Cho High Court Decision 2010Du3455 (No. 12, 2011)

The term "ownership of stocks" in Article 10 (2) (a) of the Korea-Japan Tax Treaty does not mean only the case of direct ownership.

Article 24(4) of the Korea-Japan Tax Treaty is to clarify the fact that a foreign-invested enterprise is a foreign-invested enterprise even in cases where the foreign-invested enterprise indirectly owns or controls the capital. As such, on the basis of the above provision, it cannot be readily concluded that the ownership of the 'stocks' under Article 10(2)(a) of the Korea-Japan Tax Treaty, which is the provision on the application of the limited tax rate on dividend income, is 'direct ownership' of stocks. Thus, the disposition imposing tax by deeming the 5% limited tax rate to apply only when a resident of a Contracting State owns the company's

2011Guhap16797 Revocation of Disposition of Corporate Tax Imposition

XX Development Limited Liability Company and 3 others

Sejong Tax Office et al. and three others

August 23, 2011

November 10, 201

1. On July 12, 2010, the collection disposition of the corporate tax withheld at KRW 3,545,450 for the business year 2008 against the Plaintiff-based limited liability company is revoked.

2. On July 14, 2010, Defendant OO head of the tax office revoked each collection disposition of KRW 2,112,809,040, corporate tax withheld for the business year 2006, and corporate tax withheld for the business year 2009, and KRW 1,290,909,09,090 for the corporate tax withheld for the business year 2009.

3. On July 14, 2010, the head of Pyeongtaek-si Tax Office’s disposition of collecting corporate tax withheld at KRW 172,553,980 for the business year 2007 against the Plaintiff-based limited liability company, corporate tax withheld at KRW 85,181,820 for the business year 208, and corporate tax withheld at KRW 22,727,260 for the business year 209.

4. On July 14, 2010, the collection disposition of KRW 140,00,000 corporate tax withheld for the business year 2006, corporate tax withheld for the business year 2008, corporate tax of KRW 140,090,900, and corporate tax of KRW 138,181,80 for the business year 2009 is revoked.

5. The costs of lawsuit are assessed against the Defendants.

The purport of the claim is as shown in the Disposition (the above collection disposition is written as each disposition of imposition, but it seems to be by mistake).

1. Details of the disposition;

A. The Plaintiffs are foreign-invested corporations, each of which invested 100% by Malaysia, △△△ Group located in Korea (hereinafter “△△△△△”), and △△△ is a foreign-invested corporation, a Japanese-invested corporation, 100% of whose capital is 100% of the △△△△△ Corporation (hereinafter “△△△”).

B. Details of the instant disposition

1) Plaintiff XXO consolidated power generation company (hereinafter “Plaintiff”)

(A) On November 30, 2006, Plaintiff XXO paid dividends of KRW 21 billion to △△△, a shareholder, △△△ (hereinafter referred to as “xxO dividend income 1”); on March 19, 2009, dividends of KRW 14.2 billion (hereinafter referred to as “xxO dividend income 2”); on December 11, 2006, Plaintiff paid KRW 25.5 billion to the head of the tax office of the tax office of the tax payment as corporate tax under Article 98-5(1) of the former Corporate Tax Act (amended by Act No. 8852, Feb. 29, 2008); Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 8141, Dec. 30, 2006).

(B) On August 16, 2007, △△△△ requested correction for the application of the limited tax rate of Article 10(2)(a) of the former Corporate Tax Act (amended by Act No. 8852, Feb. 29, 2008) to Defendant OO head of the tax office for the application of the limited tax rate of Article 10(2)(10% including resident tax) of the former Corporate Tax Act (amended by Act No. 8852, Feb. 29, 2008). On January 14, 2008, the head of the DefendantOO head of the tax office rejected the above request for correction on the ground that △△△△ was not the actual owner of ○ dividend income

(C) On June 19, 2008, △△△△, the shareholder of △△△△ filed with the head of the competent tax office for rectification to apply the limited tax rate of Article 10(2)(b) of the Convention between the Republic of Korea and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter “Korea-Japan Tax Treaty”) 4.54% (including resident tax; hereinafter “limited tax rate of 5%”) to the special tax rate of 4.54% (hereinafter “limited tax rate of 5%”). Accordingly, the head of the competent tax office returned the amount of 4,295,545,454,540,540 won subtracting the tax amount of 5.5 billion won which applied the limited tax rate of 5.25 billion won on March 19, 2009 by adding the limited tax rate of 954,545,4540 won,4527,680O.

(D) In addition, on January 7, 2009, for which 5% of the limited tax rate under Article 10(2)(a) of the Korea-Japan Tax Treaty was applied to 2 of the dividend income, △△△△, △△△△△, applied for prior approval of source collection pursuant to Article 98-5(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010). The Central Director of the Central District Tax Office approved the said prior approval by deeming the actual owner of the said dividend income as △△△△ on March 5, 2009. Accordingly, on April 10, 2009, Plaintiff XXO withheld 645,454,540 won, which applied 5% of the limited tax rate on the said dividend income as corporate tax for the business year of 2009 and paid it to the head of the Central Tax Office.

(E) In relation to the dividend income 1 and 2, the director of the Central Regional Tax Office instructed the Plaintiff to make a revised return by applying the limited tax rate of 13.63% (including resident tax; hereinafter “limited tax rate of 15%”) pursuant to Article 10(2)(b) of the Korea-Japan Tax Treaty with respect to the Plaintiff’s indirect ownership through △△△△△, not directly owning the Plaintiff’s shares. On December 30, 2009, the director of the Central Tax Office notified the Plaintiff of the revised return on March 22, 2010, on the ground of correction of errors in applying the limited tax rate of 13.63% (including the resident tax; hereinafter “limited tax rate of 15%”) on the dividend income of 206 and 2009, the head of the Central Tax Office notified the Plaintiff of the scheduled tax amount of KRW 3,532,809,040 for the business year 200, 209, 2009.

2) Plaintiff XX oil limited liability company (hereinafter “Plaintiff”)

(A) On April 27, 2007, Plaintiff XX oil paid dividends of KRW 1.741 billion to △△△, a shareholder, △△△ (hereinafter referred to as 'P milk dividend income 1'), dividends of KRW 937 million on September 24, 2008 (hereinafter referred to as 'P milk dividend income 2'), and dividends of KRW 250 million on May 8, 2009 (hereinafter referred to as "3"), and withheld the withholding tax rate of KRW 98-5 (1) of the former Corporate Tax Act (amended by Act No. 8852, Feb. 29, 2008), and Article 205 (1) of the former Corporate Tax Act (amended by Act No. 8852, Dec. 26, 2008); and Defendant 2507 (amended by Act No. 3075, Mar. 27, 2005).

(B) On June 18, 2008, △△△, a shareholder of △△△△, filed a request with the head of △△ District Tax Office for rectification for the application of special taxation for withholding tax under Article 98-5(2) of the former Corporate Tax Act (amended by Act No. 8852 of Feb. 29, 2008) to pay for dividend income 1. Accordingly, on March 24, 2009, the head of △△△△△ District Tax Office refunded KRW 356,113,630 additional dues of KRW 32,132,840 for the Plaintiff’s refund to the Plaintiff.

(C) In addition, on June 11, 2008, for whom 5% of the limited tax rate under Article 10(2)(a) of the Korea-Japan Tax Treaty was applied to 2 of the dividend income, △△△, △△△△△, the Plaintiff filed an application for prior approval of withholding under Article 98-5(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) with the Director of the Central Tax Office. On August 20, 2008, the Vice Director of the Central District Tax Office approved the said application by deeming the actual owner of the said dividend income as △△△△, and on this basis, on October 10, 2008 by applying 5% of the limited tax rate based on the above prior approval of the Deputy Director of the Central Tax Office, △△△△△△, the Plaintiff collected 42,590,000 won as corporate tax for the business year of 2008.

(D) After that, on the grounds that △△, with respect to the dividend income 1 through 3, the head of the Central District Tax Office provided guidance for filing a revised return by applying the limited tax rate of 15% pursuant to Article 10(2)(b) of the Korea-Japan Tax Treaty on December 30, 2009, on the grounds that △△ was indirectly owned by the Plaintiff through △△△△△△, not directly owning the Plaintiff’s shares. On March 22, 2010, on the ground that the error in applying the limited tax rate of 15% on the dividend income was corrected, the head of the Central Tax Office notified the Plaintiff that the total amount of corporate tax withheld for the business year from 2007 to 2009 and 290,52,160 won would be imposed on the Plaintiff’s milk (the head of the Central Tax Office collected the limited tax rate of 207 to 1 through 3009, 208, 2085, 2097, 2008.

3) Plaintiff XX Development Limited Liability Company (hereinafter “Plaintiff”)

(A) On September 24, 2008, Plaintiff XX Development paid dividends of KRW 39 million to △△△, a shareholder, to △△△△, and on April 30, 2008, △△△△’s shareholder, applied for prior approval of special exemption from withholding under Article 98-5(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) to the Director of the Seoul Regional Tax Office for the application of the limited tax rate of Article 10(2)(a) of the Korea-Japan Tax Treaty for the limited tax rate of KRW 5% on the dividend income under Article 10(2)(c) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 201). The Director of the Seoul Regional Tax Office approved the said application to △△△ on July 25, 2008 on the ground of the aforementioned prior approval.

(B) After that, the director of the Seoul Regional Tax Office notified the Plaintiff’s indirect ownership of the Plaintiff’s developing dividend income through △△△△, without directly owning the Plaintiff’s developing shares, on March 31, 2010, that the Plaintiff would levy KRW 3,900,000 of the corporate tax withheld in the business year of 2008. The Defendant Sejong District Tax Office re-calculated the corporate tax withheld in the business year of 2008 by applying the limited tax rate of 15% on the dividend income subject to the aforementioned notice of taxation, based on which the Defendant Sejong District Tax Office re-calculated the corporate tax withheld in the business year of 2008. On July 12, 2010, it additionally imposed the Plaintiff’s corporate tax withheld in the business year of 2008 (including penalty tax of KRW 354,540).

4) Plaintiff XXO consolidated power generation company (hereinafter “Plaintiff”)

(A) On April 28, 2006, Plaintiff XXO paid dividends of KRW 2.8 billion to △△△, a shareholder, △△△△ (hereinafter referred to as “xxO dividend income 1”), KRW 1.54 billion dividend on September 24, 2008 (hereinafter referred to as “xxO dividend income 2”), KRW 1.52 billion dividend on May 8, 2009 (hereinafter referred to as “xxO dividend income 3”), and KRW 1.520 million on May 8, 2009 (hereinafter referred to as “xxO dividend income 3”), and Article 10(2)(a) of the Malaysia Tax Treaty applied limited tax rates of KRW 9.09% (including resident tax) to 2545,450,00 to 200,000 for the first time, and Article 10(2) of the Addenda of the Corporate Tax Act did not apply to the head of the tax office of the tax office having jurisdiction over the dividend income as corporate tax for 2081.7.5

(B) After that, △△△, a shareholder of △△△△, filed an application for prior approval of the special case of withholding tax under Article 98-5(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) for the application of 5% of the limited tax rate under Article 10(2)(a) of the Korea-Japan Tax Treaty against 2 of the dividend income of △△△△△△△△△△△△△, the director of the relevant regional tax office approved the said application by deeming the actual owner of 2 of xxO dividend income of △○ on August 7, 2008 to be the △△△△△△△△△△, and the Plaintiff paid 70,045,450 won to 2 of the above prior approval based on the limited tax rate of 5% on October 10, 208, as corporate tax for the business year of 2008, 609,090

(C) The director of the regional tax office of Gwangju Regional Tax Office, on April 1, 2010, notified the Plaintiff of the scheduled tax amounting to KRW 445,713,10,00 for the business year of 206, 2008, and the business year of 2009, and the total amount of the corporate tax withheld for the business year of 2006, 2006, 2008, 2006, 2008, 2008, 2008, 2008, 2009, 309, 209, 109, 209, 209, 209, 109, 209, 209, 2009, 209, 209, 209, 209, 209, 209, 109, 209, 209, 2009, 109.

(c) Decision on reduction by the Tax Tribunal for inquiry;

1) On October 8, 2010, the Plaintiffs were dissatisfied with the above collection disposition, and requested a tax Tribunal on October 8, 201, and on May 12, 201, the Tax Tribunal did not deem that there was a cause attributable to the Plaintiffs for failure to withhold taxes. Accordingly, the portion of additional tax in each of the above collection disposition against the Plaintiffs was reduced, and the remaining request for a trial was dismissed.

2) A summary of the initial collection disposition and the following specifications after reduction according to the determination of the pertinent Tax Tribunal (hereinafter referred to as "the instant dividend income in total, including each of the foregoing collection dispositions, for which the remainder of the reduction of the additional tax amount due to the reduction of each of the above collection dispositions, shall be referred to as "the instant disposition", and "the dividend income in total, of the dividend income in the table below).

[Ground of recognition] Facts without dispute, Gap 1 to 25 evidence, Eul 1 to 10 evidence (including each number), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion and the issues of this case

The plaintiffs asserted that in the application of the limited tax rate stipulated in Article 10 of the Korea-Japan Tax Treaty, 5% of the limited tax rate under Article 10 (2) (a) of the Korea-Japan Tax Treaty should be applied to the case where the actual truster of the dividend income of this case is deemed a Japanese corporation. The defendants asserted that the "ownership of shares" of Article 10 (2) (a) of the Korea-Japan Tax Treaty means the case where the company directly invested in the invested company, i.e., the case where the shares are directly owned. The Do governor indirectly owned the plaintiffs' shares through △△△△△△△, and therefore, 5% of the limited tax rate under

Therefore, the key issue of this case is whether the Do governor can apply 5% of the limited tax rate under Article 10(2)(a) of the Korea-Japan Tax Treaty, considering that he owns more than 25% of the plaintiffs' shares.

(b) Attached records, such as relevant statutes;

C. Determination

1)Relation between a tax treaty and a domestic tax law

Article 6 (1) of the Constitution of the Republic of Korea provides that "any treaty concluded and promulgated by the Constitution and any generally accepted international law shall have the same effect as the domestic law," so a tax treaty concluded with the consent of the National Assembly shall have the same effect as that of the law, and in the legal relationship governed by the tax treaty, the treaty shall take precedence over the domestic law because the treaty is in the special position of the domestic law.

On the other hand, a tax treaty is concluded to prevent double taxation and tax avoidance and to create conditions for international trade by adjusting the authority to impose taxes on a certain country in relation to a certain transaction, etc. Therefore, in principle, the tax treaty does not create an independent authority to impose taxes, but functions as allocating or restricting the authority to impose taxes already established under the tax laws of each country. Therefore, matters concerning the occurrence of the authority to impose taxes are governed by the tax laws of each country, but the tax treaty determines the location of the final authority to impose taxes by applying the tax treaty to matters determined differently from the domestic tax law.

As above, a tax treaty is subject to the regulation of the right to impose taxes already established under the domestic tax law, so in applying a tax treaty to taxes of a Contracting State, unless otherwise defined in the tax treaty or the context requires a different interpretation, it shall be deemed that the tax treaty is applied within the meaning stated in the domestic tax law, which serves as the basis for the right to impose taxes of the State.

2) In full view of the following circumstances as revealed in the argument of this case, △△ is deemed to hold at least 25% of the voting shares issued by the plaintiffs. Thus, Article 10(2)(a) of the Korea-Japan Tax Treaty with respect to the dividend income of this case is subject to the limited tax rate of 5%. Thus, on a different premise, the instant disposition that applied the limited tax rate of 15% under Article 10(2)(b) of the Korea-Japan Tax Treaty with respect to the dividend income of this case is unlawful.

① As provided for in the instant case, Article 10(1) of the Korea-Japan Tax Treaty provides that the dividend paid by a corporation which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. As to the dividend under paragraph (1) of the said Article, the corporation paying the dividend may also be taxed in the Contracting State, which is a resident, under the law of the other Contracting State: Provided, That the tax imposed on the dividend when the beneficial owner of the other Contracting State is a resident of the other Contracting State shall not exceed the following: (a) the beneficial owner of the dividend owns at least 25 per cent of the voting stocks issued by the corporation paying the dividend for 6 months immediately before the end of the fiscal term in which the profit distribution occurred; and (b) the total amount of the dividend shall be 5 per cent of the dividend in other cases.

In other words, the above provision permits all the taxation of the country of residence and the source country on the dividend income, but it recognizes the taxation of the source country only within the limit of the limited tax rate in order to minimize double taxation and promote international investment, and in particular, in case where a corporation owns at least 25% the voting stocks issued by the corporation which pays the dividend, it is deemed necessary to apply the limited tax rate of 5%, i.e., the limited tax rate at a lower than the general case.

In light of the purport of the application of such a limited tax rate, not only the case where a beneficial owner of dividend income directly owns the stocks of a dividend payment corporation, but also the case where a beneficial owner of dividend income and a person to whom the actual dividend income actually accrue indirectly owns the stocks of a dividend payment corporation through a dividend income in the legal form, as in this case, shall be deemed to include not only the case where a beneficial owner of dividend income owns the stocks of a dividend payment corporation, and also the case where a corporation to whom the actual dividend income actually accrue indirectly owns the stocks of a dividend payment corporation through a dividend income in the legal form. Rather, the necessity for applying the limited tax rate is deemed to exist even in indirect possession. Thus, if there exists an agreement between both Contracting States and other countries to limit the case where the application of the limited tax rate is directly owned due to their circumstances or necessity, it is common to specify the requirement of "direct ownership" as in the tax treaty

② In addition, the interpretation of tax laws and regulations shall be interpreted in accordance with the principle of no taxation without the law, and shall not be extensively interpreted or analogically interpreted without any justifiable reason, barring special circumstances (see, e.g., Supreme Court Decision 2002Du6781, May 27, 2004). This is the same in interpreting the provisions of the tax treaty between the states. Article 10(2)(a) of the Korea-Japan Tax Treaty provides that the OECD Model Tax Convention (hereinafter referred to as the " OECD Model Tax Convention") of the Organization for Economic Cooperation and Development (hereinafter referred to as the " OECD Model Tax Convention") or many tax treaties of the Republic of Korea concluded by the Republic of Korea (Korean, Malaysia, Luxembourg, Korea, the Netherlands Tax Treaty, etc.) shall be applied as the requirements for the application of limited tax rates on dividend income to "direct ownership of stocks of the dividend payment corporation," and it shall not be interpreted as "direct ownership of stocks" or "direct ownership of stocks."

③ In addition, the contents of Article 10(2)(a) of the Korea-Japan Tax Treaty, which was concluded in 1970 and amended in 198, shall be without any change, and it shall not be interpreted that the ownership of shares is limited to the ownership of shares at the time of the conclusion or amendment of the above provision. The administrative interpretation of the Korean Government Department (the Ministry of Planning and Finance) of the Republic of Korea (the defendant seems to have reached the disposition in this case) even though there is no objective data to confirm the intention of the above provision at the time of the conclusion or amendment, it cannot be interpreted that the ownership of shares is limited to the ownership of shares under the above provision as the direct ownership of shares.

④ Meanwhile, in applying a tax treaty to the tax of a Contracting State, unless otherwise defined in the tax treaty, or the context otherwise requires, it shall be applied within the meaning of the provisions of the domestic tax law, which serves as the basis for the imposition of the right to taxation by the said State (Articles 2(1)8 and 17(2)). However, the provisions related to the ownership of stocks under the Adjustment of International Taxes Act, which are the domestic tax law (Articles 138-5(2)4), and the provisions pertaining to the ownership of stocks under the Enforcement Decree of the Corporate Tax Act (Article 138-5(2) of the Corporate Tax Act), include cases where stocks are owned directly or indirectly without limiting the scope of ownership. Thus, even according to the interpretation of the domestic tax law, the concept of “ownership of stocks” under Article 10(2)(a) of the Korea-Japan Tax Treaty shall not be interpreted only where a

⑤ According to the OECD Tax Model Convention and its Compact, in order to apply the limited tax rate on dividend income, the Defendants asserted that the residents of a Contracting State need to directly own the capital of the company located in the other Contracting State at least 25%. Since the Republic of Korea did not express an opinion of reservation regarding the interpretation of the above note, the above note’s interpretation should be the priority standard in interpreting Article 10(2)(a) of the Korea-Japan Tax Treaty, and therefore, the term “ownership of the shares” of the above clause should be interpreted as “direct ownership” of the shares.

However, the OECD Model Tax Convention is merely a telecom of the OECD tax treaty established to assist in concluding a tax treaty or amending a tax treaty between OECD member countries, and thus, member countries of the OECD can conclude a tax treaty differently from the contents of the OECD Model Tax Convention depending on their circumstances. While the Compact of the OECD Model Tax Convention is not a treaty concluded and promulgated in accordance with Article 6(1) of the Constitution, it is not legally binding because it can not be deemed an generally accepted international law, and it can be regarded as an international reference for the proper interpretation of the tax treaty between member countries of the OECD. The requirements for the restriction on the tax rate under Article 10(2)(a) of the Korea-Japan Model Tax Treaty are different from the requirements under the relevant provisions of the OECD Model Tax Convention ("for a profit-making corporation's capital stock of the dividend payer corporation" 25% or more) (in light of Article 25(1) of the OECD Model Tax Treaty's interpretation of the Korea-Japan Model Tax Treaty's 25% or more of voting stocks of the dividend payer corporation during the six months immediately preceding the accounting period during which occurred.

(6) In addition, the Defendants asserts that, in cases where the concept of ownership is extended to indirect ownership (Article 24(4)), the Korea-Japan Tax Treaty explicitly stipulates it (Article 24(4)), the term “the ownership of stocks” under Article 10(2)(a) of the Korea-Japan Tax Treaty should be interpreted to be terminated only in cases where the stocks are directly owned, unless the aforementioned contents are specified.

However, Article 24(4) of the Korea-Japan Tax Treaty (see, e.g., the relevant laws and regulations) provides that one of the so-called "non-discrimination principles under the tax treaty shall not be discriminated against foreign investment enterprises and domestic enterprises." The concept of "direct or indirect ownership or control of all or part of the capital used in the above provision is to clarify that it constitutes a foreign investment enterprise even in the case of indirect ownership or control of the capital, as the criteria for distinguishing foreign investment enterprises. Therefore, it cannot be concluded that the term "ownership of stocks" under Article 10(2)(a) of the Korea-Japan Tax Treaty, which is the provision for the limited tax rate on dividend income, is limited to cases where a foreign investment enterprise owns stocks "direct ownership."

3. Conclusion

The plaintiffs' claims are justified, and they are accepted respectively.