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

Article 57(1)1 and (3) of the Corporate Tax Act; 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; Article 5(1) of the Protocol between the Government of the Republic of Korea and the People’s Republic of China

Escer Co., Ltd. (Law Firm Jeongyang, Attorneys Jeong Jong-ki et al., Counsel for the plaintiff-appellant)

The superintendent of the tax office

Seoul High Court Decision 2017Nu30520 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 Corporate Tax Act provides that, where a domestic corporation’s tax base for each business year includes income generated from sources in foreign countries, and there is any foreign corporate tax paid or to be paid on such income generated in foreign countries, the amount of the foreign corporate tax may be selected by deducting the amount of the foreign corporate tax from the amount of the corporate tax for the relevant business year within the limit of credit. Article 57(3) of the same Act provides that the amount equivalent to the tax amount of the foreign corporate tax reduced or exempted on the relevant income generated in foreign countries in the other country to the tax treaty of the domestic

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 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 the Taxes on Income, which was concluded in 2006. 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, “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 from 2011 to 2013, the Plaintiff directly owned 100% of the shares of the instant subsidiary established in China received the instant dividends from the instant subsidiary, and paid the tax amount calculated by applying the limited tax rate of 5% under Article 10(2)(a) of the Korea-China Tax Treaty to China, and then deducted the said tax amount from the foreign corporate tax amount under Article 57(1)1 of the Corporate Tax Act (hereinafter “direct foreign tax amount”).

B. On January 30, 2015, the Plaintiff: (a) applied 10% foreign tax rate prescribed in the latter part of the instant provision to the Defendant regarding the instant dividend; (b) applied 5% of the deemed foreign tax credit to the Defendant, deeming that the amount of the said foreign tax credit increased; and (c) filed a claim for the correction of the tax amount by applying the total of KRW 456,686,366 (hereinafter “instant tax credit”) additionally deemed to have been paid to the Defendant in relation to the return of corporate tax for business year 2011 or 2013.

C. On March 9, 2015, 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 stipulated in Article 10(2)(a) of the Korea-China Tax Treaty since 2008, the Plaintiff did not take any measures for tax reduction or exemption than the 5% limited tax rate stipulated in Article 10(2)(a) of the Korea-China Tax Treaty and imposed the instant dividend by applying the said 5% limited

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 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)