In the case of interest income paid by a guarantor who is a domestic corporation to a nonresident or a creditor who is a foreign corporation for a primary debtor who is a foreign corporation, whether a guarantor is liable to withhold corporate tax as corporate tax pursuant to Article 98(1) of the former Corporate Tax Act (affirmative), and whether the same applies to a primary debtor’

Article 93 subparag. 1 of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter the same) stipulates that interest income received by a nonresident or a foreign corporation as domestic source income shall be determined as income in principle, and stipulates that only the interest on loans directly borrowed by the overseas business place of a resident or a domestic corporation shall be excluded from domestic source income exceptionally. If a guarantor pays interest income to a creditor for a primary debtor, it is only necessary to determine as at the time of payment of the interest income derived from the guarantor and the primary debtor after the payment, and it is also necessary to determine as at the time of payment of the interest income derived from the primary debtor. It is also consistent with the nature of the withholding tax system that takes the guarantor as at the time of payment from the source of income to the guarantor at the time of payment. Thus, Article 93 subparag. 1 of the former Corporate Tax Act applies the proviso to Article 93 subparag. 1 of the former Corporate Tax Act to a domestic corporation as a guarantor, a foreign corporation, as the primary debtor, as prescribed by Article 93 subparag.1 of the former Corporate Tax Act.

Article 93 subparagraph 1 (a) and Article 98 (1) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006)

Hartjin Co., Ltd. (Law Firm Squa, Attorneys Soh-kick et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office

Seoul High Court Decision 2012Nu30068 decided April 24, 2013

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

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

1. Article 98(1) of the former Corporate Tax Act (amended by Act No. 8141 of Dec. 30, 2006; hereinafter the same) provides that “any person who pays domestic source income to a foreign corporation under Article 93(1) shall withhold corporate tax at the time of payment and pay it.” Article 93 provides that “The following income under the following items shall be excluded from interest income and other payments under Article 16(1) of the Income Tax Act: Provided, That this does not include interest on loans directly borrowed by the overseas place of business for the overseas place of business of a resident or domestic corporation.” Article 98(1) provides that “income received from the domestic place of business of the State, local government, resident, domestic corporation, or foreign corporation, or the domestic place of business of a non-resident under Article 120 of the Income Tax Act” as one of the domestic source income of a foreign corporation.

Article 93 subparag. 1 of the former Corporate Tax Act stipulates that interest income received by a nonresident or a foreign corporation as domestic source income shall be exceptionally excluded from domestic source income. In light of the above, where a guarantor pays interest income to a creditor for a principal debtor, it is only necessary to determine as at the time of payment of the interest income accrued from the guarantor and the principal debtor after payment, and it also accords with the essence of the withholding tax system that takes the guarantor as a withholding agent at the time of payment from the source of income to the time of payment. Article 93 subparag. 1 of the former Corporate Tax Act prescribes that Article 93 subparag. 1 of the former Corporate Tax Act applies the proviso to Article 93 subparag. 1 of the former Corporate Tax Act to a domestic corporation’s overseas subsidiaries as well as the domestic corporation’s overseas subsidiaries as at the time of payment. In full view of the above, Article 93 subparag. 1 of the former Corporate Tax Act provides that the guarantor who is a domestic corporation and a foreign corporation is not a principal debtor at the time of payment from the source of income to the domestic corporation.

2. citing the reasoning of the judgment of the court of first instance, the court below acknowledged the following facts: ① the Plaintiff, a domestic corporation, established Jinro International Limited (H.K.) on February 28, 1996 in accordance with the Hong Kong Act, and acquired the entire shares issued by it; ② the Plaintiff, a payment guarantee for the payment of the changed interest rate, additional bonds and loans issued by the former Hong Kong, failed to repay them; ② on March 16, 2006, the Plaintiff failed to withhold corporate tax on interest income from paying the principal and interest (hereinafter “the interest portion”) to the payment guarantee creditor, a foreign corporation, on March 16, 2006; ③ The Defendant rendered the instant disposition imposing corporate tax withheld from the Plaintiff on January 3, 2011.

Furthermore, the court below rejected the Plaintiff’s assertion that Article 93 subparag. 1 of the former Corporate Tax Act (amended by Act No. 93 subparag. 1), in principle, should exceptionally determine the source of interest income depending on the payer’s residence, and exceptionally determine the place of use only in cases of a domestic corporation’s overseas business place. However, insofar as the payer of the instant payment is the Plaintiff who is a domestic corporation and his career Hong Kong, which is a subsidiary, cannot be seen as the Plaintiff’s overseas business place, the instant disposition is legitimate on the ground that the instant payment constitutes domestic source income under Article 93 subparag. 1(a)

The judgment of the court below is just in accordance with the above provisions and legal principles. Contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the source of interest income paid by a guarantor who is a domestic corporation, or the scope of application under the proviso of

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

Justices Lee Ki-taik (Presiding Justice)