Mobilization Entertainment Co., Ltd. (Attorneys Ba-sik et al., Counsel for the defendant-appellant-appellee)

Head of Seocho Tax Office

March 30, 2012

Seoul Administrative Court Decision 2009Guhap3538 Decided February 18, 2011

1. Of the judgment of the first instance court, the part against the plaintiff falling under the order to revoke below shall be revoked.

The Defendant’s disposition of imposing corporate tax of KRW 1,307,603,450 for the business year of 2005 against the Plaintiff on May 1, 2007, which exceeds KRW 1,006,336,250, shall be revoked.

2. The plaintiff's remaining appeal is dismissed.

3. The plaintiff shall bear 3/4 of the total litigation cost, and the remainder shall be borne by the defendant, respectively.

The judgment of the first instance shall be revoked. The defendant shall revoke the disposition of imposition of 1,307,603,450 won of corporate tax belonging to the business year 2005 against the plaintiff on May 1, 2007.

1. Details of disposition;

This part of the judgment is the same as the corresponding part of the judgment of the court of first instance, and thus, it is accepted by Article 8(2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) Since KR is apparent that the Plaintiff was a Belgium resident as a person who transferred the instant shares to the Plaintiff, it is against the principle of strict interpretation of the tax treaty and the principle of proportionality to deny the substance of KR by applying the substance over form principle, which is merely a legal principle under the Korea-Belgium Tax Treaty, and to allow the Plaintiff, who is not a taxpayer, but a withholding agent, to identify the actual owner of the instant transfer income of the instant shares, and to bear withholding obligations on the Plaintiff, who is not a withholding agent, is unilaterally denied the judgment of the transferor or resident in accordance with the Korea-Belgium Tax Treaty, which has the priority over the domestic tax law. Thus, it is contrary to the principle of no taxation

2) As an investment holding company, so-called SPC (Speci PP), which is not established for the purpose of tax avoidance, but with the legitimate business objective of holding stocks of DMP, and has made important decisions by lawfully holding a general meeting of shareholders or the board of directors, and as a legal entity, such as preparing separate financial statements and operating separate accounts independently from higher parent companies, the instant disposition based on the premise that KDH is an incorporated company is unlawful.

3) Even if KRH is merely a conduit company, in light of the following facts, CV Asia and CSAP are not a substantial owner of the transfer income of this case.

A) CVC Asia is merely a partnership that does not belong to income under tax law, and is similar to investment associations to which the provisions of the Civil Act apply, and in itself, according to the domestic law, there is no legal personality, and furthermore, there is no employee or office in the Gun, like KRH, etc. Accordingly, CVC Asia cannot be deemed as a person to whom the transfer income of the instant stocks belongs, and its final investors should not be deemed as a person to whom the tax treaty was actually attributed (Therefore, among the final investors in CVC Asia, only 1.18% of nationality and its equity shares, which are not entered into with Korea, and 4.14% of the sum of 2.96% of Singapore, shall not be subject to non-taxation).

B) In light of the fact that AI is an organization established for investment purposes and is engaged in various investment activities, its legal nature as a limited liability company, which is a legal entity under the U.S. law, and that it is recognized as a limited liability company under the Commercial Act, it can be recognized as a legal entity or a legal entity, and thus, AI cannot be deemed an entity.

C) Even if an AI is considered as a Do government company, the Defendant, as a person who actually reverts to the transfer income of this case, has no office or employee in Hong Kong as a special purpose corporation for investment holding and lending for the affiliates of the City Group, and its operation is entirely in charge of the City Group, the parent company, and all directors and employees of the CSAP are the City Group employees of the City Group. In light of the fact that the CSAP is a director or employee of the City Group, the CSAP cannot be deemed as a person who actually reverts to the transfer income of this case, and the final investors should be deemed as a person who actually reverts (the CSAP shares are owned by the City Group, and the City Group is subject to non-taxation of stocks under the U.S. Tax Treaty).

D) If CVC Asia is deemed as the actual owner of the instant stock transfer income, there is no reason to see AI, a limited liability company, as the Do government company, and if AI is deemed as the Do government company, it is obviously unreasonable to deny or grant the legal personality of the Defendant’s selectively without any objective standard for taxation purposes, even though there is no reason to see CVC Asia as the Do government company.

4) The Plaintiff’s withholding duty is merely a cooperation duty in the collection procedure and did not fully grant the authority to investigate the facts against the taxpayer. In full view of the circumstances, the instant disposition is against the principle of trust protection, taking account of the following: (a) the Plaintiff submitted an application for non-taxation and exemption to the Defendant for the confirmation that the instant capital gains from the instant stocks were not subject to taxation; and (b) the Defendant trusted that the instant capital gains from the instant stocks were not subject to taxation; and (c) around around 2002, the Defendant recognized that the instant disposition was the beneficial owner of the dividend income as prescribed in Article 10 of the Korea-Belgium Tax Treaty, with respect to the dividend income paid by DH to DH.

B. Relevant statutes

Since the corresponding column of the judgment of the court of first instance is the same as the entry, it shall be quoted in accordance with Article 8(2) of the Administrative Litigation Act and Article 420 of the Civil Procedure Act.

C. Determination

1) Whether the substance over form principle can be applied to the taxation of the transfer income of the instant shares

The reasoning of this decision concerning this part is as stated in Article 2-3 (1) (f) of the reasoning of the judgment of the court of first instance except for the dismissal of the part concerning the theory of the lawsuit as set forth in Article 2-3 (1) (f). Thus, it is accepted by Article 8 (2) of the Administrative Litigation Act and the main text of Article 420 of the Civil Procedure Act.

The theory of the lawsuit (f)

As seen above, the substance over form principle, along with the constitutional principles on the interpretation of the no taxation without law and treaties, the basis and content of the substance over form principle, the purpose of concluding the Korea-Belgium Tax Treaty, and the purport of Article 13 of the Korea-Belgium Tax Treaty, is to realize the principle of fair taxation burden and the ability to respond, and is equally applied to both the taxpayer and non-residents. In interpreting the provisions of a tax treaty between countries, the substance over form principle can be considered as the basis of interpretation unless it is inferred or expanded the meaning of the language itself or goes against the language and text (the plaintiff was amended on May 24, 2006 under the Adjustment of International Taxes Act, which is applied preferentially to international trades, to which a tax treaty is applied. At least in international trades, the Plaintiff’s assertion that the substance over form principle can only be applied when it was newly established and applied to the application of the tax treaty, and that the transfer of stocks in this case, which was prior to the enforcement of the said provisions, cannot be seen as the basis for the application of the tax treaty. However, the Plaintiff’s argument on the substance over form principle applied to the domestic tax treaty.

Therefore, the Defendant, who is the tax authority, may determine whether to impose the income tax on the instant stock transfer income by deeming the actual actor and the person to whom the income accrues as the Belgium resident in the Belgium under the Korea-Belgium Tax Treaty, or whether to impose the income tax according to the domestic law by recognizing the CVC Asia, etc. outside the scope of application under the Korea-Belgium Tax Treaty.

On the other hand, in the tax withholding method, if subject to withholding under the domestic tax law, it appears that there is a duty to investigate the tax exemption requirements or a burden of proof, and as seen thereafter, it appears that KR knew or could have known that KR was not the actual owner of the stock transfer income of this case. In light of the following, it cannot be deemed that it excessively expands the burden of the withholding agent to allow the Plaintiff, who is only the withholding agent, to identify the actual owner of the stock transfer income of this case in accordance with the substance over form principle, and thus, it does not go against the principle of proportionality.

Therefore, we cannot accept this part of the plaintiff's argument.

2) Whether KRH as a Do official company is not the actual owner of the instant stock transfer income

A) As seen earlier, comprehensively taking into account the constitutional principles of no taxation without law and the interpretation standards of tax treaties between the states, the purport and contents of the substance over form principle, the purpose of the Korea-Belgium Tax Treaty, and the purport of the tax exemption provisions on non-residents, etc., a corporation recognized as a resident in the Belgium under the Korea-Belgium Tax Treaty is a “transferr” as prescribed by Article 13 of the Korea-Belgium Tax Treaty in order to conduct business transactions in the Republic of Korea and to benefit from tax exemption on income source in accordance with the said Tax Treaty. In determining the meaning of a transferor, the interpretation of the substance over form principle should be limited to the extent consistent with the purpose of preventing double taxation or tax avoidance and not contrary to the language and text of the Treaty. Thus, in cases where a non-resident with nationality other than Belgium establishes a corporation in the Belgium for investment purpose and operates a business with the purpose of capital acquisition in the name of the corporation, the corporation’s act is not a normal business activity in the Belgium for the purpose of its own economic profit and its role in the transaction within the Republic of the Plaintiff-Belgium, and its legal entity’s legal entity.

Therefore, in this case, the original investor who is recognized as a party to the transaction and a person to whom the income substantially accrues according to the substance over form principle becomes a taxpayer under the domestic law, and there is a tax liability under the Corporate Tax Act or the Income Tax Act and the tax treaty between the Republic of Korea and

B) Based on the foregoing legal doctrine, we examine who is the actual owner of the instant stock transfer income.

In full view of the following circumstances, without any dispute between the parties, which can be acknowledged by comprehensively taking into account the respective descriptions of evidence Nos. 36, 2, 3, 4, 6, 7, 9, 11-17, 25, 27, 28, 33, and 34 and the overall purport of the pleadings, as well as the following circumstances, KR merely is an authorized company established to acquire the resident status in the Belgium to avoid taxation on the transfer income of the instant stocks upon the application of the Korea-Belgium Tax Treaty, and thus, KR cannot be deemed as a substantial owner of the transfer income of the instant stocks. The evidence submitted by the Plaintiff alone is insufficient to reverse the aforementioned judgment.

(1) The CVC Asian and the AI located in the United States of America, at each of 66.7% and 33.3%, have been jointly invested in Luxembourg, establishing KRL, a Luxembourg, a Luxembourg-based corporation. In other words, KRL and DMP managers jointly invested 8.75% and 11.25%, respectively, and jointly invested Belgium-based, a Belgium-based corporation on December 10, 1999, and the amount of investment in DMF acquisition was provided by CVC Asia, AI, and DMP management.

(2) Nonparty 4 signed various reports and contracts related to the DNA food acquisition contract by Nonparty 4, who is an investment manager of CVC Asia (hereinafter “CVC AP”), to which CVC Asia participated as a party to the DVP acquisition contract and decided the investment conditions, etc.

(3) On November 1, 1999, CVP presented a plan to establish a new company in Belgium or Luxembourg as a result, by visiting a factory of DMD. On December 8, 1999, MBO (Mage Management uy Out, a company’s whole or part of its business units or affiliates are taken over at the center of the company’s or its officers and employees, and the company’s purchase or management is taken over at the center) to DMP managers. On August 1, 2005, CV had been established on December 10, 1999, and after the sale of the entire shares of DMD to the Plaintiff, CV commenced the liquidation procedure immediately after August 1, 2005.

(4) Even after having acquired DDH’s stocks, the management of DV did not report its business activities to KDH, but reported to Nonparty 1 and Nonparty 4, an employee of the CVAP branch, who is an employee of the CVAP branch. Nonparty 1 reported DV AP’s domestic market situation, management status, CVC’s investment status, and financial status to Nonparty 4 and 6, an employee of CVAP, etc. quarterly.

(5) The distribution ratio of the DMM sales proceeds is 66.7% and 33.3% respectively by CV Asia and AI, and there is no difference between the amount in the DMF Retns-Fa) distribution plan (DM Retns- Fasti) prepared by Nonparty 1, an employee of the CVP domestic branch of CVC, and the distribution from DMM sales was transferred to CV Asia and AI around August 2005, immediately after the receipt of the DDH’s account. In this process, there was no distribution received by CVH, a shareholder of DV, from DV.

(6) The directors of KDH consisting of Nonparty 2, 3, 4, and 5, but Nonparty 2 and Nonparty 4 are employees of CVC AP who are in charge of investment in Japan and Asian region, and Nonparty 3 and Nonparty 5 are employees of CVC Capital Part N.V. (hereinafter “CVP”).

(7) The telephone number at the address of KR is the telephone number of the CV Berux staff in the inquiry data that there is only the office of CV Berux but there is no independent place of business, and KRDD&B's Dun&B (the credit information, marketing information, purchase information, and decision-making support service of all individual companies all over the world as a business information/credit rating company) is the telephone number of the members of the CVC Berux, and KR has not spent almost all of its assets for the purpose of labor cost and business cost necessary for the operation of the business.

(8) KR also has no independent place of business, and there are about 30 legal entities, including the name of the legal entity of KRL, among the mail boxes of the building located at the domicile. This photograph also has a minimum formal constituent element as a company, which is merely a non-party 4 and non-party 4, who is an employee belonging to CVC AP, and most of the total assets are comprised of stocks and dividends of IMD investment-related KR from the establishment to liquidation, and there is no essential type of assets such as buildings and fixtures.

(9) CVC Asia studies and analyzes each country’s tax systems, tax treaties, etc. in order to maximize its profits and to exempt or reduce taxes, including capital gains from investment returns in the Republic of Korea in the future, and establish Belgium in Belgium as an investment holding company (special purpose companies (SPC; hereinafter the same shall apply) and Luxembourg, respectively. Belgium is exempted from source tax on capital gains in the Republic of Korea in accordance with the Korea-Belgium Tax Treaty, and is also exempted from income tax on capital gains; Luxembourg is also exempted from income tax on income from overseas investment companies; Luxembourg is also exempted from income tax and source tax on income from overseas investment companies; Luxembourg is also exempted from income tax and source tax on income from overseas investment companies; Luxembourg and Luxembourg is recognized as a representative tax have no source tax on personal income tax; and even at the time of taxation, it is recognized as a representative tax have no source tax on income from overseas investment companies;

(10) In managing funds, the necessity of an investment holding company, such as KR, cannot be denied for the efficient management and operation of investment funds and investment assets. In the event of investment through an investment holding company, the actual person in charge of actual source of funds, investment and asset management, and the ultimate ownership of the investment profits, cannot be reconcept into the transactional relationship. However, establishing a variety of investment holding companies in the Belgium, which is irrelevant to the actual state of residence of the investors in Korea or CVC Asian, and making them complicated in the investment governance structure by establishing various investment holding companies in the Belgium, etc., which is irrelevant to the actual state of residence of the investors in Korea or CVC Asian, rather than for efficient management and operation of the said investment, is in accordance with the tax avoidance scheme led from the beginning, and thus, the said investment holding company is a nominal company used for tax avoidance, notwithstanding its necessity.

3) Whether CVC Asia and CSAP constitute a foreign corporation subject to corporate tax as the person substantially reverted to the instant stock transfer income.

A) As seen earlier, KRH cannot be deemed as a Do government company to be the actual owner of the instant transfer income, and once the transfer price of IMM stocks was remitted to CVC Asia and AI, the instant transfer income of the stocks is deemed to have been reverted to CVC Asia and AI in economic aspect.

Therefore, whether a corporate tax can be imposed on CV Asia and AI depends on whether it constitutes a foreign corporation under the Corporate Tax Act. The determination of whether it constitutes a foreign corporation under the Corporate Tax Act should be based on whether it can be deemed as an entity to whom separate rights and obligations can be attributed independent of its members, in light of the laws and regulations of the country where the organization is established and the substance of the organization, unless otherwise specifically provided in the Corporate Tax Act (see Supreme Court Decision 2010Du5950, Jan. 27, 2012).

B) First, we examine CVC Asia.

CVC Asia consists of general partners with expertise in fund management, who conduct the daily business of the fund and who are general partners with unlimited liability, and limited partners who are not actively involved in fund management and who are responsible only within the investment limit as passive investors not actively involved in fund management. It is a profit-making organization with property separate from its members and conduct its own business activities in the course of operating the fund with its own investment purpose. It is not a human combination with the members, but a group of individuals with strong personality as a principal agent of rights and obligations, so it can be seen as a foreign corporation subject to taxation under the Corporate Tax Act of Korea.

Therefore, the part concerning CVC Asia’s income from the instant disposition, which was based on the premise that CVC Asia constitutes a foreign corporation under the Corporate Tax Act, is legitimate. Accordingly, CVC Asia is merely a partnership form that does not belong to a corporate entity and an entity under the tax law, and thus, it cannot be deemed a person to whom the instant income from the transfer of stocks is actually attributed, and the person to whom it is attributed should be deemed a final investor, cannot be accepted.

C) Next, we examine AI.

In full view of the fact that the legal nature of AI is a limited liability company that all members are liable to compensate for corporate creditors within the limit of their investments in each company and are able to actively participate in corporate management, and that many investment transactions have been conducted while attracting and operating funds for investment purposes, a limited liability company is treated as a corporation under the private law of the United States, which is an AI establishment country, and the Commercial Act effective on April 15, 2012 recognizes a limited liability company as a type of a company, rather than a personal combination that shows strong personality of its members, an AI has the nature as an independent entity that can be the subject of rights and obligations separate from the personal nature of its members, and thus, it can be deemed that it is a foreign corporation that is subject to taxation under the Corporate Tax Act (the United States has a provision that allows the U.S. to choose corporate taxation and partner taxation in order to encourage the incorporation of a limited liability company in the form of a company, but it is not determined that it constitutes a foreign corporation under the Corporate Tax Act of the Republic of Korea, which is not a shareholder of the Hong Kong and its member.

Therefore, as seen above, inasmuch as an AI has the nature of its own existence that can be the subject of rights and obligations, separate from its constituent members, and the transfer price of the instant shares was introduced into AI, the actual source of the portion corresponding to the share held by the AI in the transfer income of the instant shares shall be deemed the AI, even though the actual source of the portion corresponding to the share held by the AI in the transfer income of the instant shares shall be deemed the AI, on different premise, the part concerning the transfer income of the instant disposition in which the

4) Whether it violates the principle of trust protection.

A) In general, in tax legal relations, in order to apply the principle of trust protection to the tax authority's acts, the tax authority must state the public opinion that is the subject of trust to the taxpayer. Second, the taxpayer should not be responsible for the taxpayer's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the taxpayer's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's reliance on the tax authority's

B) We examine this case in light of the above legal principles. ① According to the evidence evidence Nos. 29 and 31, it can be acknowledged that the fact that the CV fund, in 200, entered 10% of shares through KR, KV fund 91.8% of CVC fund 91.8% and DMM management 8.2% of the total amount of capital gains of this case, the plaintiff knew or could have known that it was not the actual owner of the capital gains of this case, ② The defendant confirmed that the capital gains of this case were non-taxable or exempted under the Korea-U.S. Tax Treaty, and that it did not constitute a violation of the above tax treaty. However, according to the evidence No. 1 of 2000, it can not be viewed that it was a violation of the above tax treaty, as long as it was found that the defendant did not know or know that it was not the owner of the capital gains of this case, as long as it was found that it was in violation of the above tax treaty.

5) Sub-committee

Therefore, the instant disposition regarding the portion of the CVC Asian income among the transfer income of the instant shares is legitimate, and the remainder is unlawful.

In addition, the part that should be revoked illegally in the disposition of this case is the part that exceeds 1,006,336,250 won (17 billion won in the stock transfer income of this case x 88.75% in the equity ratio of KS x 6.7% in the CVI Asia x 10% in the corporate tax rate).

3. Conclusion

Therefore, the plaintiff's claim of this case shall be accepted within the above scope of recognition, and the remaining claims shall be dismissed for reasons. Since the judgment of the court of first instance is unfair by accepting part of the plaintiff's appeal, and the part of the judgment of the court of first instance which lost the plaintiff, which falls under the subsequent part of the judgment of the court of first instance, shall be revoked. The defendant revoked the part of the disposition imposing corporate tax of KRW 1,307,603,450 against the plaintiff on May 1, 2007, exceeding KRW 1,006,336,250 of the disposition imposing corporate tax of KRW 1,30 for the business year belonging to the plaintiff

Judges Kim Jong-chul (Presiding Judge)