Cho High Court Decision 2012 Deputy 1391 ( December 18, 2012)

Tax withholding for a person who actually reverts income in the form of a Do-based corporation is legitimate.

The plaintiff is merely a company of the Do government, and the defendant's disposition rejecting the correction of the plaintiff's corporate tax is legitimate because AAA, which is not subject to the Korea-Nether Tax Treaty according to the substance over form principle, falls under the transferor as the actual owner of the transfer income

Actual taxation to international trade under Article 2-2 of the Adjustment of International Taxes Act;

2013Guhap554 Revocation of Disposition of Refusal to correct corporate tax

AAA’s In-House Social B.V. (AAA AA INTERNIONAL B.V.)

○ Head of tax office

September 12, 2013

November 7, 2013

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The defendant's refusal to rectify the amount of corporate tax withheld to the plaintiff on December 14, 2011 shall be revoked.

1. Details of the disposition;

A. AAA (hereinafter referred to as "AA") was established in accordance with the laws of the United Kingdom of America (hereinafter referred to as the "UAE"), and it is a corporation whose purpose is to hold 100% shares in the global petroleum-related business and to invest in the world's petroleum-related business. AA is a corporation established in accordance with the laws of Finland (hereinafter referred to as "BB") and the BBO Y (hereinafter referred to as "AAH2") established in accordance with the laws of the Austria and the Austria, which owns 100% shares of the 100% shares issued by the AAHbH (hereinafter referred to as "AH"). BB is a corporation established in accordance with the Netherlands Act, and the remaining shares of the 90% shares issued by the 2.7% shares of the 2.2.3% shares issued by the 2.2.3% shares issued by the 199.

B. On December 12, 199, CCC acquired 122,541,211 shares of priority shares (50% of total issued shares) issued by DDDD Co., Ltd. (hereinafter “DDD”), and on February 9, 2006, the Plaintiff acquired 49,016,485 shares (20% of total issued shares; hereinafter “instant shares”) from CCC to the OOO (00 won per share). On August 12, 2010, the Plaintiff transferred the instant shares to EE Industries Co., Ltd. (hereinafter “EE Industries”).

C. Under Article 98(1)4 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010), EE Heavy Industries withheld an amount equivalent to 10% of the transfer value (OOO) and 20% of the transfer margin (OOO) and paid to the Defendant on August 12, 2010.

D. As to the instant capital gains, the Plaintiff should be exempted from taxation in Korea in accordance with the Convention between the Government of the Republic of Korea and the Government of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Nether Tax Treaty”), the Plaintiff filed a claim for rectification of corporate tax against the Defendant on October 13, 201 on the ground that the corporate tax withholding amount paid to the Defendant by the EE Heavy Industries ought to be refunded to the Plaintiff, but the Defendant dismissed the claim on December 14, 201 (hereinafter “instant disposition”).

E. The Plaintiff appealed and filed an appeal with the Tax Tribunal on March 13, 2012, but the Tax Tribunal dismissed the Plaintiff’s claim on December 18, 2012.

[Reasons for Recognition] Unsatisfy, each entry in Gap evidence 1 to 4 (including virtual number), and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

For the following reasons, the instant disposition should be revoked in an unlawful manner.

1) At the time of the conclusion of the Korea- Netherlands Tax Treaty in 1978, the substance over form principle was not scheduled, and the Commentary note on the provisions of the OECD amended Model Tax Treaty in 2003, dealing with the prevention of tax evasion, did not exist at the time of the conclusion of the above treaty. Thus, the substance over form principle under the Framework Act on National Taxes cannot be applied to the transfer of stocks in this case.

2) Even if the substance over form principle is applied to domestic affairs, the Plaintiff was engaged in a business that conforms to the purpose of establishment, carried out an independent accounting management and fund operation with AA, and made an independent decision-making through a board of directors and a general meeting of shareholders. Therefore, the Plaintiff cannot be deemed a subsidiary company established for the purpose of tax avoidance solely on the grounds that AA and the Plaintiff are in a parent company, the Plaintiff was in a relationship with the mother company, or that the Plaintiff invested only in the Plaintiff’s shares

3) Compared to the principle of non-discrimination under Article 24 of the Asset-Backed Securitization Act and a corporate restructuring investment company under the Corporate Restructuring Investment Company Act, etc., domestic special-purpose corporations such as a special purpose corporation under the Act on Asset-Backed Securitization and a corporate restructuring investment company under the Corporate Restructuring Investment Company Act recognize the Plaintiff as an independent legal entity for tax purposes and imposes considerable tax reduction benefits.

4) Accordingly, the Plaintiff is a resident of the Netherlands, who is the transferor of the instant transfer income, and is a resident of the Netherlands, only in the Netherlands, where the transferor is a resident pursuant to Article 14(4) of the Korea- Netherlands Tax Treaty, and should be exempted from taxation in Korea.

B. Relevant statutes

Attached Form 3 is as listed in the "relevant Acts and subordinate statutes".

C. Determination

1) Whether the substance over form principle is applied

A)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 domestic law," so a tax treaty concluded with the consent of the National Assembly shall have the same effect as that of Acts.

On the other hand, the purpose of the tax treaty is to prevent double taxation and tax avoidance by adjusting the issue of the taxation right between the contracting parties. As a matter of principle, it does not create an independent taxation right, but functions to allocate or restrict the already established taxation right under the tax laws of the contracting state. Matters concerning the occurrence of the taxation right are first governed by the tax laws of each country, and the tax treaty determines the place of final taxation right for matters which are otherwise prescribed by the domestic tax laws. Ultimately, in the legal relationship governed by the tax treaty, the treaty concerned is in the special status of the domestic law, and it can be seen that the treaty concerned is applied

B) Principle of no taxation without law and strict interpretation of tax treaties

Article 38 of the Constitution provides that "All citizens shall have the duty to pay taxes under the conditions as prescribed by Act," and Article 59 provides that "the items and rates of taxes shall be determined by Act," and thus, the principle of no taxation without the law is declared. In determining the tax requirements or tax exemption requirements pursuant to the principle of no taxation without the law, the National Assembly, which is the representative body of the citizens, shall be stipulated by the law enacted by the National Assembly, and shall be strictly interpreted and applied in enforcing the law. Furthermore, Articles 26, 27, and 31 of the Vienna Convention on Treaties to which the Republic of Korea is a party, shall be construed and applied in a strict manner." Since Articles 26, 27, and 31 of the Vienna Convention on Treaties to which the Republic of Korea is a party, the provisions of domestic law shall be observed, shall not be invoked in a way that justify the failure to implement the treaty, and the text of a treaty shall be

C) The substance over form principle and the interpretation of tax treaties

(1) Article 11(1) of the Constitution provides, “All citizens shall be equal before the law, and no person shall be discriminated against in all areas of political, economic, social, and cultural life on the basis of gender, religion, or social status.” The principle of tax equality can be regarded as an expression of tax law in the principle of equality under the above Constitution or the principle of prohibition of discrimination. Therefore, in implementing tax legislation, the State must establish laws so that the burden of tax can be distributed fairly among the citizens, and have the duty to treat all the citizens equally in interpreting and applying the tax law. One of the legal systems to realize the principle of tax equality is the principle of substance over form as provided in Article 14 of the Framework Act on National Taxes, Article 4 of the Corporate Tax Act, and Article 4 of the Corporate Tax Act, and it is the principle of realization of tax justice in the process of legislation or enforcement (see, e.g., Supreme Court Decision 2009Hun-Ma38, Jul. 21, 1989).

(2) On the other hand, the OECD has sought various regulatory measures against the act of tax avoidance using the tax haven since 199 through international discussions in the Harmful Tax Forum. Accordingly, it has been widely dealt with in OECDnot in 2003 the type and method of the act of tax avoidance, and the interpretation of treaties related thereto. Article 1(7) of the Model Convention provides that "the primary purpose of the Convention is to prevent international double taxation and promote human exchanges between goods and services by preventing international double taxation." The Convention on the Prevention of Double Taxation also aims to avoid tax avoidance and the prevention of Fiscal Evasion." Since the above Article 22(2) through (24) of the OECD provides that "the principles of tax avoidance stipulated in its laws are not relevant to the treaty's domestic law and the treaty's general rules are not relevant to the interpretation of the treaty's treaty's treaty's treaty's treaty', which is not relevant to the conclusion of the treaty's treaty's treaty's treaty', which is not relevant to the treaty's general rules of tax avoidance.

(3) Furthermore, Article 2-2 of the Adjustment of International Taxes Act was newly established on May 24, 2006, and a tax treaty was applied to international trades based on the beneficial owner and economic substance, thereby establishing a legal basis for preventing international tax avoidance.

(4) Considering the above, in interpreting a tax treaty, the principle of strict interpretation pursuant to the principle of no taxation without the law and the principle of faithful interpretation according to the ordinary meaning as stipulated in the Vienna Convention shall be observed, but the interpretation according to the substance of the tax treaty in light of the legislative intent and purpose, etc. within the meaning of the text possible according to the substance of the pertinent provision shall not be deemed as a systematic and logical interpretation that clearly expresses the ordinary and logical meaning of the text, and it does not contravene the principle of strict interpretation. Ultimately, it is reasonable to deem that the substance over form principle can be considered as the basis of the interpretation, unless it is unfairly inferred, expanded, or contrary to the language itself in interpreting individual provisions of the tax treaty.

D) In the instant case, in addition to the aforementioned legal principles, the following circumstances, namely, ① the purpose of a treaty is to prevent tax evasion along with the double taxation avoidance in the text of the Korea- Netherlands Tax Treaty. As such, the purpose of the said tax treaty cannot be deemed to be limited to simply preventing international double taxation, thereby promoting the exchange of goods and services, and the prevention of tax evasion can also be deemed to have dealt with the important purpose of the said tax treaty like the avoidance of double taxation. ② Article 3(1) of the Korea- Netherlands Tax Treaty provides, “The term that is not otherwise defined in the application of this Convention has the meaning to be known in the laws of the Contracting State related to the taxes of this Convention, unless the context otherwise requires,” and ③ The tax treaty provides that “a resident or a person who is a resident of the other Contracting State shall not have independent authority to impose taxes, as well as to allocate or restrict the right to taxation established by the tax laws of the other Contracting State.” Thus, the first determination of whether a specific tax treaty applies is determined in accordance with the domestic law of the Contracting State, and thus, the concept of the substance over form principle can only be interpreted as one of the tax treaty.

E) Therefore, the tax authority, as the defendant, can decide whether to exercise the right to impose tax or not by recognizing the actual trader and the beneficial owner of the income as the plaintiff with respect to the attribution of the transfer income of this case to which the application of the tax treaty is scheduled, according to the substance over form principle. The plaintiff's assertion in this part is without merit.

2) The transferor of the instant shares

In accordance with the above legal doctrine, whether the transferor is the actual owner of the capital gains of the instant shares, that is, whether the Plaintiff is merely a subsidiary company of AA.

A) Facts of recognition

(1) As a resident of the Netherlands, the Plaintiff is a company established on January 23, 2006 for its business purposes, such as management, finance, accounting, and other support services, and provision of advice to its affiliates and third parties.

(2) The Plaintiff prepared annual reports and financial statements independently from 2006 to 2011, and reported corporate tax to the Netherlands.

(3) From March 1, 2006, the Plaintiff leased from Citco Nederland B.V. offices of size of 20 square meters in Worldler B, 11th floor, Straskyana 1129, 1077.

(4) On February 1, 2006, the Plaintiff entered into a contract with S.Kleuver, S.Marta and each certified judicial scrivener or accounting clerk, who is residing in the Netherlands. On January 1, 2010, the Plaintiff entered into a contract with J.P.V.G.V.ler, P.V.er, and each certified judicial scrivener or accounting clerk. From 2007 to 2011, the Plaintiff’s annual report was two employees.

(5) At around 2002, DDR was faced with liquidity crisis, and its bank began to recover credit and became insolvent unless there is any additional financial support from shareholders. Accordingly, DDR requested CCC and EE Group affiliates to provide capital increase with 50% equity shares, and EE Group refused to provide financial support, and requested CCC alone to provide financial support on condition that they transfer their management rights and give them with call options for 20% equity shares. CCC provided several SCC loans with funds from AAA and acquired call options for 20% equity interest. However, CCC provided loans to LCC and obtained call options for 20% equity interest.

According to the agreement between the shareholders of the CCC and the EE Group, the CCC had to own 50:50 shares of the EE Group shareholders and DDD, and in fact, it was not appropriate for CCC to hold all shares of 70% at the risk diversification. Therefore, CCC intended to adjust the share ownership structure by transferring AA’s shares to the Plaintiff, a subsidiary, and continuously holding only 50% shares, and the Plaintiff was established under the above circumstances.

(6) The Plaintiff borrowed 20% of the total issued stocks of DD from CCC and AA to invest in DD shares after its establishment in around 2006, and acquired 20% of the total issued stocks of DD from CCC, thereby including the investment assets of OOO in the balance sheet.

(7) In the course of discussions for the above CCC’s call options, AA has the right to exercise call options in accordance with Article 6.1 of the concession agreement concluded on May 1, 2003 and concluded on May 1, 2003. EE Heavy Industries has expressed an obvious objection to the exercise of AAAA’s call options. However, AA has indicated that this issue is subject to a resolution of the board of directors, and AA management has pointed out that it has no discretionary power in relation to it. The letter sent to the EA Heavy Industries on February 1, 2006, stating that "AA shall transfer 20% of DD shares from DD to the Plaintiff." It is entirely known that DD and DD will transfer the shares to the 20% of DD shares to the 20% of DD shares to the 20% of DD shares, and the transfer of shares to the AA 206 Port for the purpose of the AA 20-20.

(8) ADD paid dividends to the Plaintiff on April 26, 2007 at a rate of 15% and paid corporate tax at a rate of 15%.

[Reasons for Recognition] 6, 8, 9, 10, 11, 16, 17, and 1 through 6 (including additional numbers), the purport of the whole pleadings

B) Determination

(1) If a company established in a specific country is a party to a transaction, the company is merely a Do government company, and the actual owner of the income is a Do government company in order to be a Do government company. The fact that the country in which the company is located has tax haven elements such as low rates of taxation or non-taxation on overseas source income. The fact that the company was formally created in accordance with the investment structure and governance designed in advance for the purpose of tax avoidance through treaty transfer. In addition, the issue of whether a company was established solely for the purpose of tax avoidance and only for the purpose of tax avoidance and only for the purpose of enjoying benefits under the treaty can be determined through all indirect facts, such as the company’s business purpose and activity details, the entity raising and collecting funds, the details of profit distribution, and the duration of the company. If it is found as a result, if it is found that the company as a party to the transaction is a Do government company, the actual owner of the income generated from the transaction is a Do government company.

(2) In the instant case, the following circumstances revealed by comprehensively taking account of the above facts and the purport of the entire pleadings, namely, ① the size of the office leased by the Plaintiff is less than 20 square meters, only one employee was employed, and the Plaintiff does not seem to have engaged in business activities other than the conclusion of the instant stock transfer contract after the establishment; ② the actual financing of investment funds for DoD stocks appears to have been AA; ③ DoD paid dividends to the Plaintiff, and paid 15% corporate tax in accordance with the Korea-UE Tax Treaty between the Republic of Korea and UAE while paying dividends to the Plaintiff, and the rate of corporate tax is higher than the tax rate under the Korea-NE Tax Treaty between the Republic of Korea and UAE. It is reasonable to view that the Plaintiff did not have reasonable reasons to establish an investment structure established in the Netherlands to avoid taxes on capital gains. ⑤ Even if the Plaintiff participated in the investment decision-making and decision-making of the Republic of Korea by the parent company at the early stage of the establishment of the Plaintiff, the Plaintiff’s assertion that the transfer of stocks was made only in the form and status of the Plaintiff’s stock transfer.

3) Whether the principle of non-discrimination under the Korea-U.S. Tax Treaty is violated

A) Article 24 of the Korea- Netherlands Tax Treaty provides that “No national of one of the countries shall be subject to taxes or other related requirements or taxes or other related requirements, regardless of whether he or she is a national of the other country or not, or any related requirements, of a national of that other country.”

B) In this case, the special purpose corporations, such as asset securitization companies under the Asset-Backed Securitization Act, which the Plaintiff claims as discrimination and are compared to the other corporations, include foreign corporations that specialize in asset-backed securitization business under the Asset-Backed Securitization Act, considering their own business functions and roles performed by them, and do not limit the nationality of promoters or shareholders of investment companies under the Financial Investment Services and Capital Markets Act or corporate restructuring investment companies under the Corporate Restructuring Investment Companies Act. In other words, granting tax benefits to special purpose corporations is irrelevant to the corporation’s nationality. In other words, the Plaintiff, a resident of the Netherlands, who is a resident of the Netherlands, is subject to the principle of substantial taxation, rather than the result of discrimination by nationality, is subject to the application of the principle of substantial taxation, and it cannot be deemed that the Plaintiff and the domestic special purpose corporations are the same in terms of the content and form of the business operated, and it cannot be deemed unlawful against the principle of non-discrimination under the Korea- Netherlands Tax Treaty.

4) Sub-committee

The plaintiff is merely a company of the Do government, and not subject to the Korea- Netherlands Tax Treaty according to the substance over form principle falls under the transferor as the actual owner of the transfer income of this case, and thus it cannot be exempted from taxation in accordance with the Korea- Netherlands Tax Treaty. This result cannot be viewed as violating the principle of non-discrimination under the Korea- Netherlands Tax Treaty. The defendant's disposition rejecting the plaintiff's corporate tax correction is legitimate, and the plaintiff's assertion is without merit.

3. Conclusion

The plaintiff's claim is dismissed. It is so decided as per Disposition.