[1] In a case where a domestic corporation including a domestic business place of a foreign corporation borrows money from a foreign controlling shareholder, whether the interest paid in relation to the excess amount among borrowings constitutes dividend income in principle (affirmative)

[2] In case where a domestic corporation’s borrowings from a foreign controlling shareholder exceed a certain ratio of equity shares invested by the foreign controlling shareholder in stocks, etc., whether a domestic corporation, a withholding agent, is liable to withhold corporate tax on a specified amount of interest paid in relation to the excess portion only after receiving a notice of change in income amount (negative)

[1] According to Article 14(1) and (2) of the former Adjustment of International Taxes Act (amended by Act No. 11606, Jan. 1, 2013; hereinafter “former International Tax Adjustment Act”), Articles 25(6) and 26 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 22574, Dec. 30, 2010); and Article 93 subparag. 2 (c) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) where a debt borrowed from a foreign controlling shareholder, among borrowings of a domestic corporation carrying on financial business (including a domestic business place of a foreign corporation), exceeds six times the equity share invested by a foreign controlling shareholder, etc., a certain amount of interest paid in excess shall not be included in deductible expenses of the domestic corporation, but shall be deemed to have been disposed of as a domestic source income of the foreign corporation as a domestic source income.

Meanwhile, “The Convention between the Government of the Republic of Korea and the Government of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income” allows both the taxation of the country of residence and the source country with respect to dividend income and interest income. Article 10(4) of the said Convention provides for the meaning of dividend income and the meaning of interest income under Article 11(5) of the said Act, respectively. In addition, Article 28 of the former Adjustment of International Taxes Act provides that a tax treaty preferentially applies to the classification

In full view of the contents, structure, etc. of these provisions, where a domestic corporation including a domestic business place of a foreign corporation borrows money from a foreign controlling shareholder, the interest paid on a certain amount of excess out of the borrowings shall be deemed dividend from each of the above provisions to be a domestic source income of the foreign controlling shareholder. Therefore, in principle, the interest paid on the relevant excess amount constitutes dividend income. However, whether the taxing authority of the source state is recognized as dividend income under the tax treaty shall be determined in accordance with the tax treaty concluded with the country in which the foreign controlling shareholder is a resident. If the interest income not dividend income under the tax treaty corresponds to other income such as interest income, etc.,

[2] Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that a person who pays domestic source income to a foreign corporation pursuant to Article 93 subparag. 2 shall withhold the pertinent corporate tax at the time of payment. Article 137(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) provides that Article 191(4) of the Enforcement Decree of the Income Tax Act (excluding subparagraph 4) and Article 192 of the former Enforcement Decree shall apply mutatis mutandis to the time of payment of dividend income. However, as the former Enforcement Decree of the Income Tax Act was amended by Presidential Decree No. 22580, Dec. 30, 2010; Article 192(2) of the Income Tax Act provides that “the dividend income from disposal of income shall be deemed to have been paid on the date of receipt of a change in income amount.”

Meanwhile, Article 14(1) and (2) of the former Adjustment of International Taxes Act (amended by Act No. 11606, Jan. 1, 2013); Articles 25(6) and 26 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 22574, Dec. 30, 2010); Article 93 Subparag. 2 of the former Corporate Tax Act provides that where a domestic corporation’s borrowings from a foreign controlling shareholder exceed a certain ratio of equity shares invested by the foreign controlling shareholder in stocks, etc., a specified amount of interest paid in excess shall be deemed to have been disposed of as a dividend under Article 67 of the Corporate Tax Act. In such a case, it cannot be deemed that a domestic corporation that is a withholding agent is liable for withholding only on the date of receipt of a notice of change in income amount.

[1] Articles 14(1) and (2), 28, and 26 of the former Adjustment of International Taxes Act (Amended by Act No. 11606, Jan. 1, 2013); Articles 25(6) and 26 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Presidential Decree No. 22574, Dec. 30, 2010); Article 93 subparag. 2 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Articles 10(4) and 11(5) of the Convention between the Government of the Republic of Korea and the Government of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income / [2] Articles 93 subparag. 2 and 98 subparag. 13 of the former Enforcement Decree of the Adjustment of International Taxes Act (Amended by Act No. 10423, Dec. 30, 2010>

DBS Bank (Attorneys White-man et al., Counsel for the plaintiff-appellant)

Seoul Regional Tax Office (Law Firm Corporation, Attorneys Soh Ho-chul et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2013Nu17178 decided June 3, 2015

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

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. According to Article 14(1) and (2) of the former Adjustment of International Taxes Act (amended by Act No. 11606, Jan. 1, 2013; hereinafter “former Adjustment of International Taxes Act”), Articles 25(6) and 26 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 22574, Dec. 30, 2010; hereinafter “former Enforcement Decree of the Adjustment of International Taxes”), Article 93 subparag. 2 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) where loans borrowed from a foreign controlling shareholder of a domestic corporation carrying on financial business (including a domestic business place of a foreign corporation) exceed six times the amount of interest paid from the domestic corporation to be disposed of as a dividend in excess of six times the amount of interest paid from the domestic corporation’s domestic source income.

Meanwhile, the Convention between the Government of the Republic of Korea and the Government of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea- Singapore Tax Treaty”) permits both the taxation of the country of residence and the source country with respect to dividend income and interest income. Article 10(4) of the said Act provides for the meaning of dividend income and the meaning of interest income under Article 11(5). In addition, Article 28 of the former Adjustment of International Taxes Act provides that the tax treaty preferentially applies to the classification of foreign corporations’ income generated in Korea, notwithstanding Article

In light of the contents, structure, etc. of these provisions, where a domestic corporation including a domestic business place of a foreign corporation borrows money from a foreign controlling shareholder, the interest paid on a certain amount of excess out of the borrowings shall be deemed as dividend in the instant provision and shall be deemed as a domestic source income of the foreign controlling shareholder. Therefore, in principle, it constitutes dividend income. However, whether the interest paid on the relevant excess amount is recognized as dividend income by the source state under the tax treaty shall be determined in accordance with the tax treaty concluded with the country where the foreign controlling shareholder is a resident. If the interest income, other than the dividend income under the said tax treaty, constitutes other income such as interest income, the existence or absence of the tax authority

B. Review of the reasoning of the first instance judgment cited by the lower court and the evidence duly admitted by the lower court reveals the following facts.

(1) The Plaintiff has its head office in Singapore and runs the financial business by opening a branch office in Korea (hereinafter “Plaintiff branch”).

(2) In the year 2010, the Plaintiff branch excluded the amount of KRW 7,684,517,875 (hereinafter “instant amount”) from the deductible expenses, which is equivalent to the interest paid in excess of six times the equity shares of the Plaintiff’s headquarters among the borrowings from the Plaintiff’s headquarters, and disposed of as “other outflow from the company.”

(3) On July 18, 201, the Defendant disposed of the instant amount as “distribution” and notified the Plaintiff of the change in the amount of income (hereinafter “instant disposition”).

C. Examining these facts and the circumstances revealed by the record in light of the legal principles as seen earlier, it is determined as follows.

(1) Article 3(1)(f) of the Korea- Singapore Tax Treaty provides that “a corporation” shall be “a corporation which is a corporate entity or an entity treated as a corporate entity for tax purposes,” and Article 5(2)(b) provides that “a branch” shall be one of the permanent establishment, and Article 5(7) provides that “a corporation which is a resident of a Contracting State is a resident of the other Contracting State or a corporation which is a resident of the other Contracting State (by means of permanent establishment or by any other means) is controlled or controlled thereby, shall not be deemed a permanent establishment of another corporation.” Thus, it is difficult to see the Plaintiff branch under the Korea- Singapore Tax Treaty as “corporation.”

(2) However, Article 10(4) of the Korea- Singapore Tax Treaty provides for dividends as “other income that is treated as the same as income generated from stocks under the tax laws of the Contracting State in which the corporation making the distribution and income generated from stocks is a resident,” and does not present dividend income under the tax laws of the State in which the branch of Singapore is located. Moreover, there is no evidence to deem that there is no provision that the branch of Singapore’s tax laws treat the interest paid to the corporation as the income generated from stocks as the income generated from stocks. Accordingly, the amount in

(3) Meanwhile, Article 11(5) of the Korea- Singapore Tax Treaty provides that interest shall be “income generated from government securities, bonds, or debentures, regardless of whether or not there is a security or a right to participate in profit, and other income that is treated as the same as income generated from a loan of money under the tax laws of the State where income accrues from all kinds of bonds, and that is treated as the same as income generated from a loan of money.” The instant amount constitutes interest paid on a loan, which constitutes an income generated from a bond

(4) Ultimately, as long as the instant amount is deemed to be a dividend under the domestic tax law pursuant to the instant provision, it constitutes a dividend income in the domestic source, and as a result, it does not constitute an interest income arising from an international financial transaction that is exempted from corporate tax pursuant to Article 21(1) of the former Restriction of Special Taxation Act (amended by Act No. 11133, Dec. 31, 201); however, under the Korea- Singapore Tax Treaty which takes precedence over the domestic tax law, the limited tax rate, etc. is set on the premise that the instant amount constitutes an interest income that is not a dividend income, and thus, the lower court should have determined the legality of

D. Nevertheless, without examining the aforementioned circumstances in detail, the lower court determined that the instant disposition was unlawful as long as the instant amount does not constitute dividend income under the Korea- Singapore Tax Treaty, on the grounds stated in its reasoning. In so determining, the lower court erred by misapprehending the legal doctrine on the effect of applying the Korea- Singapore Tax System and the classification of income under the tax treaty, etc., thereby adversely affecting the conclusion of the judgment.

2. Regarding ground of appeal No. 2

A. Article 98(1)3 of the former Corporate Tax Act provides that a person who pays a foreign corporation domestic source income under Article 93 subparag. 2 shall withhold corporate tax at the time of payment. Article 137(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) provides that Article 191(4) of the Enforcement Decree of the Income Tax Act (excluding subparagraph 4) and Article 192 shall apply mutatis mutandis to the timing of payment of dividend income. However, as the former Enforcement Decree of the Income Tax Act was amended by Presidential Decree No. 22580, Dec. 30, 2010, Article 192(2) of the former Enforcement Decree of the Income Tax Act provides that “the dividend income from disposal of income shall be deemed to have been paid on the date of receipt of a notice of change in income amount” was deleted, and Article 192(2) of the same Act amended by Act No. 10408, Dec. 27, 2010.

Meanwhile, as seen earlier, where the amount borrowed from a foreign controlling shareholder out of the domestic corporation’s borrowings exceeds a certain ratio of equity shares invested by the foreign controlling shareholder, a certain amount of interest paid in relation to the excess amount shall be deemed to have been disposed of as a dividend pursuant to Article 67 of the Corporate Tax Act. In such a case, it cannot be deemed that a domestic corporation that is a withholding agent is liable for withholding taxes only on the date of receipt

B. Reviewing the reasoning of the lower judgment and the record reveals the following: (a) the amount borrowed by the Plaintiff branch from the Plaintiff’s headquarters in the year 2010 exceeds six times the equity shares in the Plaintiff’s headquarters; and (b) examining these facts in light of the legal principles as seen earlier, the instant amount out of the interest paid to the Plaintiff headquarters is deemed to have been disposed of as a dividend; and (c) thereby, the Plaintiff’s obligation to withhold taxes under Article 98 of the former Corporate Tax Act was already established. Therefore, even if the amount was deleted on December 30, 2010, which is a general provision on the timing of dividend payment due to disposal of income, the establishment of the obligation to withhold taxes on the instant amount shall not affect.

C. Nevertheless, the lower court determined otherwise on the grounds stated in its reasoning that the timing for payment of dividend income cannot be determined, and thus, did not establish a withholding obligation for the instant amount. In so determining, the lower court erred by misapprehending the legal doctrine on the timing for payment of dividend income deemed dividend income, thereby adversely affecting the conclusion of the judgment. The allegation contained in

3. Conclusion

Therefore, 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 on the bench.

Justices Kim Shin (Presiding Justice)