Cho Jae-2015-west-2352 (Law No. 28, 2015)

Interpretation of Article 5 (1) of Protocol 2 to the Korea-China Tax Treaty related to deemed foreign tax credit.

The latter part of Article 5 (1) of the Protocol 2 to the Korea-China Tax Treaty is reasonable to deem that the latter part does not apply unless there is a reduced or exempted tax amount subject to a tax credit pursuant to the latter part of

Article 57 (Foreign Tax Credit) of the Corporate Tax Act, Article 10 of the Korea-China Tax Treaty

2015Guhap79451 Revocation of Disposition of Rejecting Corporate Tax

○ Stock Company

○ Head of tax office

September 2, 2016

October 28, 2016

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The defendant's rejection disposition against the plaintiff on March 2, 2015 against each of the corporate tax of 309,739,102, corporate tax of 2011, corporate tax of 342,252,180, corporate tax of 2012, and corporate tax of 626,69,621 is revoked.

1. Details of the disposition;

A. The Plaintiff is a corporation engaged in civil engineering and construction, new construction and sale of housing, plant, electricity, and integrated overseas construction business, and around 2004, the Plaintiff established ○○ Co., Ltd., Ltd. (hereinafter “instant subsidiary”).

B. From the business year 201 to the business year 2013, the Plaintiff paid the amount of corporate tax in the column of “direct foreign tax paid to China” on the dividend received from the instant subsidiary (hereinafter referred to as “instant dividend”) as indicated in the table below, and filed a report on corporate tax with the Defendant by applying the foreign tax credit directly to that amount.

C. On January 1, 2008, the Plaintiff requested the Defendant to rectify the tax amount by applying the total of KRW 1,278,690,903 as the tax amount deemed to be paid to the Defendant on the ground that the amount equivalent to the amount indicated in the “direct foreign tax amount” should be deducted as the tax amount paid to the instant dividends, as well as the deemed foreign tax amount deemed to be paid to the Plaintiff, which was deemed to be paid to him/her for the business year of 2011 or 2013.

D. On March 2, 2015, the Defendant rejected the Plaintiff’s request for correction on the ground that “if the Defendant imposed tax by applying the limited tax rate of 5% to the dividend income earned from the earned surplus since 2008 pursuant to the Korea-China Tax Treaty, it shall not be deemed to apply foreign tax credit pursuant to the said Treaty” (hereinafter “instant disposition”).

[Ground of recognition] Facts without dispute, Gap's 1 through 7, 9, 10, 14 (including branch numbers for those with branch numbers; hereinafter the same shall apply), Eul's 1 to 4, and the purport of the whole pleadings

2. Related Acts and subordinate statutes and treaties;

Attached Acts and subordinate statutes and treaties shall be as the same.

3. Whether the instant disposition is lawful

A. As to whether the foreign tax credit is deemed to be paid abroad

1) The plaintiff's assertion

Articles 3 and 4 of the Income Tax Act of the People's Republic of China revised on January 1, 208 (hereinafter "China Income Tax Act") provide that the Plaintiff and non-residents shall levy income tax at a rate of 20% on the income acquired in the Chinese calendar. Article 27 of the Chinese Corporate Income Tax Act located below Chapter IV (tax benefits) provides that the said tax rate may be exempted or reduced, and Article 91 of the Chinese Corporate Income Tax Enforcement Ordinance provides that the said tax rate shall be 10%. Accordingly, Article 27 of the Chinese Corporate Income Tax Act and Article 91 of the aforementioned Enforcement Ordinance shall be deemed as 27 of the Protocol for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Republic of Korea and the People's Republic of China (hereinafter "Protocol 2") shall be deemed as 10% of the total tax credit and the corresponding tax credit shall be deemed as 10% of the corresponding tax credit, regardless of the difference between the tax credit and the corresponding tax credit provided for in the Chinese Tax Treaty.

2) Determination

A) Article 57(3) of the Corporate Tax Act provides that "the amount equivalent to the tax amount reduced or exempted by a domestic corporation which has income generated from overseas shall be deemed the amount of foreign corporate tax which is subject to the tax credit or inclusion in deductible expenses pursuant to paragraph (1) within the scope prescribed by the relevant tax treaty." Article 4(1) of the Protocol replacing Article 23(1) of the tax treaty corresponding to the relevant tax treaty provides that double taxation shall be avoided as follows. With respect to taxes paid in countries other than Korea, the provisions of Korean tax law on the permission of tax credit (5) shall be applicable to the source income in China, either directly or otherwise through mutual aid, and if the tax amount is paid in accordance with paragraph 2(a) of this Article, the amount of tax credit shall not exceed 10% of the total amount of tax paid in Korea, and the provisions of paragraph 2(b) of this Article provide that "the amount of tax credit shall not exceed 20% of the total amount of tax paid in Korea, which is the owner of the relevant tax treaty."

B) In full view of the circumstances described in paragraphs (1) and (2) above and the contents, purport, and history of the relevant tax treaty and the provisions of the relevant tax treaty, it is reasonable to deem that the instant provision does not apply to the corporate tax amount under 5% of the limited tax rate already paid by the Plaintiff to China (Article 10(1)(a) of the instant tax treaty) with respect to the instant dividend payment.

(1) Whether the provision of this case falls under the main sentence of this case

In light of the following points, there is no tax considered by the first sentence of the instant provision with respect to the dividend income of this case.

① Article 4(1)(a) of the Protocol provides that, in the case of a Korean resident, a tax credit shall be granted from Korean tax paid to China on income from sources in China, and the provisions of Korean tax law on the permission of tax credit from Korean tax. The provisions of foreign tax credit under the Tax Treaty and the Protocol 2 are effective only within the scope of the provisions of the Corporate Tax Act. However, Article 57(3) of the Corporate Tax Act provides that the amount of foreign tax to be considered as the subject of tax credit shall be determined as the amount of foreign tax reduced or exempted from corporate tax on the relevant income from the foreign source in the country of the tax treaty, and the amount of foreign tax to be considered as the subject of tax credit shall be determined as the amount of tax reduced or exempted from the other country of the tax treaty.

② Article 4(1)(a) of the Protocol provides that the Chinese tax payable by a Korean resident in accordance with the Chinese law and agreement on income derived from sources in China may be deducted from Korean tax. The main sentence of Article 4(1)(a) of the Act provides that the tax paid by a Contracting Party referred to in paragraph (1)(a) of the same Article shall be deemed to include the tax that would have had been paid if there had been no "the other tax reduction, exemption, or other tax inducement regulations for the promotion of economic development" (hereinafter referred to as "the other tax inducement regulations"). The main sentence of Article 4(1) of the Act provides that the tax of this case shall be deemed to have been paid if there was no "the other tax inducement regulations for the reduction, exemption, or other tax inducement regulations for the promotion of economic development" (hereinafter referred to as "the other provisions of the Act on the Measures for Tax Inducement.

(3) In light of the general purpose of the foreign tax credit system which provides that the tax amount reduced or exempted by one Contracting Party’s domestic reduction or exemption measures shall be deemed to have been paid to that country, it is reasonable to deem that the former part of the instant provision refers to the domestic legal provisions prescribed by the Contracting Party as a tax incentive measure to attract foreign capital. In other words, the scope of the taxation authority of each State is limited under the tax treaty, and the tax incentive measure is the active measure taken by either Contracting Party to attract foreign capital by voluntarily reducing the scope of the taxation authority. Accordingly, in this case, the relevant legal provisions related to the tax incentive measure refer to the Chinese domestic legal provision as a tax incentive measure by one Contracting Party, which is the first Contracting Party, and it is difficult to see that the tax reduction or exemption provisions of China as to the portion exceeding the scope of the tax limit from the beginning.

④ In full view of Article 4(1)(a) of the Protocol and the main sentence of Article 2(1) of the instant provision, the purport of the former part of the instant provision is that if there was no relevant legal provision regarding the measures for attracting Chinese taxes paid in accordance with the Chinese law and agreement, the taxes that would have to be paid would be included. Article 27 of the Chinese Corporate Income Tax Act and Article 91 of the said Enforcement Ordinance provide that Article 27 of the Chinese Corporate Tax Act and Article 91 of the said Enforcement Ordinance reduces the tax rate of 20% to non-residents to 10%. However, even without the above provision, the Chinese tax paid in accordance with the Chinese law and agreement is 5% tax still paid in China according to the limited tax rate under Article 10(2)(a) of the Agreement

(2) Whether the latter part of the provision of this case is applied

In light of the following points, since the latter part of the instant provision is premised on the existence of legal provisions related to the measures for tax incentives, it is reasonable to deem that the latter part of the instant provision does not apply to the instant case, unless there is any reduced or exempted tax amount subject to tax credits under the former part of the instant provision.

① 이 사건 조항의 후문은 이 사건 조항의 전문과 함께 같은 항에서 규정되어 있고, 연결어로 '이 항의 목적상(For the purpose of this paragraph)'이라는 문언을 두고 있다. 이러한 조항의 규정 내용 및 형식에 비추어 보면, 전문과 후문을 서로 관련이 없는 별개의 규정으로 보는 것은 부자연스럽고, 후문에 따른 간주 세율은 전문과 동일한 목적으로만 한정적으로 적용되어야 한다고 해석함이 타당하다. 즉, 전문에 따라 중국 국내법상 조세감면규정이 존재하고, 그러한 중국 국내법에 의하여 세액감면이 실제 이루어지는 경우, 외국납부가 간주되는 세액의 범위와 관련하여 그 세액의 세율 자체를 간주하는 규정을 둔 것으로 해석할 수 있고, 체약상대국이 국내 조세를 과다하게 감면하여 줌으로써 간주외국납부세액공제 규정이 남용되는 상황 또는 체약상대국에서 조세유인조치에 따라 감면된 정확한 세금 액수의 산정이 곤란한 상황 등을 막기 위하여 그러한 규율의 필요성도 인정된다.

② Article 10(2) of the Tax Treaty discriminates against each limited tax rate of 5% in cases where a beneficial owner directly owns more than 25% of the company’s capital that pays dividends, and 10% in all other cases. The purpose of setting such a limited tax rate is to prevent double taxation and distribute the taxation rights between the two countries, as well as the resident state of the dividend income under the Tax Treaty is to allow taxation in the source state as well as in the resident state. Since the limited tax rate is the result of the agreement between the two countries, it is not of the nature that can be adjusted according to the intention of one Contracting State. In other words, it cannot be deemed that the same purpose is the same as the tax incentives.

Furthermore, the purpose of the differential limited tax rate is to facilitate international investment between the two countries. The purpose of the differential limited tax rate provision is to facilitate international investment between the two countries. It is only to conclude a tax treaty with the view that the source country that enjoys the investment benefits in itself is subject to more restrictive restrictions in relation to the resident state. The differential limited tax rate provision also provides for the foreign tax credit provision that provides tax benefits to the corporation that invested in the source country, etc., so that the resident country itself is subject to restrictions on the taxing authority of the country of the country of the country of the country of the country of the country of the country of the country of the tax payment is not logical in terms of treaty (in 2006, China extended the deadline for application of the provision of this case from January 1, 2005 to December 31, 2014, which is to promote the taxing authority of the country of the country of the country of the country of the tax payment (which is automatically abolished as of December 31, 2014, while the provisions of this case tax treaty are automatically abolished to facilitate the investment in the country of the country of the country of the country of tax payment.

Therefore, just because the purpose of promoting international investment is to promote the differential limited tax rate, it cannot be deemed that the latter part of the instant provision ought to be applied to a limited tax rate based on the deemed tax rate (if interpreted otherwise, it would result in conclusion that all provisions of the instant tax treaty with the potential purpose of promoting international investment are subject to the latter part of the instant provision).

③ The language and content of the provisions of the tax treaty regarding deemed tax credit in each country are not identical to the examples of the OECD Model Tax Treaty, and have various provisions in accordance with the tax treaty. Accordingly, the instant provisions ought to be individually interpreted in accordance with their language and text, and the same interpretation is not always to be made on the ground that there are similar provisions in the OECD Model Tax Treaty or the tax treaty provisions with other countries.

"The Convention between the Government of the Republic of Korea and the Government of the Republic of the Philippines for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (hereinafter referred to as the "Korea-Luxembourg Tax Treaty") provides that limited tax rates of 10% and 25% shall be set in relation to dividend income (Article 10), and that for the purpose of tax credit under paragraph (1) of this Article, in the case of dividends, taxes of the Philippines shall be deemed to have been paid at 20% and 10% (Article 23 (3)." In the Korea-Turkey Tax Treaty, "the purpose of tax credit under paragraph (1) of this Article is similar to the latter part of the provisions of this case," but "the said provisions are not corresponding to the former part of the provisions of this case, but shall be deemed to have been different from the latter part of the provisions of the said Tax Treaty from the latter part of the said Tax Treaty to be interpreted to have been different from the latter part of the provisions of the said Tax Treaty.

④ As in the instant case, the latter part of the instant provision applies in cases where only 5% of the tax was paid in the source country with the differential limited tax rate as seen in the instant case. While the limited tax rate is 10%, the two countries would pay 100% of the tax in both countries, while in the case of the former, only 95% of the tax in both countries would be paid. Such inequality of taxation should be strictly recognized in accordance with the relevant provisions of the Corporate Tax Act and the instant tax treaty. In light of the language, structure, purport, etc. of the aforementioned provisions, even in cases where the tax was paid upon the application of the limited tax rate, there exists any tax deemed to exist any tax deemed to apply under the former part of the instant provisions, and the said tax amount may be deemed to be 10%, or it is difficult to clearly state that the latter part of the instant provisions are 10% of the tax amount deemed to have been paid in China under the latter part of the instant provisions without relation thereto.

C) Therefore, the Plaintiff’s assertion that foreign tax credit for the additional 5% tax rate under the instant provision should be granted in addition to foreign tax credit directly cannot be accepted.

B. As to the violation of the principle of protection of trust

1) The plaintiff's assertion

The National Tax Service, through the book "Tax Guidance for Enterprises entering China" in 2008, expressed the public opinion that when a domestic corporation receives dividends from a Chinese subsidiary on or after January 1, 2008, the domestic corporation can apply foreign tax credit if it receives dividends from earned surplus funds. On August 23, 2011, the National Tax Service’s authoritative interpretation explicitly expressed that the amount of tax reduced or exempted pursuant to Article 27 of the Income Tax Act and Article 91 of the Enforcement Ordinance of the same Act is eligible for foreign tax credit if the amount of tax was reduced or exempted pursuant to Article 27 of the Income Tax Act and Article 91 of the same Ordinance, the disposition rejecting the Plaintiff’s request for correction contrary to the above public opinion is unlawful

2) Determination

A) The tax authority’s name of the public opinion that is the subject of taxpayer’s trust, and the taxpayer’s name of the opinion that is the subject of taxpayer’s trust is not a cause attributable to the taxpayer, and the taxpayer committed an act that is trusted and what is the subject of taxpayer’s interest. In a case where the tax authority’s disposition contrary to the opinion list results in a violation of taxpayer’s interest, the principle of trust protection may be applied to the tax authority’s act (see, e.g., Supreme Court Decision 2003Du7620, Apr. 27, 2006).

B) In addition to the overall arguments on Gap evidence Nos. 8 and 11, it stated that "the tax guidance for entering China" issued by the National Tax Service around September 2008 was 25% or more of the shares of the Chinese subsidiary's 2008, and the Korean parent company's income received from Chinese subsidiary's 5% or more shall be withheld in China through "direct foreign tax credit" for 5%, and the difference between 10% of the deemed tax rate under the provision of this case and 5% of the actual withholding tax rate shall be deemed to have been paid to China and 10% of the tax credit shall be deemed to have been applied to 10% of the tax credit under the above authoritative interpretation of 208.3% of the tax credit for the Chinese company's 2008 (No. 208-7) and the Plaintiff's tax credit for 205% of the total amount of foreign tax credit shall not be deemed to have been applied to 30% of the tax credit for 10% of the tax credit for 25% of the Chinese corporate tax credit.5% of this case.

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

4. Conclusion

The plaintiff's claim is dismissed on the ground that it is without merit.