[1] Whether the principle of taxation on the beneficial owner under Article 14(1) of the former Framework Act on National Taxes applies to the interpretation and application of tax treaties (affirmative in principle) / Whether Article 27(2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital constitutes a special provision excluding the principle of substantial taxation in the interpretation and application of the said Treaty (negative); and the standard for determining whether the restriction under Articles 10(2), 11(2), 12(2), and 21 of the said Treaty is applied pursuant to the said

[2] The case holding that in a case where Company A, a German limited liability company, established Company B and acquired 100% of the shares issued by Company B, and Germany Company C, which held the entire shares issued by Company A, intended to procure the acquisition price for the shares issued by Company B, and thereafter, Company B withheld corporate tax and paid corporate tax to the tax authority by applying the limited tax rate of Article 10 (2) Item (a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, and the tax authority deemed the beneficial owner of the above dividend income as Company C and imposed corporate tax collection on Company B by applying the limited tax rate of 15% under the former Corporate Tax Act, in light of all the relevant circumstances, the application of the limited tax rate of 15% cannot be ruled out on the grounds of

[1] Articles 10(2), 11(2), 12(2), 21, and 27(1)(a) and (2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital; Article 14(1) of the former Framework Act on National Taxes (Amended by Act No. 9911, Jan. 1, 2010) / [2] Articles 10(2)(a) and (b), and 27(2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital / [2] Articles 93 subparag. 2 and 98(1)3 (see current Article 98(1)2) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008)

[1] Supreme Court en banc Decision 2008Du8499 Decided January 19, 2012 (Gong2012Sang, 359) Supreme Court Decision 2010Du11948 Decided April 26, 2012 (Gong2012Sang, 892) Supreme Court Decision 2016Du841 Decided June 27, 2019 (Gong2019Ha, 1477)

Other companies specializing in securitization (Attorneys Ba-sik et al., Counsel for the plaintiff-appellant-appellee)

The Head of the District Tax Office (Bae, Kim & Lee LLC, Attorneys Yu-type et al., Counsel for the defendant-appellant)

Supreme Court Decision 2013Du7711 Decided March 26, 2015

Seoul High Court Decision 2015Nu976 decided June 9, 2016

All appeals are dismissed. The costs of appeal are assessed against each party.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. The plaintiff's ground of appeal Nos. 1 and 2 and the defendant's ground of appeal No. 2

A. At the time of the instant dividend income payment, the lower court determined that the 15% limited tax rate under Article 10(2) Item (b) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to the Income Tax on Capital and on the amount corresponding to the percentage of the members of German residents among the members of the German residents who bear the comprehensive tax liability in Germany, and the Austria and Luxembourg resident in Germany, among the members of the Gyeonggi-do Seoul Special Metropolitan City Special Metropolitan City Special Metropolitan City Special Metropolitan City Special Metropolitan City Special Metropolitan City Specialized Partnership (hereinafter “TMW”), should be applied to the amount equivalent to the percentage of the members of the other members, and the 25% tax rate under Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008) should be applied to each of the instant dividend income.

B. Examining the reasoning of the lower judgment and the evidence duly admitted by the lower court, the said determination by the lower court is justifiable in accordance with the purport of the judgment on remanding. In so determining, it did not err by misapprehending the legal doctrine on whether a resident is a resident under the tax treaty, the scope of application of the Korea- Germany

2. The defendant's first ground for appeal

A. Article 27(1)(a) of the Korea- Germany Tax Treaty provides that “The Korea- Germany Tax Treaty shall not be construed to mean that the provisions of a Contracting State shall not apply to the prevention of tax evasion or tax avoidance unless the provisions of its domestic law are in conformity with the principles contained in the Korea- Germany Tax Treaty.” In addition, the restrictions referred to in Articles 10(2), 11(2), 12(2) and 21, subject to the provisions of paragraph (1), shall not apply to the establishment or transfer of rights to stocks or other rights to the payment of dividends, the establishment or transfer of rights to the payment of interest, the establishment or transfer of rights to the payment of interest, or the establishment or transfer of rights to the payment of other income, or the establishment or transfer of rights to the payment of other income, without any reasonable economic reasons, if the principal purpose of a related person is to use Articles 10, 11, 12 and 21 by such establishment or transfer without the relevant business operation.”

Meanwhile, Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010) declares the principle of substantial taxation by stipulating that “If the ownership of income, profit, property, act, or transaction subject to taxation is merely nominal and there is a separate person to whom such income, profit, property, act, or transaction belongs, the person to whom such income, profit, or transaction belongs shall be subject to the application of tax-related Acts.” Therefore, if there is a separate person who substantially controls and manages such income, profit, property, act, transaction, etc. different from the nominal person to whom such income, profit, or transaction belongs, the nominal person shall not be deemed the nominal person on the ground of form or appearance, but the person who actually controls and manages the relevant taxable object shall be the tax obligor (see Supreme Court en banc Decision 2008Du8499, Jan. 19, 201). This principle applies to the interpretation and application of a tax treaty having the same effect as the Act, except as otherwise provided (see Supreme Court Decision 201010Du14848, Apr. 26, 2019

In full view of the language, content, structure, purpose, etc. of the aforementioned relevant statutes, Article 27(2) of the Korea- Germany Tax Treaty does not include any special provision excluding the principle of substantial taxation in the interpretation and application of the Korea- Germany Tax Treaty. In addition, whether to apply the restriction prescribed in Articles 10(2), 11(2), 12(2), and 21 of the Korea- Germany Tax Treaty pursuant to Article 27(2) of the same Treaty shall be determined by comprehensively taking into account all the circumstances, such as the developments leading up to the creation or transfer of the right to the payment of dividends, interest, user fees, and other income, the purpose and content of the relevant business, the role of the relevant person in business operation

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

(1) TMW was established mainly for the purpose of investing in real estate and real estate rights in Asian countries, including Japan, Australia, Singapore, Thailand, China, Hong Kong, Malaysia, Korea, and India. From May 2003 to October 2009, WT made a total of 29 investments in each Asian country, and owned 1,980,000,000 as of December 31, 2010.

(2) The German limited liability company established the Plaintiff and acquired 100% of the Plaintiff’s issued shares. TelecommunicationsW has owned the entire shares issued by TMWHz, and TMW intended to procure the Plaintiff’s shares issued by TMWHz.

(3) Around March 2003, TMW decided to acquire ○ building with the approval of the Investment Committee, and TMWH entertainment had the Plaintiff acquire ○ building on May 16, 2003.

(4) TMWH entertainment had no particular business activities except for those holding the Plaintiff’s issued stocks. They were only identical to TMW and its location, contact address, and directors, and there were no independent personnel members. After receiving the instant dividend income from the Plaintiff, they immediately paid to TMW the entire amount excluding the German capital gains.

(5) Around April 2008, TPP decided to sell ○ building with the approval of the Investment Committee, and TPPWH entertainment decided to sell the building immediately at the Plaintiff’s general meeting, and thereafter, the Plaintiff sold it.

C. Examining the foregoing factual basis in light of the legal principles as seen earlier, even if TPP established TMWHol, a beneficial owner of the instant dividend income, and acquired the Plaintiff’s outstanding stocks, it is difficult to deem that it mainly aims at the application of 15% limited tax rate under Article 10(2) Item (b) of the Korea- Germany Tax Treaty without reasonable economic reasons for the relevant business operations. Therefore, the said limited tax rate may not be excluded on the ground of Article 27(2) of the Korea- Germany Tax Treaty with respect to TPP.

D. In the same purport, the lower court was justifiable to have determined that the claim by TMWHol for the application of the 5% limited tax rate under Article 10(2)(a) of the Korea- Germany Tax Treaty is not permissible pursuant to Article 27(2) of the same Treaty, but that the 15% limited tax rate under Article 10(2)(b) of the same Treaty may be applied to TMW. In so doing, it did not err by misapprehending the legal doctrine on the interpretation and application of the Korea- Germany Tax Treaty, thereby affecting the conclusion

3. Conclusion

Therefore, all appeals by the Plaintiff and the Defendant are dismissed, and the costs of appeal are assessed against each party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Min You-sook (Presiding Justice)