Interpretation of the direct ownership of a beneficial owner and a tax treaty

If an intermediate company residing in a third country is considered to be Do Governor and neglected, the beneficial owner, who is a resident of the third country, directly owns the plaintiff's shares, and the limited tax rate should be applied.

Framework Act on National Taxes, the Korea-Luxembourg Tax Convention

Suwon District Court 2017Guhap67514 Disposition of revocation of corporate tax withholding

Pakistan******

***The Director of the Tax Office

July 12, 2018

August 16, 2018

1. The Defendant’s total tax amount of 4,300,000,000,000,000, written on April 4, 2017 (attached Form 1) against the Plaintiff

The original collection disposition shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a corporation for the purpose of manufacturing, importing, and selling compression machines, pumps, and leisure time, and the PHH 2B (hereinafter “B”) which is the Netherlands corporation owns 100% of the Plaintiff’s equity interest. (B) The Plaintiff paid dividends of a total of KRW 86 billion from 2012 to 2016 (hereinafter “instant dividends”) to BB, and filed a report thereon with the Government of the Republic of Korea and the Government of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “the instant dividends”) (hereinafter “Korea-Korea Tax Treaty”) by withholding 10% of the total amount of dividends subject to the limited tax rates set forth in Article 10(2)(a) of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Government of the Republic of Korea and the Government of the Netherlands (hereinafter “the instant withholding”).

C. On April 4, 2017, the Defendant is only the formal owner of the instant dividends, and the actual owner is a PHDD (hereinafter “DD”). DD did not directly own the Plaintiff’s shares that paid the instant dividends, and thereby did not constitute a corporation, and thus, DD corrected and notified each of the corporate tax withheld at KRW 4,300,000,00 in total as indicated in [Attachment 1] to the Plaintiff on the ground that the limited tax rate of 15% under Article 10(2)(b) of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital between the Government of the Republic of Korea and the Government of Luxembourg (hereinafter “Korea-Luxembourg Tax Treaty”) shall be applied on November 7, 1984 and December 26, 1986 as the date of entry into force.

D. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on May 31, 2017.

[Reasons for Recognition] Facts without dispute, Gap evidence 1 to 5 (including each number; hereinafter the same shall apply)

Statement, the purport of the whole pleading

2. The parties' assertion

A. The plaintiff

1) BB is a company established to establish the function of holding companies in Korea and Japan with human and physical facilities and to deny the Plaintiff’s actual possession of BB against the Plaintiff, the circumstances that the said company was formally created for the purpose of tax avoidance should be acknowledged. The Korea-Nene Tax Treaty and the Korea-Luxembourg Tax Treaty are the same as 10% where the limited tax rate on dividends is 25% or more of the capital, and 15% in other cases where the Plaintiff’s shares are acquired, and where the Plaintiff’s shares are acquired, the same limited tax rate is applied, and no tax avoidance purpose is found.

2) Even if DoD is determined as the beneficial owner of the Plaintiff, the “person who directly owned the Plaintiff’s stocks according to the substance over form principle” should also be deemed DoD. As such, 10% of the limited tax rate shall apply to DoD pursuant to Article 10(2)(a) of the Korea-Luxembourg Tax Treaty. On the contrary, the instant disposition, which arbitrarily applies the substance over form principle on a arbitrary basis, is in violation of Article 14(3) of the Framework Act on National Taxes and Article 2-2(3) of the National Tax Adjustment Act.

B. Defendant

1) As long as the concept of a beneficial owner is deemed to be the same as the beneficial owner under the substance over form principle, the physical and human composition of BB established for the purpose of tax evasion without the ability to control and manage the Plaintiff due to the absence of business purpose cannot be deemed as the beneficial owner of the Plaintiff, and it shall be deemed as the beneficial owner of the instant dividend income.

2) The actual income earner with respect to the Plaintiff’s dividend income is merely a result of ascertaining the relationship of substantial attribution from the perspective of tax law, and as DoD does not own the Plaintiff’s shares directly, the limited tax rate of 15% under Article 10(2)(b) of the Korea-Luxembourg Tax Treaty shall be applied.

3. Whether the instant disposition is lawful

(a) Facts of recognition;

"1) 원고는 미국법인인 QQQQ(이하 'PHIC'라한다)에 의하여 1998. 8. 20. 설립된 후 수차례 증자를 거쳐 2016. 6. 30. 기준 자본금은 32,797,000,000원이다.",2) PHIC는 2008. 6. 30. 같은 미국법인으로 PHIC의 모회사인 QQQQ(이하 'PHC'라 한다)과 공동(50:50)으로 네덜란드에 BB를 설립한 후 같은

13.5% of the Plaintiff’s shares on the day shall be invested in BB, and 86.5% of the remaining shares on July 7, 2008 shall be added.

By investing in kind PHIC and PHC have a structure of indirect control over the plaintiff through BB.

3) On July 7, 2008, PHC transferred 50% of the BB shares to PHIC, and next day, B shares were transferred from TPPIC to RR, which is a Zter, and later transferred to Luxembourg after the transfer to Luxembourg, which is a corporation of Luxembourg.

"4) 그 후 DDD은 2012. 2. 3. 자신이 2006. 3. 1. 설립한 QQQQ(이하 '1BV'라 한다)에 BB 주식을 100% 양도함으로써 아래와 같은 지배구조를 구성하였다.",5) DDD은 BB, 1BV 등 Parker 그룹의 관계사들이 참여하는 Cash-pooling의 운영주체로 BB와는 2011. 5. 31. Cash-pool Agreement를 체결하였고, 위 계약에 따라 BB는 최소자금 25,000유로를 제외하고 남은 자금을 모두 DDD에 예치하여 운용ㆍ관리하게 된다.

6) Meanwhile, as a result of the on-site verification conducted by the National Tax Service from September 19, 2016 to September 25, 2016 in the International Trade Investigation Division, and Luxembourg’s business sites, BB and 1BV places of business are only in the form of a door tag stating the trade names of each company within the business premises of P Group PB.V. and PHV BV.V., a service provider, and B and 1B did not have a separate business establishment, and B and 1BV did not have a separate business establishment. In addition, it was confirmed that the Plaintiff’s employees exchange and e-mail with DD officers and e-mail other than those bearing labor costs of the said corporation under the control of PHB.V. and that the Plaintiff’s employees exchange and exchange of e-mail with the officers and employees of DD who are not BB on June 8, 2016.

[Reasons for Recognition] Facts without dispute, entry Eul's evidence Nos. 1 through 5, the purport of the whole pleadings

B. Relevant statutes

[Attachment 2] The entry is as follows.

C. Determination

1) A beneficial owner of the instant dividend

A) The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes is income or profit;

Persons subject to taxation of property, transactions, etc., different from the person to whom such property, transactions, etc. belongs;

the nominal owner of the form or appearance is not a taxpayer if the nominal owner is not a taxpayer.

As such, the nominal owner of the property will be the person to whom the property belongs.

the name of the title holder who is not capable of controlling and managing it, and is substantially through control, etc. over the nominal owner.

There is a separate person in charge of control and management, and the disparity between such name and substance is intended to avoid tax.

income from the property shall be paid to a person who substantially controls and manages the property.

The Supreme Court Decision 2008 Decided January 19, 2012 should be deemed as belonging to the taxpayer (Supreme Court Decision 2008

See Supreme Court en banc Decision 28499. Such a principle is a treaty having the same effect as the law.

Except as otherwise provided for in the interpretation and application of the Act, the Act shall apply as it is,

Seoul High Court Decision 2011Du12917 decided September 26, 2013

B) In light of the above legal principles, we can find out the facts acknowledged earlier in light of the following.

In light of the following circumstances, BB is a resident of the Netherlands with a view to tax evasion:

Having been established to obtain the qualification of the Do Governor, and the beneficial owner of the dividend of this case shall be Luxembourg

It is reasonable to see DoD as DoD, a resident of Haxk. Therefore, this case’s withholding is Korea-Nek

Except as otherwise provided for in a tax treaty, the Korea-Luxembourg Tax Treaty shall apply.

① From the time of receiving the instant dividends, BB or 1BV, a parent company, has been located in another corporation’s place of business of the Parker Group until now, and there is no physical or permanent employee in that place. It seems that it did not have any human or physical facilities as a holding company.

② The Plaintiff’s shares were invested in kind by PHIC and did not engage in any economic activity or effort to acquire the Plaintiff’s shares, and it does not appear that the Plaintiff was a role in any particular profit-making activity or holding company even before receiving the instant dividends.

③ Even if B receives the instant dividends in accordance with the Cash-pool Credit Agreement with DD, B shall deposit them with DD except at least 25,000 square meters of the minimum amount of the dividends, and DD shall operate and manage most of the instant dividends.

④ There is no reasonable ground for the Plaintiff’s shares transferred from PHIC, a U.S. corporation, to BB, and the complex governance that constitutes a complete parent company on a 30,000 square meters, and there is no evidence to deem that BB has a reasonable purpose to manage the instant dividends received from the Plaintiff via DD again.

⑤ Article 10(2) of the Korea-Luxembourg Tax Treaty and Article 10(2) of the Korea-Luxembourg Tax Treaty provide that “In cases where a person receiving dividends or a beneficial owner directly owns at least 25 percent of the capital of a corporation paying dividends, 10% of the total amount of dividends, and in other cases, it shall not exceed 15% of the total amount of dividends.” Thus, there is no difference between the case where B receives the instant dividends from the Plaintiff and the case where DD directly receives the instant dividends from the Plaintiff.

However, Article 14(1) through (3) of the Korea-NN Tax Treaty provides for the imposition of taxes on capital gains on real estate, movable property, ship, aircraft, etc. which form part of business property, and Paragraph (4) provides that “gains accruing from transfer other than those stipulated in paragraphs (1), (2) and (3) above shall be taxed only in the country in which the transferor is a resident.” Thus, if the Netherlands transfers its stocks, it can avoid withholding tax in advance. Therefore, in this case where BB does not seem to have a business purpose other than avoiding or exempting taxes on capital transaction income such as dividends through formal control and transaction, it is difficult to deem that there was no intention of tax avoidance even if BB did not have any intention to avoid taxes on dividend income in Korea by investing the Plaintiff’s stocks in kind (the tax treaty can be amended at any time, and it is also attributable to the difference between the substance and substance of the corporation’s establishment in the name of the company that actually conducts business activities in the future and the name of the company that actually conducted business activities in the future).

2) Whether Article 10(2)(a) of the Korea-Luxembourg Tax Treaty is applied

A) Article 10(1) of the Korea-Luxembourg 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 that other Contracting State. Article 10(2) of the said Treaty provides that the dividends may be taxed in the Contracting State in which the corporation paying the dividends is a resident; Provided, That if the recipient is a beneficial owner of the dividends, the taxes so imposed shall not exceed the following: (a) if the recipient is a corporation (excluding partnership) that directly owns at least 25% of the capital of the corporation paying the dividends, the total dividends shall be 10%, and in other cases, 15% of the total dividends shall be imposed on the dividends. The purport of the said provision is to allow taxation on the dividend income at the source and at the rate of 15% in all in all cases; however, if the recipient is a corporation that directly owns and directly pays the dividends within the scope of the limited tax rate on international investment and to facilitate the tax rate on the dividends, it is deemed that 1% of the total dividends are applied to the corporation directly and directly.

B) Although the Korea-Luxembourg Tax Treaty does not specifically define the concept of “direct ownership”, it is reasonable to apply the limited tax rate of 10% by deeming that the “direct ownership” requirement under Article 10(2)(a) of the Korea-Luxembourg Tax Treaty is satisfied even in cases where DD, which is the beneficial owner of the dividend in this case, actually owns the Plaintiff’s stocks through BB, which is the nominal owner of the dividend in the legal form, through the interpretation of the said Tax Treaty.

① If, according to the application of the substance over form principle, a contracting party’s resident was the taxpayer regardless of the form or appearance of the shares, it would be logical consistent to apply the limited tax rate by identifying the “direct ownership” of the Korea-Luxembourg Tax Treaty according to economic substance, not legal form.

② Even if DD, the beneficial owner of the instant dividend within the scope of tax law, owns the Plaintiffs’ shares as dividend payment corporations, it does not deny the legal personality of BB, the subsidiary company, nor change the judicial ownership relationship.

③ Since Article 10(2) of the Korea-Luxembourg Tax Treaty provides that the term "beneficial owner" shall be given such term. Thus, as long as the meaning of a beneficial owner is viewed as an effective owner of income pursuant to the substance over form principle, deeming the term "direct ownership" of the above provision as the same meaning as "beneficial ownership."

④ Note 22 and 22.1 to Article 1 of the OECD Model Tax Treaty states that "where a taxpayer is changed as a result of the application of the substance over form principle, the provisions of the tax treaty shall also be applied in consideration of such change," and the statement on member of the United States Model Tax Treaty (No. 15,206) of the United States Model Tax Treaty shall also be deemed to have been owned directly by a beneficial owner, who is a resident of a Contracting State, and the limited tax rate shall be applied if the intermediate company, who resides in a third State, is considered to have been treated as an instrument under the US Tax Act."

Tax treaties also need to be interpreted in accordance with the international trend of interpretation of the above tax treaty.

C) Therefore, the instant disposition, based on the premise that the 15% limited tax rate as stipulated in Article 10(2)(b) of the Korea-Luxembourg Tax Treaty is applied to the instant withholding, should be revoked as it is unlawful.

4. Conclusion

Thus, the plaintiff's claim of this case is justified and accepted.