LSF case and one other (Law Firm LLC, Attorneys Kang Han-hun et al., Counsel for the plaintiff-appellant)

The Head of Nam-gu Tax Office (Law Firm Corporation, Attorneys Kim Jae-gu et al., Counsel for the plaintiff-appellant)

August 19, 2015

Seoul Administrative Court Decision 2012Guhap39544, 2013 Guhap9076 decided November 21, 2014

1. All appeals by the plaintiffs and the defendant are dismissed.

2. The costs of appeal shall be borne by each party.

1. Purport of claim

A. The Defendant’s disposition rejecting correction of KRW 387,645,171,890 as of March 5, 2012, against Plaintiff LSFK to Plaintiff LSC on July 9, 2012, was revoked.

B. The Defendant’s disposition of withholding corporate tax of KRW 4,307,168,570 (including additional tax) for the business year 2010 against the Plaintiff Han Financial Branch Co., Ltd. on February 1, 2013 shall be revoked.

2. Purport of appeal

A. The plaintiffs

1) Of the judgment of the first instance court, the part against the plaintiffs falling under the order to revoke below shall be revoked.

2) On July 9, 2012, the part equivalent to KRW 210,394,417,039, among the disposition rejecting correction of KRW 387,645,171,890, which the Defendant rendered to Plaintiff LSFK on March 5, 2012, to Plaintiff LSSC’s withholding tax amounting to KRW 387,645,171,890.

B) Of the disposition of withholding corporate tax of KRW 4,307,168,570 (including additional tax) for the business year 2010 against the Plaintiff Han Financial Branch Co., Ltd. on February 1, 2013, the part equivalent to KRW 2,37,715,744

Each cancellation shall be revoked.

B. Defendant

The part of the judgment of the court of first instance against the defendant shall be revoked, and all plaintiffs' claims corresponding to the revoked part shall be dismissed.

1. Quotation of judgment of the first instance;

The reasoning for the court’s explanation on the instant case is as follows, and the reasoning for the court’s explanation is as stated in the reasoning for the judgment of the first instance, except where the judgment on the Plaintiffs’ assertion was added in the trial under Paragraph (2) above and Paragraph (3) above is as stated in the reasoning for the judgment of the court of first instance. As such, it is acceptable in accordance with Article 8(2) of

2. Parts to be dried;

○ The second page of the third page “foreign bank” shall be deemed to be “foreign exchange bank”.

(1) The plaintiff's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right to request correction or rejection of correction's right can not be asserted. However, the above legal principle is not based on the actual right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right holder's right to request correction can not be acknowledged as the plaintiff's right holder's right holder's right holder's right holder's right's right.

In the end of the 9th line, “Sone Star U. S.” added “as of February 9, 2012 in which the instant shares were transferred,” the “Boston Safe De Posit and Trust Copa Company” is deemed to read “JDPT Part NE I and LP”.

○ Rule 3(c) adds “A evidence No. 50” to the quoted evidence.

The 18th and 9th of the 18th, “the entire process was led to the stock transfer,” and the 18th and 9th of the 18th, “the entire process was led to the stock acquisition, and the sale of stocks of foreign exchange banks was conducted under the direction of Nonparty 4, the representative of lsMC, and Nonparty 1, etc.

“SCM is a company controlled by lsM ......” of 20th 6-7th 20th , and “BS” is a company controlled through Lone Star U.S., Hudco Partners, Lone Star Funds Korea Ltd., and Lone Star Korea Ltd., among superior investors, through Lone Star Global Holdings. As such, “BS” is a company controlled through Lone Star Global Holdings.

○ From 25 up to 26 pages 20 up to 18 pages are as follows.

As to the instant case, the health class, Lone Star U.S. consists of lsP and 38 final investors, which are GP (1%). 38 final investors, are U.S. residents [it is insufficient to recognize the final investors as U.S. residents only with the data submitted by the Plaintiffs, but it is not sufficient evidence to prove that the final investors are U.S. residents of Lone Star’s partnership contract (A. 30), Internet data and establishment-related documents (A. 4-1 through 51), final investors’ details (A. 50), Lone Star U.S. resident certificates (A. 54-1, 3, or 5), etc. of some final investors of Lone Star U.S. or some investors’ resident certificates (A. 54-1, 54-1, etc.), etc. of the instant capital gains from the transfer of the instant case, if there is no objective evidence to acknowledge that the final investors of the instant capital gains from the transfer of the instant case should be distributed according to the investment shares of the aforementioned final investors (U.).

On the other hand, LSP, which is Lone Star U.S., consists of lsmC (GP corporation, 0.1% equity interest) and 25 LP (9.9% equity interest). According to the evidence 54-2 and 9-9 of LSP, some of the members of LSP can be recognized as a U.S. resident or a member of LSP, but it is insufficient to prove that the amount of equity interest in LSP owned by them is much. Thus, the Korea-U.S. Tax Treaty cannot apply to all of LSP equity interest in LSP (1%).

Therefore, the portion attributable to LP of Lone Star U.S (excluding 9% of the equity interest of LP, which is the GP), among the transfer income of this case, is subject to the Korea-U.S. Tax Treaty (Article 4.8.6 of the OECD Model Convention). It is explained that “I shall assume the comprehensive tax liability for the global income on the basis of the place of residence under the laws of the Contracting State with respect to the tax liability which is the standard for judgment of residents, and most countries bear abstract tax liability in accordance with the internal tax laws of the Contracting State shall be sufficient if they bear abstract tax liability, and even if they do not actually pay taxes through non-taxation or reduction, it shall be interpreted that I assume the tax liability even if they do not pay taxes.” Considering the fact that the above note is an internationally recognized standard for the proper interpretation of the tax treaty between OECD members, which can be referenced materials in the interpretation of the treaty between OECD members.”

3. Additional determination

A. The plaintiffs' assertion

The beneficial owner of the transfer income of this case is Plaintiff SC, and thus, the Korea-Belgium Tax Treaty shall apply. Even if Plaintiff SC constitutes a Do government-invested company established to avoid the taxation of the transfer income of this case, six higher-tier investors except Lone Star U.S. and Hudco Partners (hereinafter “six higher-tier investors”) are not the beneficial owner of the transfer income of this case, but not foreign corporations under the Corporate Tax Act, so the tax treaty shall apply to the part attributable to six higher-tier investors among the transfer income of this case based on their final investors.

B. Determination

1) As to the application of the Korea-Belgium Tax Treaty

As seen earlier, the Plaintiff’s assertion on this part is without merit, since Plaintiff SC merely is a Dog company and thus cannot be applied to the Korea-Belgium Tax Treaty.

2) As to the application of the Korea-Japan Tax Treaty on the basis of the final investors of six higher-tier investors

Where a foreign unincorporated association, foundation, or other organization acquires domestic source income under Article 119 of the Income Tax Act (amended by Act No. 11611, Jan. 1, 2013) or Article 93 of the Corporate Tax Act and distributes it to individuals who are partners, if it can be deemed a foreign corporation under the Corporate Tax Act, it shall be liable to pay corporate tax on domestic source income. If it cannot be deemed a foreign corporation under the Corporate Tax Act, a foreign corporation shall be liable to pay corporate tax on income distributed to each of its members as a taxpayer in the same manner as in the case of a resident and shall be liable to pay income tax on income distributed to each of its members. Whether it can be deemed a foreign corporation under the Corporate Tax Act shall be determined depending on whether it can be deemed as the subject of separate rights and obligations independent of its members under the Korean Justice (Judicial) in light of the content of the laws and regulations of the country where the organization is established, and the substance of the organization (see, e.g., Supreme Court Decision 2011Du3159626, Apr. 16).

In light of the following circumstances, i.e., ① 6 higher-tier investors have a substantial role in supplying funds for purchasing stocks in the process of acquiring and transferring stocks issued by the foreign exchange bank through Plaintiff SC with funds raised from final investors; ② 6 higher-tier investors are organizations established with unique investment purposes to obtain capital gains through the transfer of stocks issued by the foreign exchange bank, and are composed of LP which is not actively involved in daily business and operation with unlimited liability within the investment limit, and lsP, which is composed of six higher-tier investors, was responsible for the recruitment of final investors, management of funds and distribution of income. ③ It is reasonable to view that 6 higher-tier investors are separate from those of 6 lower-tier investors in the process of establishing and selling this case’s stocks under the laws of 10% higher-tier investors, including those of 6 lower-tier investors, and that 10% higher-tier investors and 10% lower-tier investors are constituted by establishing and selling this case’s stocks.

As such, insofar as six higher-tier investors are deemed to fall under the subject of corporate tax as a foreign corporation under the Corporate Tax Act, a tax treaty has not been concluded between the State of Do, which is the domicile of six higher-tier investors, and the Republic of Korea. As such, regarding the portion of the transfer income of this case to which six higher-tier investors belong, deeming the final investors to substantially belong, and cannot be exempted from withholding by applying the tax treaty related

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

4. Conclusion

Therefore, the plaintiffs' claims shall be accepted within the scope of the above recognition, and the remaining claims shall be dismissed as they are without merit. Since the judgment of the court of first instance is justifiable in this conclusion, all appeals filed by the plaintiffs and the defendant shall be dismissed, and it is so decided as per Disposition.

Judges Sung Pung-tae (Presiding Judge)