Cho High Court Decision 2007Da2918 (O. 21, 2008)

A person who substantially reverts to equity gains;

In cases where the person who has the formal ownership of capital gains is different from the person who has the actual ownership, the actual owner shall be deemed the transferor.

The contents of the decision shall be the same as attached.

1. The plaintiff's claim is dismissed.

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

The defendant's rejection disposition against the plaintiff on April 30, 2007 against the plaintiff of 935,90,250 won of corporate tax of 2006 shall be revoked.

1. Circumstances of the disposition;

A. The Plaintiff is a legal entity of Malaysia established by the laws of Malaysia.

B. On September 5, 2006, the Plaintiff transferred the transfer margin of KRW 3,791,601,011 to Nonparty AAC, a domestic corporation, to 2,370,000 (as of December 31, 2005, at the rate of 3,000,000 of the total number of investment shares of AAABM in total, as of December 31, 2005, corresponding to 79% of the total number of investment shares; hereinafter referred to as “instant investment shares”) from 3,791,601,011 to 3,791,00,000, a domestic corporation (hereinafter referred to as “AABD”), and the acquisition corporation obtained transfer margin from 3,791,601,01,011, and on October 10, 2006, it appears that the acquisition corporation was based on Article 9058 of the former Corporate Tax Act (Article 9058 of the former Corporate Tax Act).

C. On March 31, 2007, pursuant to Article 13 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 (hereinafter “Korea-Malaysia Tax Treaty”), the Plaintiff applied for a refund of KRW 947,90,250,000, when filing a return of the corporate tax base for the transfer income of the instant equity shares to zero won, on the ground that income from the transfer of equity shares is imposed only on the resident state of the transferor, and the Plaintiff is a resident of Malaysia for tax purposes.

D. On April 30, 2007, the defendant could not verify that the plaintiff is a resident of Malaysia, and furthermore, he could not be seen as an actual beneficiary of income, and only the difference between the withholding tax rate and the corporate tax rate of KRW 12,00,000 shall be refunded, and the remaining amount of KRW 935,90,250 shall be refunded (hereinafter "the disposition of this case").

E. On July 30, 2007, the Plaintiff filed a petition with the Tax Tribunal for a trial seeking revocation of the instant disposition, but the Tax Tribunal dismissed the Plaintiff’s petition on March 21, 2008.

[Ground of recognition] Facts without dispute, Gap evidence No. 1's evidence No. 2, Gap evidence No. 3-1, 2, Eul evidence No. 1, 2, and 4, the purport of the whole pleadings

2. The legality of the instant disposition

A. The plaintiff's principal

1) Article 13(4) of the Korea-U.S. Tax Treaty provides that the right to impose tax on the transfer income of equity shares held by a resident of a Contracting State shall be granted only to the resident state, but does not require that the transferor be the person to whom the transfer income actually accrues, denying the application of the said tax treaty on the ground that the Plaintiff is not the person to whom the transfer income substantially accrues. Even if the principle of substantial taxation is applicable with respect to the reversion of equity shares in the instant case, the Plaintiff constitutes the person to whom the transfer income actually accrues, and thus,

2) The Defendant refunded the Plaintiff the difference between the withholding tax rate and the corporate tax rate of KRW 12,00,000 to the Plaintiff as to the Plaintiff’s application for refund of this case. This is based on the premise that the Plaintiff is the subject to whom corporate tax is attributed due to the transfer of equity shares, and accordingly, the refusal of the remainder of the application for refund on the ground that the Plaintiff is not the subject

(b) Related statutes;

It shall be as shown in the attached Form.

(c) Fact of recognition;

1) The Plaintiff is a foreign corporation with no domestic place of business, and according to the resident certificate (Evidence A-5-3) issued by the Commissioner of the National Tax Service in Malaysia on February 12, 2008, the Plaintiff confirmed that the Plaintiff was a resident for the tax purpose of Malaysia during the business year 2006 (from January 1, 2006 to December 31, 2006).

2) 미국 법인인 DDD삭스에 의하여 미국 델라웨어주에 설립된 유한 파트너쉽인 스톤 스트리트 리얼 에스테이트 펀드 2000 FF(Stone Street Real Estate 2000 L.P.) 화이트홀 스트리트 리얼 에스테이트 FF X III(Whitehall Street Real Estate L.P. XIII), 화이트홀 패럴렐 리얼 에스테이트 FF X III (Whi tehall Parallel Real Estate L.P. X III)와 미국 법인인 KKKK리(Morgan Stanley)와 DDD 삭스에 의하여 영국령 케이만 아일랜드에 설립된 법인인 엠에스케이 인크(MSK Inc), 지에스에스오에이에프 홀딩 컴퍼니(GSSOAF Holding Company)는, 한국에 있는 부동산에 투자할 목적으로 공동으로 출자하여 말레이시아 HHH에 EE 인베스트먼트 H 프라이빗 엘티디(Mercer Investment II Private Ltd, 이하 'EE H'라고 한다)를 설립하였는데, EEH의 소재지는 '말레이시아 HHH 잘란 케마주안 위즈마 라젠다 3 레벨 2&3 로트'이고 이사회 회의록상의 대표이사는 'GG 윌리'로 모두 원고와 동일하였다.

3) In May 2005, the Plaintiff and EEH were found to have been engaged in the duties of acting as an agent, keeping documents, acting as an agent, filing legal reports, and paying annual fees by employees of a trust company (SHEAR SINN SINER) without an office or resident employee, and the list of the offshore companies managed by the above trust company, including the Plaintiff and EEH, was posted on the wall of the entrance.

4) The officers of EEH were all officers and employees of DDRs and KK Ha, not residents of Malaysia, who were registered as the representative director of EEH as the above trust company, and EEH did not fully pay wages, etc. to the above officers and employees of DDRs and KK Ha, including LL Standards, performed all important duties of EEH.

5) According to the findings of the Seoul Regional Tax Office’s investigation, if Malaysia HH is 2-3 days, it can establish a company such as EEH, and its establishment cost is less than 3 million won, and its confidentiality is legally guaranteed for shareholders, etc., so a number of foreign private equity funds were established by Malaysia to avoid exercising Korea’s taxation right immediately before investing them in Korea, and then were confirmed to have invested in Korea through this.

[Ground of recognition] Facts without dispute, Gap evidence 5-1 to 3, Gap evidence 3-2, the purport of the whole pleadings

D. Determination

1) Determination on the first argument

A) Status of the tax treaty and the principle of strict interpretation

Article 6 (1) of the Constitution of the Republic of Korea provides that "any treaty concluded and promulgated by the Constitution and any generally accepted international law shall have the same effect as domestic law," so a tax treaty concluded with the consent of the National Assembly shall have the same effect as that of domestic law, and with respect to the legal relationship governed by the tax treaty, the treaty concerned shall have the same effect as that of domestic law,

In addition, the Constitution provides that "All citizens shall have the duty to pay taxes under the conditions as prescribed by Act" (Article 38). The items and rates of taxes shall be determined by Act (Article 59). The principle of no taxation without the law is adopted. In determining the requirements for taxation, tax exemption, etc., the principle of no taxation without the law should be prescribed by the law enacted by the National Assembly, which is the representative agency of the people, and its strict interpretation and application should be made in the enforcement of the law.

In addition, Articles 26, 27, and 31 of the Vienna Convention on the Law of Treaties to which Korea is a party shall be observed, and the provisions of the domestic law shall not be invoked in such a way as to justify the non-performance of the treaty, and the wording of the treaty shall be interpreted faithfully in accordance with its ordinary meaning. Therefore, even in the case of a tax treaty which is a kind of tax law, it is not permissible to extend or analogically apply to a treaty.

B) Domestic legal basis of substance over form principle

Article 11(1) of the Constitution provides, “All citizens shall be equal before the law. No person shall be discriminated against in all areas of political, economic, social, and cultural life on the basis of gender, religion, or social status.” The principle of equality in taxation can be deemed an expression of tax law in accordance with the above constitutional provisions or the principle of prohibition of discrimination. Therefore, when a tax legislation is made, the State must enact laws so that the burden of taxes can be equally distributed among the people, and shall treat all citizens equally in the interpretation and application of the tax law. One of the legal systems to realize the ideology of the principle of equality in taxation can be deemed as the principle of substantial taxation provided for in Article 14 of the Framework Act on National Taxes. In addition, the principle of equality in taxation can be deemed as the principle of realization of tax justice in the legislative process or enforcement process of the tax law by equally treating the same as “equally equal”, and unequally equal as the principle of justice (see, e.g., Constitutional Court Order 8Hun-Ma38, Jul. 21, 1989).

Therefore, the ideology of the principle of tax equality under the Constitution cannot be an exception to the interpretation of the tax treaty having the effect corresponding to the law. Therefore, the application of the principle of substance over form cannot be deemed to violate the principle of strict interpretation

C) As to OECD Notes

With the increase in international trade, the OECD established a company on the document in a tax haven place that is not related to the actual transaction with the purpose of tax avoidance through changes in the crepan tax treaty and avoided taxes on capital transaction income such as interest, dividend, and stock gains through the form of transaction, the OECD has started to seek various regulatory measures for the act of tax avoidance using the tax haven since 199 through the international discussions of the OECD Harmful Tax Forum that began in 199.

Therefore, the OECD has widely dealt with the key issues of the OECD Model Convention, which are the criteria for interpreting the OECD Tax Treaty, as well as the types and methods of preventing the act of tax evasion, and the interpretation of the treaty-related interpretation. Article 1(7) of the OECD Model Convention provides that "the primary purpose of the Convention on the Prevention of Double Taxation is to facilitate human exchanges between goods, services, capital and human resources by preventing international double taxation." The Convention on the Prevention of Double Taxation also aims to avoid tax evasion and the prevention of Fiscal Evasion" and Article 22 through 24 of the same Article provides that "the substance over form rule prescribed in the laws of each country", "the law of each country", "the rule on the prevention of abuse of tax treaties, such as the control company law, are not mutually inconsistent with the tax treaty, and the regulations on the prevention of tax evasion under domestic law, which is part of the laws of each country to determine the tax burden, and the provisions on the prevention of tax evasion under domestic law, which is a fundamental element of the tax treaty, are not affected by the definitions of each treaty."

The OECD note above is not a treaty concluded and promulgated by the Constitution or an generally accepted international law, and thus is not legally binding, but is an international standard for the proper interpretation of a treaty between the OECD countries, and can be used as one reference material in the interpretation of a treaty regarding substance over form principle, etc. as an international standard for the proper interpretation of a treaty between the OECD countries.

D) Interpretation of the Korea-end Tax Treaty

Since the language and text of the Korea-Malaysia Tax Treaty is apparent that it was concluded between the Republic of Korea and the Government of Malaysia for the avoidance of double taxation and the prevention of tax evasion, the purpose of the Treaty cannot be deemed to be limited to preventing international double taxation and promoting mutual exchange and investment by preventing international double taxation, and it also deals with the important purpose of the Treaty as well as the avoidance of double taxation.

As seen earlier, the substance of the principle of no taxation without law and the basic principles on the interpretation of treaties under the Constitution, the basis and content of the substance over form principle, and the purpose of the Korea-Mali Tax Treaty is to realize the principle of fairness and satisfaction of tax burden under Article 14(l) of the Framework Act on National Taxes and Article 4(1) of the Corporate Tax Act, and the substance over form principle is equally applied to both a domestic corporation and a foreign corporation, which are liable to pay corporate tax under the domestic law. As such, the substance over form principle can be applied to the interpretation of a tax treaty between countries, unless it does not fall under extended interpretation or analogical interpretation beyond the meaning of possible language. As such, the Korean tax authority may determine whether the actual person to whom the transfer income of equity shares in this case is deemed as the Plaintiff, who is the resident of Malaysia, and determine

Therefore, the Plaintiff’s assertion that the substance over form principle does not apply to the ownership of equity capital gains under the Korea-End Tax Treaty and the Korea-End Tax Treaty on the premise that the interpretation of the treaty should be strict (see, e.g., Seoul High Court Decision 2009Nu23886, May 13, 2010).

(e) Persons who have de facto reverted to the transfer income shares in this case;

As seen earlier, in light of the contents of the principle of no taxation without law, the standards for interpretation of the tax treaty, the purport and contents of the substance over form principle, and the purpose of the Korea-end Tax Treaty, etc., the transferor under Article 13 subparag. 4 of the Korea-end Tax Treaty refers to the actual owner of capital gains. Thus, if the actual owner of capital gains is different from the actual owner of capital gains, the actual owner of

In light of the above legal principles, the instant case is deemed to have been conducted by the employees of the trust company without resident employees or offices at the location. ④ In light of the representative tax haven where many foreign private equity funds are used as the place of establishment of the Do government company to avoid the exercise of Korea’s taxation right before investing in Korea, the Plaintiff is merely a formal company established to avoid the exercise of Korea’s taxation right, like EEH, since the Plaintiff is merely a formal company established to avoid the exercise of Korea’s taxation right. The Plaintiff is also deemed to have actually accrued the investment share in the instant case.

F) Sub-decision

Therefore, this part of the plaintiffs' assertion is without merit.

(ii) the second light judgment;

According to Article 98-4 of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006) and Article 138-4 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19815 of Dec. 30, 2006), a foreign corporation that wishes to be exempted or exempted from domestic source income under the tax treaty can have its agent file a tax exemption or application for exemption with the head of the district tax office having jurisdiction over the place of tax payment. Thus, even in cases where a foreign corporation claims rectification of the tax base on the domestic source income withheld at source on the grounds of non-taxation or exemption under the tax treaty, it is reasonable to interpret that the agent may file

In the instant case, the Plaintiff filed an application for refund of KRW 947,900,250 with the corporate tax base for the year 2006 as zero won on March 31, 2007. As seen earlier, the Plaintiff’s application for refund of withholding tax amount of KRW 947,90,250 may be deemed as filing an application for refund of withholding tax on behalf of the beneficiary of actual transfer margin pursuant to Article 45-2(1) of the former Framework Act on National Taxes (amended by Act No. 8372 of April 11, 2007) on behalf of the beneficiary of actual transfer margin. As such, the Defendant’s application for refund of withholding tax amount of KRW 947,90,250 against the Plaintiff cannot be deemed as contradictory or unlawful since the difference between the withholding tax rate and the corporate tax rate had been refunded to the Plaintiff,

Therefore, there is no reason for the plaintiff's accusation.

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.