are dismissed.

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

Cheong-gu Office

The Defendant’s disposition of collecting KRW 1,233,761,164 of corporate tax for the business year 2010 against the Plaintiff on May 8, 2015 and disposition of collecting KRW 123,376,116 of corporate tax for the business year 2010 is revoked.

1. Details of the disposition;

A. Status and governance structure of the Plaintiff, etc.

1) The Plaintiff was a corporation that is engaged in the manufacture, etc. of aluminium products, and was incorporated into ○○○○ Inc. (hereinafter “○○”) and ○○ Stock Company’s joint investment around September 199.

2) Around September 2004, ○○○○○○ Inc. (hereinafter referred to as “○○○”) was established by dividing a business sector related to aluminium into a Canadian corporation (hereinafter referred to as “Canadian”), and around November 10, 204, ○○ established 40○○, a Canadian corporation (hereinafter referred to as “instant Canada corporation 1”), 400 Sanada Inc. (hereinafter referred to as “instant Canadian corporation 2”), a Canadian corporation (hereinafter referred to as “instant Canadian corporation”), and 1 and 2, a Canadian corporation (hereinafter referred to as “instant Canadian corporation”), respectively.

3) On January 1, 2005, ○○ transferred the Plaintiff’s shares to Canadian corporations, thereby holding 27.3% of the Plaintiff’s shares, and 40.7% of the Plaintiff’s shares, Canadian corporations, Canadian corporations, and Canadian corporations, Canadian corporations, and Canadian corporations, Canadian corporations, respectively. The issues were Canadian corporations 1, 27.16% of the Plaintiff’s shares, and 40.743% of the Plaintiff’s shares, respectively, around 2010.

4) ○○○○ additionally established 80○○○ca Inc. (hereinafter referred to as “Canadian corporation 3”), and the said corporation acquired 31.2% of the Plaintiff’s shares by the day of 2011. Meanwhile, ○○○ owns 100% of the Canadian corporations and 3 Canadian corporations.

B. Payment of dividend and taxation

1) On April 2, 2010, the Plaintiff withheld KRW 616,880,570, which is calculated by applying the limited tax rate of 5% (including local income tax) pursuant to Article 10(2)(a) of the Convention between the Republic of Korea and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the payment of dividends of USD 35,071,115 (in original conversion amount of USD 40,414,142,424) (hereinafter “instant dividends”) to the Canadian corporations at issue, and reported and paid to the Defendant.

2) On May 11, 2015, the Defendant issued a correction and notification of the corporate tax (Withholding) 1, 357,137,280 won (=1,233,761,164 won + 123,376,116 won) on April 201, on the ground that “the beneficial owner of the instant dividend is not a Canadian corporation, but rather ○○○○, and 25% of the voting right of the corporation (Plaintiff) paying dividends is not a corporation directly controlling the interest rate of 15%.” Thus, the Defendant issued a correction and notification (hereinafter “instant disposition”).

3) On August 4, 2015, the Plaintiff filed an appeal with the Tax Tribunal on the instant disposition. However, the Plaintiff’s appeal was dismissed on July 10, 2018.

Facts that there is no dispute over recognition, Gap evidence 1 through 3 (including paper numbers, hereinafter the same shall apply), Eul evidence 4, the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition is unlawful for the following reasons.

1) The key Canada corporations are not pure intermediary companies established for the purpose of tax avoidance, but pure intermediary companies, and they are beneficial owners under the instant tax treaty because they were not legal or contractual obligations to transfer the instant dividends to ○○○. Furthermore, the key Canada corporations are Canadian corporations such as ○○○, and thus they cannot be subject to tax avoidance through the establishment of Canadian corporations, and thus, they cannot deny the beneficial owner status of the Canadian corporations based on the principle of substantial taxation (section 1).

2) If ○○○○○ appears to be the beneficial owner of the instant dividend, it should be deemed that ○○○ directly controls the Plaintiff from a tax law perspective based on logical consistent reasoning. Ultimately, ○○○○ directly controlled the Plaintiff’s 25% of the Plaintiff’s voting rights, thereby satisfying the requirements of Article 10(2)(a) of the instant tax treaty, and thus, 5% of the limited tax rate should be applied (section 2).

(b) Relevant statutes and treaties;

Attached Acts and subordinate statutes and treaties shall be as the same.

(c) Fact of recognition;

The following facts can be acknowledged if the above evidence and evidence Nos. 4 through 11 are added to the purport of the whole pleadings.

1) Relation between Canadian corporations and Canadian corporations and ○○○, business activities details, etc.

A) The key Canada corporations were established on the same day as ○○○○’s complete subsidiary, and the location of the office and the human composition (two directors) are entirely identical. The location of the office is the same as the location of ○○○○○’s head office, and two directors are employees of ○○○○ who are paid benefits from ○○○○. This also applies to three major Canada corporations.

B) According to each fiscal year’s financial statements that ends on March 31, 2010 of the Canadian corporations’ key issues and end on March 31, 2012 from the fiscal year’s financial statements that ends on March 31, 2010, they did not hold cash assets, tangible assets at all, and they did not have any sales outside dividend income, foreign exchange losses, taxes, and other business expenses.

C) The key Canada corporations approved financial statements for each fiscal year through the resolution of the board of directors as unlisted companies, but did not receive any separate external audit. The corporate tax in 2010 (Fiscal year: April 1, 2010 to March 31, 201) of the Canadian corporations at issue did not have the amount of tax payable (the data reported on corporate tax for other fiscal years were not submitted as evidence).

D) The key Canada corporations did not directly attend the Plaintiff’s shareholders’ meeting and delegated the exercise of the Plaintiff’s shareholders’ rights to the executives and employees of the Canadian corporations to attend the shareholders’ meeting as an agent of the Canadian corporations, and the same person was the same as the executives and employees of the Plaintiff delegated voting rights from the Canadian corporations.

2) The details, use, etc. of the instant dividend payment

A)***** on March 29, 2010, as the representative of each of the issues Canadian corporations, exchanged the dividend of this case that the Plaintiff had to pay to the Plaintiff on April 2, 2010 into US dollars on the basis of the exchange rate effective on the payment date, and then directed the Plaintiff to pay to the Canadian corporations via the account of ○○○○ (○○○○○○○○○○○○, Account Number: ○○○○○○○○○○○○, Account Number). Meanwhile, the above written statement was written in the document form of ○○○○○○, and the address of ○○○○○○○○○○ was not a Canada but a United States.

B) On April 2, 2010, the Plaintiff paid the instant dividends to the account of the said ○○○○○○○ on the said order. On April 2, 2010, ○○○ used USD 33 million out of the instant dividends in order to repay loans for the extension of overseas factory investment, including Brazil, etc.

C) On January 27, 2016, Canadian Corporation 1, the issue after the instant disposition, prepared a written resolution stating that Canadian Corporation 1 paid USD 14,028,711 as dividends to ○○○ on April 2, 2010, USD 26,913,845 as of March 29, 2012, USD 20,23,750 as of March 28, 2013, USD 26,817,693 as of March 28, 2014, and the pertinent Canadian corporation 2 paid the dividend to ○○○○○, each of the above USD 21,042,404, USD 4036,307,308, 204, 2013, 305, 307, 208, 307, 2013.

D) Meanwhile, the Plaintiffs stated that the subject who received the actual report in relation to the payment of dividend in this case was not a Canadian corporation but ○○○○. The Plaintiff stated that the total dividend amount determined in March 2018, and the dividend amount by shareholder was reported to ○○○ Fund Manager (○○○○○○○).

(iii) payment of acquisition tax deemed by Canadian Corporation 1 of the issue;

Around 2012, Canadian Corporation 1 and 3 additionally acquired the Plaintiff’s shares (this is that Canadian Corporation 1 holds 27.31% of the Plaintiff’s shares, and Canadian Corporation 3 holds 31.95% of the Canadian shares) and around that time, reported and paid the deemed acquisition tax for oligopolistic shareholders under Article 7(5) of the Local Tax Act.

D. Determination

1) Determination as to the first proposal

A) Relevant legal principles, etc.

Article 10(1) of the 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 the other Contracting State," and Article 10(2) provides, however, that such dividends may be taxed in the Contracting State, where the corporation paying the dividends is a resident of the other Contracting State: Provided, That if the beneficial owner of the dividends is a resident of the other Contracting State, the taxes so levied shall not exceed: (a) provides that "if the beneficial owner of the dividends is a resident of the other Contracting State, the taxes so levied shall not exceed: (b) provides that "if the beneficial owner of the dividends is a corporation (not a partnership) which directly controls at least 25 percent of the voting rights of the corporation paying the dividends

Where a Korean corporation pays dividends to a corporate shareholder who is a beneficial owner of Canada pursuant to Article 10 of the tax treaty of this case, the Korean corporate tax withheld on dividend income is limited to a maximum of 15% from 15% to 5%, notwithstanding the provisions of the Corporate Tax Act. In full view of the history of the introduction of the provisions of the above treaty and the context thereof, etc., the beneficial owner refers to cases where the person who received the dividend income has a right to use and benefit without any legal or contractual obligation to transfer the dividend income to another person. Determination as to whether the person is a beneficial owner ought to be made by comprehensively taking into account all the circumstances, including the substance and status of business activities related to the pertinent income, the details of the actual use and operation of the income (see Supreme Court Decision 2017Du3008, Nov. 15, 2018)

Meanwhile, Article 14(1) of the Framework Act on National Taxes applies to the interpretation and application of tax treaties having the same effect as the Act (see, e.g., Supreme Court Decisions 2010Du11948, Apr. 26, 2012). Therefore, even if the beneficial owner of dividend income is recognized as abuse of treaty pursuant to the principle of substantial taxation under the Framework Act on National Taxes, such application may be denied. In other words, where the nominal owner of property is not capable of controlling and managing the property, and there is another person who substantially controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, the application of tax treaties according to the nominal owner shall be denied and the income on the property shall be deemed reverted to the person who actually controls and manages the property. However, where there is no such disparity between the nominal owner and the real owner, the income on the property shall belong to the nominal owner of the income (see, e.g., Supreme Court Decisions 2012Du163818Du1684.

B) Determination

In light of the above legal principles, when examining the following circumstances recognized as the purport of the above facts and the entire purport of the pleading, the person who enjoyed the right to use and benefit from the dividends of this case and controlled and managed the dividends of this case is not the Canadian corporation, but the ○○○, which has control over the issues of Canada corporations, and the disparity between the name and substance is derived from the purpose of ○○○○’s avoidance of acquisition tax deemed as the oligopolistic shareholder of this case. Accordingly, the beneficial owner and actual owner of the dividends of this case are ○○○, and therefore, the Plaintiff’s first week is not reasonable.

(1) The key Canada corporations are ○○○ ○○ ○○ ○○ ○○, which was established two months prior to the acquisition of the Plaintiff’s shares, and did not have the minimum human and physical facility tanks necessary for the holding company to carry out its main purpose. The employees of ○○ ○ ○ were deemed to have directly carried out various tasks that the Canadian corporations should carry out as holding companies

(2) The Plaintiff exchanged the instant dividends into US dollars without going through the accounts of Canadian corporations and immediately remitted them to ○○○○’s U.S. account. The ○○○○ used almost the amount of the instant dividends on the date when the instant dividends were transferred to ○○○○’s account. At the time, there was no resolution of the board of directors on the payment of dividends to ○○○○○○. There was only a resolution of the board of directors that approves the payment of the said dividends after the instant disposition. Therefore, the substantial decision-making entity with respect to the instant dividends is not the Canadian corporations, but rather the Canadian corporations, and the ○○○○○ was also deemed to have been ○○○.

(3) In addition, comprehensively taking into account the time of the establishment of the Canadian corporations in question, the current status of human and physical facilities, business activities details, the actual place of use of the dividend of this case, the timing of resolution by the board of directors of the Canadian corporations on the dividend of this case, and the fact that ○○○○○○○○○, an employee of the Canadian corporations in question, who was the representative of ○○○○○○○, exercised the shareholder’s right against the Plaintiff, separate from ○○○○, independent management judgment, it can be deemed that the Canadian corporations in question held the Plaintiff’s shares in formality, but did not have the ability to control and manage the Plaintiff’s shares and the dividend of this case, and ○○○○ was practically controlled and managed through control

(4) Around 2004, ○○○○ established a Canadian corporation with the same business location, personnel composition, and purpose of its establishment without any particular reason, even though it was possible to comprehensively inherit the Plaintiff’s shares at the time of division into ○○○○○○○○, without any specific reason. Moreover, the key Canada corporations established as above, through ○○○○’s employees, have held board of directors, filed corporate tax reports, exercised shareholder rights, etc. with the same content on the same day, and there is no difference in the place where the instant dividends were used, the details of the orders given to the Plaintiff, and the details of business activities. Considering these factors, it appears that ○○○ acquired the Plaintiff’s shares by establishing the Canadian corporation with the issue of seeking to avoid deemed acquisition tax of oligopolistic shareholders under the Local Tax Act, which was imposed upon ○○○○ upon acquiring the Plaintiff’s shares.

2) Determination on the second proposal

A) Relevant treaties and statutes

(1) In the application of this Convention, Article 3(2) of the Tax Treaty provides that "for the purposes of this Convention, terms not defined in the Convention, unless the context otherwise requires: (a) the meaning provided by the law of the Contracting State at the time of the application of this Convention for the purposes of taxes to which the Convention is applied and the meaning under the tax law of the Contracting State in respect of such terms shall prevail over the meaning under the other law of the other Contracting State."

(2) Although the tax treaty does not separately define "direct control" of voting rights, Article 2 (1) 8 of the Adjustment of International Taxes Act and Article 2 of the Enforcement Decree of the same Act stipulate that "indirect ownership" of stocks shall be indirectly owned by one or more corporations between the corporations, and these corporations are connected through the stock ownership relationship, and the calculation method of the indirect ownership ratio of stocks shall be specified in detail. Article 45-3 (1) of the Inheritance Tax and Gift Tax Act and Article 34-2 (1) and (2) of the Enforcement Decree of the same Act provide that "indirect ownership ratio shall be calculated in cases where one or more corporations interpose between individuals and beneficiary corporations by holding stocks of each subsidiary company". In addition, Article 7-4 (1) [Attachment 2] of the Enforcement Decree of the Framework Act on Small and Medium Enterprises provide that "indirect control, substantial control, direct control, direct control, and direct control of the subsidiary company or beneficiary company," "direct control of each parent company."

(3) On the other hand, the interpretation of tax laws and regulations shall be interpreted as the legal text, barring special circumstances, and shall not be extensively interpreted or analogically interpreted without reasonable grounds (see, e.g., Supreme Court Decision 2002Du6781, May 27, 2004).

B) Determination

In light of the following circumstances, in light of the relevant treaties and the relevant laws and regulations, ○○○ cannot be deemed to have controlled 25% of the Plaintiff’s voting rights, and the Plaintiff’s voting rights should be indirectly controlled. In this case, Article 10(2)(a) of the Tax Treaty cannot be applied and Article 10(2)(b) should be applied. Accordingly, the Plaintiff’s second chapter is without merit, and the Defendant’s disposition is lawful.

(1) Article 7-4(1) of the Enforcement Decree of the Framework Act on Small and Medium Enterprises provides that “in cases where one or more corporations interpose between a corporation and such corporations are connected through the stock ownership, the method of calculating the indirect ownership ratio of stocks shall be considered as “indirect control”. Article 7-4(1) of the Enforcement Decree of the Framework Act on Small and Medium Enterprises provides that “in cases where a parent company directly owns the stocks, etc. of the subsidiary company, which is a stockholder of the parent company, directly owns the stocks, etc. of the subsidiary company or grandchild company, the parent company shall be considered as “direct control”. Therefore, the term “direct control” under the tax treaty of this case should be interpreted as “in cases where the other corporation and the corporation directly own the stocks paid by the dividends, without the incorporation of the other corporation.” However, 00% of the stocks of the Canadian corporation at issue are owned by 100%, but does not directly own the Plaintiff

(2) The instant tax treaty provides that “not less than 25% of the voting rights of a corporation paying dividends shall be controlled directly.” In order to exercise voting rights, a registered shareholder must be registered as a shareholder in the register of shareholders (see, e.g., Supreme Court en banc Decision 2015Da248342, Mar. 23, 2017). Therefore, even if ○○○ substantially controls the Plaintiff’s shares through control over Canadian corporations, it cannot be deemed that “direct control” is not “direct control unless registered as a shareholder in the Plaintiff’s register of shareholders.”

(3) The substance over form principle is merely based on who is the person who is the actual owner in the hinterland of the transaction titleholder at issue, and does not deny the legal personality of the nominal owner under the corporate law, and thus, determined that ○○○ was the person who actually reverts the Plaintiff’s stocks and the instant dividends pursuant to the substance over form principle, and thus, the status as the shareholder of the Canadian corporation at issue is not denied.

(4) As alleged by the Plaintiff, interpreting that “the beneficial owner of shares or the actual person to whom shares substantially accrue under the substance over form principle” is “the person to whom the beneficial owner directly controls the voting rights” and “other cases where the beneficial owner otherwise controls the voting rights” pursuant to separate provisions (Article 10(2)(b) of the Tax Treaty refers to cases where the beneficial owner directly controls the voting rights of the corporation, which pays dividends, or indirectly controls the voting rights of the corporation which pays dividends, under 25%).

(5) In the note of the OECD Model Tax Treaty recently published, when a taxpayer was changed as a result of the application of the principle of substantial taxation, the provisions of the tax treaty should also be applied in consideration of such change, and (a) where a corporation is treated as a Do Governor in the equity relationship formed by a corporation (b) corporation (C). However, the above note is not legally effective, and its contents are not consistent with the concept of indirect ownership of shares, the method of calculating indirect ownership of shares, and the method of calculating indirect ownership of shares.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.