In calculating the limit of deduction of foreign corporate tax pursuant to Article 57(1)1 of the former Corporate Tax Act, the method of calculating “foreign source income” (i.e., calculating total amount of deductible expenses related to the total amount of gross income accrued overseas) and whether the same applies to cases where a domestic corporation was liable for corporate tax calculated by multiplying the amount of income generated from overseas by a specified withholding tax rate on the amount of income generated from overseas because it did not have a permanent

Article 57(1)1 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010)

SBS Content hub Co., Ltd. (Attorney Kim-hwan et al., Counsel for the plaintiff-appellant)

The head of Yangcheon Tax Office

Seoul High Court Decision 2014Nu4957 decided January 28, 2015

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

The grounds of appeal are examined.

1. Plaintiff’s ground of appeal

A. Ground of appeal No.1

Article 57(1)1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that the amount of foreign corporate tax may be deducted from the amount of corporate tax for the relevant business year, within the limit of the amount calculated by multiplying the amount of corporate tax for the relevant business year by the ratio of income generated from overseas to the amount of corporate tax for the relevant business year, where income generated from overseas is included in the tax base of a domestic corporation for each business year and there is the amount of foreign corporate tax paid or payable on such income generated from overseas (hereinafter

As can be seen, Article 57(1)1 of the former Corporate Tax Act provides that the amount of foreign corporate tax may be deducted from the amount of corporate tax for the pertinent business year in order to adjust international double taxation, setting the limit of deduction as “amount calculated by multiplying the amount of corporate tax for the pertinent business year by the ratio of income generated from overseas sources to the tax base for the pertinent business year,” and allow the deduction of the amount of foreign corporate tax only within the scope of the amount of corporate tax to be paid to the Republic of Korea on income generated from overseas sources. This is intended to prevent the occurrence of foreign corporate tax if the amount of foreign corporate tax is allowed to be fully deducted from the source country where income generated from overseas sources is located, as part of the corporate tax to be paid on income

In light of the language and purport of Article 57(1)1 of the former Corporate Tax Act, and Article 14(1) of the former Corporate Tax Act provides that income for each business year of a domestic corporation shall be the amount obtained by deducting the total amount of deductible expenses belonging to the business year from the total amount of gross income belonging to the business year concerned without asking whether the source is domestic or foreign, and not, in calculating the limit of deduction of foreign corporate tax pursuant to Article 57(1)1 of the former Corporate Tax Act, the “amount of income generated from overseas” shall be calculated by deducting the total amount of deductible expenses related thereto from the total amount of gross income accrued overseas belonging to the relevant business year of a domestic corporation. This also applies where a domestic corporation bears corporate tax calculated by multiplying the amount of income generated from overseas by a certain withholding tax rate on the income generated from overseas because it did not have a permanent establishment in the source country where the income generated from overseas was generated (see Supreme Court Decision 2014Du5613, Mar

In the same purport, the lower court determined that, even if the Plaintiff, who did not have a foreign permanent establishment, bears corporate tax calculated by multiplying the income amount from overseas source by a certain withholding tax rate on the foreign source income of the instant case, which was acquired by selling broadcast programs, etc. to a foreign broadcasting company, when calculating the limit of foreign corporate tax deduction pursuant to Article 57(1)1 of the former Corporate Tax Act, the amount of foreign source income should be calculated by deducting expenses related thereto from the income amount. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules, or by misapprehending the legal doctrine on the deduction system of foreign corporate tax amount

B. Ground of appeal No. 2

The lower court, based on the circumstances indicated in its reasoning, determined that the Plaintiff did not have justifiable grounds for failing to perform the obligation to pay the corporate tax of this case. In so doing, it did not err by misapprehending the legal doctrine on the justifiable grounds for exempting penalty, contrary to what is alleged in the grounds of

2. As to the Defendant’s ground of appeal

For the reasons indicated in its holding, the lower court determined that the instant disposition, which the Defendant allocated common expenses based on the sales cost or sales cost of each business sector, was unlawful within the scope exceeding the reasonable tax amount calculated by allocating common expenses based on the personnel cost of each business sector, on the grounds that the causes of the instant business are reasonable relations with the personnel cost of each business sector (hereinafter “common expenses”).

Examining the reasoning of the lower judgment in light of the record, the lower court did not exhaust all necessary deliberations, and did not err by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or by misapprehending the legal doctrine on the reasonable allocation standard of domestic and foreign common expenses

3. Conclusion

Therefore, all appeals 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 Il-young (Presiding Justice)