Early High Court Decision 2015No4074 ( December 20, 2016)

A holding company established to avoid tax evasion can not be regarded as a beneficial owner merely because it is the intent of dividend income.

WB was established in X countries by taking into account the benefits that can be enjoyed from the double taxation avoidance agreement that provides for the high-friendly corporate tax system of X countries and the withholding tax rate for residents in X countries. In full view of various circumstances such as the organization and operation status of WB, the establishment of WB shall be deemed to be aimed at tax avoidance.

National Tax Adjustment Act other than Article 2-2

2017Guhap59055 Requests for revocation of disposition of imposition, including corporate tax

United StatesAAAAA corporation

BB Director of the Tax Office

April 27, 2018

June 22, 2018

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s disposition of imposing corporate tax of KRW 1,708,949,990 (including additional tax) for the business year 2010 against the Plaintiff on May 6, 2015 is revoked.

1. Details of the disposition;

(1) On September 9, 200, the Plaintiff: (a) purchased 40% of the corporate tax rate of 20% between the Republic of Korea and the ZB 1; (b) obtained 0% of the corporate tax rate of 10% from 200,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,00,000,000,000,00,000,00,000,00,000,00,000,00,000,00,000,00,00,00,00.

[Ground of recognition] Unsatisfy, Gap evidence Nos. 1- 5 (including virtual number), the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's assertion

F is not for the purpose of evading the dividend income of this case by taking advantage of the Korea-X Tax Treaty, but for the purpose of maintaining cooperative relations between the Plaintiff and HH (hereinafter “HH”), the Plaintiff and HH’s intermediary holding company as an intermediary holding company, and WBB is established in X as an intermediary holding company, and WB is not a Do government company, but a person and an entity, who is an independent holder of rights and obligations, and is in conformity with the purpose and function of the intermediary holding company, and exercises rights as a shareholder of the instant shares. The beneficial owner of the instant dividend income is not WBB, and thus is not FB, the instant disposition based on a different premise is unlawful, or BB is unlawful.

It is as shown in the attached Form.

(c) Fact of recognition;

1) The background and circumstances of the establishment of the WB

F and GG jointly established the same ratio of shares of the Plaintiff, a domestic corporation, and HH, Z, a Z, respectively, (40% for the Plaintiff, 40% for the 12%, 8% for the EEM, and 50% for the HH respectively). The Plaintiff and HH have maintained a cooperative relationship, such as mutual navigation, exchange of personal tonnage information, freight rates, and sharing of information as exceptions to the application of the provision on unfair collaborative acts under the Fair Competition Act as the Shipping Union Act.

"F and GG have entered into an agreement on joint operation on July 1, 2008, on the ground that the Plaintiff and HH should be able to avoid regulation on unfair collaborative acts in the EU by establishing the economic single body, and that the Plaintiff and HH should be de facto merged with the Plaintiff, and that they should be avoided, and after establishing WBB and WCCC, a subsidiary holding 100% shares in each of these 10% shares, the agreement was concluded between the FF and WCC, and the GG and HBC on the reorganization of their respective shares in accordance with the agreement, the FF has been holding shares of the Plaintiff and HB, which were owned by them in WB (other than actual capital has not been invested), and GG has been holding shares of the Plaintiff and H, which were owned by them in the way of reorganization of the company's respective decision-making structure and reorganization of the company's shares in the same way as that of MBC with the number of members designated by each of the MF decision-making organizations.

On the other hand, F introduced a new ton tax system around 2008 by the government of the Y state, and as a result, F was apprehended to increase tax burden due to retroactive payment of deferred corporate tax and imposition of tax on vessel appraisal profit in the past, around April 2008, after determining X as a new business place through the board of directors, two subsidiaries were established in X countries on the same day as indicated below, and WW Holdings I M&D was established in the same registry on August 22, 201 (registration number C5366). In addition, WS M&D, which is another subsidiary, was established in the above registration location on March 26, 2008 (registration number).

name of corporation

Number of registration

Date of registration

Place of registration

W Maimed Limited

C4625

July 2, 2008

W

H,

L

W L S Mimited

C44626

July 2, 2008

WBB

C4628

July 2, 2008

(ii) the legal entity, human composition, and physical facilities of WB;

WB is a limited company established by X-State Company Act, and is a resident of X-State under the Korea-X State Tax Treaty.

WB’s Council consists of Txx Wxxx, Jx Wxxxx, and Dxxxxxx, respectively. They hold the concurrent office of 43,39, and 24 directors of each of them. Txxxx Wxxxxxxx, the Chairman of the Council of F after April 2012, Jx Exxxxx x x x 3, each year after June 2010, the Lx 3rd of FF, while the Lxx x 2, a local tax management company, and a small amount of Lxx xx xx xx 2, a regional tax management company, have concluded with the Lx 2, a small amount of Lx x x, and there is no 4, a small amount of Lx xx xx xx x, a resident of the MB, and there is no 2, a small amount of 2, 3,000,000.

3) the place where the WB’s board of directors or general meeting of shareholders is held.

WB Council or shareholders' general meeting held 12 times from 2011 to 2013 was held at the FF office located in Y country, except once (the board of directors on June 5, 2012). WB's annual report from 2012 to 2013 also includes the YB's actual management place.

4) Details of the business of WB

WB is a pure holding company that holds the Plaintiff and HH’s shares, and its principal business is to receive dividends from the Plaintiff to F, and otherwise hold the shares of another company, or there is no other business activity.

5) Details of the use of dividends by WB

WB paid most of the dividends received from the Plaintiff to F as dividends, except in 2013 as listed below, and reserved only a part of the retained dividends to F, and did not use the retained dividends to other business or investment activities.

(unit: USD)

Classification

2010

2011

2012

2013

2014

Total

Total Amount of dividend revenue

10,000,000

23,997,600

23,997,600

23,997,600

24,000,000

105,992,800

Amount received of dividends

(5% after withholding)

9,500,000

2,797,720

2,797,720

2,797,720

2,800,000

100,693,160

net income

9,432,610

2,230,560

22,463,587

2,173,044

23,195,930

9,495,731

Dividend Payments

9,432,610

20,667,373

20,485,336

-

22,045,198

72,630,517

Internal Reserve Amount

-

2,130,347

2,312,384

2,797,720

754,802

27,995,253

6) The Plaintiff’s person responsible for performance guarantee

Since the owner of the instant shares transferred from F to WBB on September 2, 2008, the Plaintiff and its principal customer from 2009 to 2015 had the responsibility of performance guarantee for long-term maritime transport services (However, the FF appears not to have fulfilled its actual performance guarantee obligation during the above period) continuously borne by F. The Plaintiff deleted the above performance guarantee liability provision while entering into a new long-term maritime transport contract between DD and EE vehicles on December 17, 2015, which was after the investigation into the Plaintiff by the director of Seoul Regional Tax Office.

7) Main contents of the e-mail related to WB exchanged by the parties concerned such as F and the Plaintiff

A) On March 17, 2010, the FF staff notified the Kim, who is an employee of the Financial Team of the Plaintiff, that the deposit account of the dividends that the Plaintiff should pay to WB was changed.

(B) The above Kim Il-il Accounting Corporation, who was in charge of the FF Financial Accounting Department, asked on April 12, 201 that the tax rate of 5% should be applied to the dividends that the Plaintiff paid to Kim Jong-B on March 31, 2010, when considering the tax amount actually to Kim Jong-B, is one of the most important purposes for the restructuring of the transfer of shares to the WBB. The tax authorities were unable to understand this fact, but if they consider it difficult to understand this fact, they responded to the purport that the Plaintiff’s view would have a good impact on the Plaintiff’s position.”

D) On April 20, 201, the Plaintiff’s financial team personnel, notified the Plaintiff’s WBxx of the remittance of the dividend to the Plaintiff’s WBxx, and sent relevant evidence.

E) On April 6, 2015, the above Jxxx Txxx notified the instant tax investigation and requested that WBx submit an annual report from 2010 to 2014.

8) Whether the F’s overall tax burden decreases due to the instant corporate governance restructuring

Before the reorganization of the governance structure of this case, 15% withholding tax rate was applied to the dividend income received by FF from the Plaintiff pursuant to the Korea-YA Tax Treaty. However, after the reorganization of the governance structure of this case, 5% withholding tax rate was applied to the dividend income received by WB from the Plaintiff pursuant to the Korea-XA Tax Treaty. Furthermore, according to the X-B tax law of the country, the resident state of WB, the WB is the source of the dividend income received by the Plaintiff, a foreign corporation, the entire amount of corporate tax is refunded to FF, who is the shareholder, and the withholding tax rate of 0% is applied to F, who is the shareholder, to whom the total amount of corporate tax is paid at the time of dividends. Ultimately, the total tax burden of FF on the dividend income received by the Plaintiff from the Plaintiff due to the reorganization of the governance structure of this case was reduced by 10%, which is as follows.

[Grounds for recognition] Facts acknowledged earlier, Gap evidence Nos. 6-15, 19, 21, 25, Eul evidence Nos. 1-10 (including additional numbers), and the purport of the whole pleadings

D. Determination

1) The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes, in cases where there is a separate person to whom such income, profit, property, and transaction, etc., belongs, and there is another person to whom such income, profit, property, and transaction, etc., belong, the nominal owner of the property shall be the person to whom such income, rather than the nominal owner is the tax obligor. Thus, in cases where the nominal owner of the property lacks the ability to control and manage the property, and there is another person who substantially controls and manages the property through the control, etc. over the nominal owner, and where the disparity between the nominal owner and the substance arises from the purpose of tax evasion, the income on the property shall be deemed reverted to the person who actually controls and manages the property, and the person to whom such income is the tax obligor shall be the person to whom such income, unless special provisions exist to exclude it from the interpretation and application of the tax treaty having the same effect as the Act (see, e.g., Supreme Court Decisions 2015Du5011, Feb. 18, 2017>

2) In light of the aforementioned legal principles, in full view of the following circumstances revealed by the entries in Gap evidence No. 26 and the purport of the entire pleading, WBB, a X-based corporation, is the beneficial owner of the instant dividend income, and the disparity between such form and substance is deemed to have arisen from the purpose of tax evasion by applying the Korea-X Tax Treaty. Thus, the Korea-YB Tax Treaty shall apply to the instant dividend income actually belonging to the Y corporation.

A) WB is a limited company established under the X-State Company Act and established for the purpose of FF to own the shares of the Plaintiff and HH on behalf of FF, and the Plaintiff and HH’s actual capital was not invested in addition to the shares of HH, and the dividends received from the Plaintiff, a subsidiary company, are merely the parent company, and other companies are owned shares of the company, or other business or investment activities are not conducted (WBB is a pure holding company and does not engage in any business activities). Thus, the Plaintiff’s argument to the effect that the issue should not be considered when determining whether the subsidiary company was a pure holding company, is acceptable if there is an inevitable institutional limitation that is outside the ability to establish WBB, but it appears that such restriction was not followed, and rather, WB is difficult to accept the argument that WB was established based on WB’s decision to reduce its management burden.

B) WB did not have a resident employee, and FF’s domestic subsidiaries did not have independent physical facilities, but WB’s board of directors or shareholders’ meeting was held at FF’s office located in the Y State most of the FB’s board of directors or shareholders’ meeting, and the directors were FF officers holding concurrent positions as directors of other corporations, or representatives of X-country’s local tax management company.

C) Both WB’s important decision-making process was conducted by F and GG in a collective decision-making body practically led by F and FG, and specific practical work related to the Plaintiff’s dividend payment was also used by WBB’s account. However, discussions were made between the Plaintiff and F’s employees. The Plaintiff’s major business partner, and the EE vehicles continued to bear the responsibility of performance guarantee for long-term maritime transport services between D and D and EE vehicles until 2015, prior to the commencement of the tax investigation.

D) Even if WBB and WCC loans H, as indicated in the evidence No. 20, to the 2009 financial crisis, KRW 50 million to HH, it appears that this would result in the decision-making of the joint decision-making body led by FF and GG, and that the funds were borrowed from F and GG, and thus, it is insufficient to view that WBB independently performed its business role and function as a holding company.

E) Although FF decided to establish an intermediary holding company by means of de facto promoting mergers between the Plaintiff and HH with a view to avoiding unfair regulation by the EU competition authorities, or the location condition of X countries is favorable to maritime transportation, the fact that FF should establish an intermediary holding company such as the Plaintiff and HB to de facto mergers and transfer the instant shares held by FF to the instant financial holding company is just based on the opinion that FF would try to establish an intermediary holding company as the preceding condition of de facto mergers, and that it would have changed in terms of the competition law, company law, and compensation for damages, “it is not necessarily necessary to establish an intermediary holding company, but is safe under the competition law,” and that FF would not have any mandatory restriction such as statutory regulation. Furthermore, in light of the fact that FF confirmed that it was necessary to establish a holding company for tax exemption at the time of the above request and that it would have been extremely favorable to the Plaintiff’s establishment of an intermediary holding company and the instant financial holding company, taking into account the fact that it would not have been able to take into account the circumstances of its establishment and the instant financial burden of investment.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.