The Export-Import Bank of Korea (Law Firm LLC, Attorney Choi Full-time, Counsel for defendant-appellant)

Yeongdeungpo-gu Tax Office (Law Firm ELKB Partners, Attorneys Shin-chul et al., Counsel for the plaintiff-appellant)

May 2, 2017

Seoul Administrative Court Decision 2015Guhap61771 decided October 27, 2016

1. Revocation of the first instance judgment.

2. The plaintiff's claim is dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

On June 17, 2014, the Defendant revoked both the disposition of collecting corporate tax and the disposition of imposing additional tax on the Plaintiff listed in the separate sheet.

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

The reasoning for this part of the judgment is as stated in the corresponding part of the judgment of the court of first instance, and thus, it is accepted in accordance with Article 8(2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act. However, the judgment of the court of first instance dismissed the “third-party” and “third-party” of the judgment of the court of first instance, “third-party and fifth-party” respectively.

2. The plaintiff's assertion

Each disposition of this case shall be revoked on the grounds that it is unlawful for the following reasons.

A. The interest at issue does not constitute domestic source income.

1) The interest at issue is the return of unjust enrichment that is paid as a result of the cancellation of each shipbuilding contract at issue. Therefore, the interest at issue does not constitute the “compensation for damages paid due to breach or termination of a contract on property rights, which exceeds the compensation for the payment under the original contract,” which is the other income stipulated in Article 93 subparag. 11 (b) of the former Corporate Tax Act, Article 132(10) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010; hereinafter “former Enforcement Decree of Corporate Tax Act”), or Article 93 subparag. 10 (b) of the Corporate Tax Act.

Even if the interest at issue falls under damages, the interest at issue is the damages paid to the foreign vessel owners in order to compensate for the actual losses, and does not constitute “money paid in excess of the damages due to the original contract terms.”

2) A foreign vessel owner is not a business operated in the Republic of Korea and does not have any personal service provided in the Republic of Korea, and does not hold assets in the Republic of Korea. Thus, it cannot be deemed that the interest at issue falls under other income provided in Article 93 subparag. 11 (j) or Article 93 subparag. 10 (j) of the former Corporate Tax Act.

3) Since foreign vessel owners did not lend the key advance payment to domestic vessel owners or received the interest interest on the said interest, it cannot be deemed that the interest on the key advance payment falls under the interest income stipulated in Article 93 subparag. 1 (a) of the former Corporate Tax Act or subparagraph 1 (a) of Article 93 of the Corporate Tax Act.

B. The Plaintiff is merely a guarantor that guarantees the domestic shipbuilding company’s outstanding advance payment and the obligation to return interest at issue under each shipbuilding contract of this case, and thus, is not a “person liable to withhold income”.

C. If a foreign vessel owner is not a formal foreign vessel owner but a substantive vessel owner is not subject to the tax treaty, and the Plaintiff does not bear the duty to withhold the interest at issue. In other words, the foreign vessel owner in each of the instant shipbuilding contracts, excluding the instant agreements Nos. 4 and 5, is merely a nominal company using convenience, and the actual vessel owner denies the legal personality of the vessel owner, or the actual vessel owner becomes a party to the shipbuilding contract. Under the substance over form principle, the Korean Corporate Tax Act and the tax treaty shall apply to the actual vessel owner, not the foreign vessel owner, who is the legal entity of the interest at issue, but the actual vessel owner.

3. Relevant statutes;

The reasons for the judgment in this part are as shown in the relevant Acts and subordinate statutes of the judgment of the first instance, except for the addition of the contents as shown in the attached Form 24 of the judgment of the first instance to the following.

4. Determination

(a) Whether it constitutes domestic source income;

1) Domestic source income and withholding obligation of a foreign corporation

Article 98 (1) 3 of the former Corporate Tax Act, the main sentence of subparagraph 1 (a), subparagraph 1 (b) and (j) of Article 93, and Article 132 (10) of the former Enforcement Decree of the Corporate Tax Act, which applies to the disposition of collecting corporate tax for the business year 2009 and 2010, shall apply to a foreign corporation under the conditions as prescribed by the Presidential Decree: ① Compensation for losses or losses paid in Korea, i.e., the value of cash or other goods paid to the foreign corporation in excess of damages per se under the original contract regardless of its title or pretext, ② Income generated from economic benefits or similar income prescribed by the Presidential Decree in connection with a business operated in Korea or services provided in Korea or assets located in Korea, ③ Income paid from a domestic corporation and falling under Article 16 (1) or 16 (1) of the former Income Tax Act (including those withheld at a domestic place of business) for the business year under the conditions as prescribed by the Presidential Decree, or the amount paid to the foreign corporation in Korea under the conditions as prescribed by the said Article 10-1 (b) of the Corporate Tax Act.

Each of the instant dispositions is premised on the assumption that the Plaintiff, a foreign vessel owner having no domestic place of business, is liable to withhold part of the amount paid, as a person who pays domestic source income under the Corporate Tax Act to the foreign vessel owner, who is a foreign corporation with no domestic place of business. The first priority is to determine whether the interest at issue falls under the domestic source income as stipulated in Article 93 Subparag. 11 (b) of the former

(ii) the facts of recognition

The reasoning of this part is that the reasoning of the judgment of the court of first instance is the same as that of the 7 to 11th 9.

3) Legal nature of the interest on the instant advance payment

The reasoning of this part is that the reasoning of the judgment of the court of first instance is the same as that of the 11th to 12th to 6th.

4) Whether the payment constitutes money paid in excess of damages on the payment itself under the original terms and conditions of the contract

A) If a penalty or compensation received due to breach or termination of a contract on property rights is merely a compensation for damages equivalent to the original benefit or actual property damages, it shall not be deemed that it constitutes a new income or other income. However, if a penalty or compensation has been paid in excess of this, it shall be subject to income tax (see Supreme Court Decision 2002Du3942, Apr. 9, 2004). Such legal principle is equally construed as “damage to the other party” under Article 21(1)10 of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009) or Article 21(1)10 of the former Enforcement Decree of the Income Tax Act (amended by Act No. 12852, Dec. 23, 2014) or Article 21(1)10 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 2034, Feb. 18, 2010) or Article 17(2(b) of the former Enforcement Decree of the Income Tax Act (amended by Act).

B) The foreign vessel owners suffered positive damages for the instant advance payment that was not returned to the domestic shipbuilding owner due to the cancellation of each shipbuilding contract, and ② passive damages equivalent to interest accrued due to the failure to use the instant advance payment in any other place. The foreign vessel owners received compensation from the Plaintiff for the amount equivalent to the advance payment that was not returned to the domestic shipbuilding owner, out of the damages incurred by the cancellation of each shipbuilding contract of this case. Therefore, the interest on the instant advance payment exceeds the aforementioned active damages, and can be deemed to have been paid to compensate for the damages equivalent to the interest accrued due to the foreign vessel owners’ failure to use the advance payment paid to the domestic shipbuilding owner in any other place. Accordingly, the interest on the instant advance payment falls under the category of money received in excess of the compensation for the payment itself, which constitutes the original content of the contract under Article 132(10) of the former Enforcement Decree of the Corporate Tax Act or Article 132(10) of the Enforcement Decree of the Corporate Tax Act.

C) The Plaintiff asserts that a foreign vessel owner bears financial expenses by borrowing the amount equivalent to the advance payment at issue from a financial institution or issuing stocks to the domestic shipbuilding owner in order to pay the advance payment at issue, and that all expenses other than the above financial expenses have been paid in the course of concluding each shipbuilding contract at issue and implementing each shipbuilding contract at a reasonable level. As such, the interest rate on the advance payment at issue is within a reasonable scope, the interest rate at issue should be deemed as the compensation paid to compensate the actual losses suffered by the foreign vessel owner. However, even if the foreign vessel owner paid the financial expenses, such financial expenses should not be deemed as included in the payment itself, which forms the contents of each shipbuilding contract at issue, apart from what constitutes the necessary expenses. The Plaintiff’s above assertion is without merit.

5) Sub-committee

Therefore, the interest at issue falls under the other income stipulated in Article 93 subparag. 11 (b) of the former Corporate Tax Act or Article 93 subparag. 10 (b) of the Corporate Tax Act, and thus, the remainder of the interest at issue falls under the domestic source income of a foreign corporation. Therefore, this part of

(b)the existence of withholding obligations;

Article 98(1) of the former Corporate Tax Act provides that the withholding obligation for domestic source income shall be borne by the person who pays the income amount to a foreign corporation at the time of payment, the essence of the withholding tax system to ensure convenient taxation and securing tax revenue by withholding at the time of payment from the source of income to the source of income, and the content and structure of other provisions related to withholding tax on the income generated from domestic sources, it is reasonable to view that the term “a person who pays income under Article 98(1) of the same Act who is liable for withholding tax on the income generated from domestic sources paid to a foreign corporation” refers to a person who actually pays the income amount as his own obligation under a contract, etc. (see Supreme Court Decision 2006Du7904, Mar. 12, 2009).

The Plaintiff paid the interest at issue in order to perform its obligation, not the other party’s obligation under each of the instant guarantee contracts. Therefore, the Plaintiff is obligated to withhold the interest at issue. This part of the Plaintiff’s assertion is without merit.

C. Whether the tax treaty is applied

1) Article 28 of the Adjustment of International Taxes Act provides that “The provisions of a tax treaty shall prevail, notwithstanding Article 93 of the Corporate Tax Act, with respect to the classification of a foreign corporation’s domestic source income.” Article 21 of the tax treaty between the Republic of Korea and Turkey, Article 21 of the tax treaty between the Republic of Korea and Germany, Article 22 of the tax treaty between the Republic of Korea and the relevant lease, and Article 22 of the tax treaty between the Republic of Korea and the United States Emirate, shall not be taxed on other income

However, the burden of proof as to the requirements for non-taxation and tax exemption is on the taxpayer’s side (see Supreme Court Decision 98Du16095 delivered on July 7, 200), and thus, a person who wishes to receive non-taxation benefits through the application of the tax treaty due to the denial of legal personality of foreign vessel owners or the actual vessel owners who have established it actually belonged to income.

2) First, we examine whether each of the instant shipbuilding contracts (other than the contracts listed in No. 4 and 5 of Table 1) denies legal personality for foreign vessel owners.

In general, a special purpose company is to be established without human and material capital by meeting the minimum requirements for capital investment in order to achieve a temporary purpose. Therefore, the mere fact that a special purpose company has at least property invested to the extent required by the law of the place of incorporation in order to achieve the purpose of its establishment, or that an employee of a company that has established a special purpose company operates or controls a special purpose company concurrently with an officer or employee of the special purpose company does not violate the principle of trust and good faith to recognize the independent corporate personality of a special purpose company is an abuse of corporate personality, and thus, it does not constitute an abuse of corporate personality, which violates the principle of trust and good faith. In order to recognize the abuse of corporate personality, the subjective intent or purpose of the company should be recognized, such as the abuse of corporate system, at least by means of avoiding legal application to the person behind the behind corporate personality of the special purpose company, or abuse of corporate system in order to achieve unlawful purposes such as evasion of obligations, evasion of contractual obligations, and evasion

The plaintiff asserts that the foreign vessel owners of each shipbuilding contract of this case are merely a nominal company established for the convenience of convenience, but in light of the above legal principles, it cannot be viewed that the legal personality is denied merely because foreign vessel owners were established for the convenience of convenience, and there is no evidence to support that foreign vessel owners were used without permission as a means to avoid the application of laws against their hinterlands. The plaintiff's assertion on this part is without merit.

3) Next, we examine whether the advance payment on the remaining issues, excluding the advance payment interest in the Nos. 3 and 4 and 5 of the table 4 and 5, belongs to the actual vessel owner claimed by the Plaintiff.

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 the actual income, profit, property, transaction, etc., belongs, unlike the nominal owner, should be the person to whom the actual income, profit, property, or transaction, etc., belongs. Thus, the nominal owner of the property does not have the ability to control and manage it, and there is a separate person who substantially controls and manages it through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, income on the property shall be deemed to have been reverted to the person who actually controls and manages the property and shall be the person to whom the income is to be the person to whom the tax payment is made. This principle applies to the interpretation and application of a tax treaty with the same legal effect (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012; 2015Du2611, Dec. 15, 2016).

According to the evidence Nos. 1, 2, 3, and 4-1, 2, 4-1, 2, 11-1, 2, 12-1, 2, and 13 of evidence Nos. 1, 12-1, 2, and 13 of evidence Nos. 3-1, 2, and 13 of evidence Nos. 1, 3-1, 2, and 13 of evidence Nos. 1, 1, 2, and 3 of evidence Nos. 1, 1, 2, and 3 were agreed to provide that the ship owner's export insurance policy stated in the letter Nos. 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 1, 3, 1, 1, 3, 1, 1, 1, 3, 1, 1, 1, 1, 3, 1, 1, 1, 3, 1, 1, 3.

However, according to the evidence Nos. 11, 12, 13, 14, 4-5, 8, 9, and 10 of the evidence Nos. 3-11, 12, 13, 14-5-8, 9, and 10 of the evidence Nos. 11, 12-2, 3, 8, 9, and 12, the foreign vessel owners, who are parties to the contract, requested the advance payment of the issue of shipbuilding contract as stated in the Table Nos. 1-2, 1, 3, 8, 9, and 12, and the cancellation of the declaration of intention to cancel the shipbuilding contract or the request for the advance payment of the issue at issue as stated in Table No. 6, 7, E.R. CHFHG G&WH&C. The above facts are insufficient to recognize that the actual owner of the advance is the actual vessel owner, and there is no other evidence to recognize this otherwise.

D. Sub-committee

Therefore, each of the dispositions of this case is legitimate.

5. Conclusion

Thus, the plaintiff's claim shall be dismissed as it is without merit, and the judgment of the court of first instance shall be dismissed as it is unfair to conclude otherwise. Thus, the judgment of the court of first instance shall be revoked

[Attachment Omission]

Judges highest (Presiding Judge)

(1) The Plaintiff asserts that the interest rate at issue is ① calculated as agreed interest rate and ② the amount to be borne by a foreign vessel owner for domestic source income is divided into the portion to be borne by the Plaintiff on behalf of the foreign vessel owner, and that at least the portion to be compensated for the amount of withholding tax cannot be deemed as a domestic source income by directly compensating for the damages to the payment itself (see, e.g., the documents submitted by the Plaintiff after the closing of the arguments at the trial). However, in light of the aforementioned legal principles, it is reasonable to view that the portion of the preservation agreement on withholding tax and the agreement to compensate for damages exceeding the active