[1] Whether the principle of taxation by the beneficial owner under Article 14(1) of the Framework Act on National Taxes applies to the interpretation and application of a tax treaty (affirmative in principle) / Whether Article 27(2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital constitutes a special provision excluding the principle of substantial taxation in the interpretation and application of the said treaty (negative); and the standard for determining whether the restriction under Articles 10(2), 11(2), 12(2), and 21 of the said Treaty is applied pursuant to

[2] The case holding that in a case where a German company Gap established Eul and Byung German company Eul and caused them to acquire 50% of the total issued stocks of Jung company, and thereafter, the Jung company paid dividends to Eul company and Byung company, the taxing authority withheld corporate tax by applying the limited tax rate of Article 10 (2) (a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, and the taxing authority subsequently paid corporate tax to the taxing authority, and the taxing authority excluded the application of the above treaty and applied the tax rate of 25% under the former Corporate Tax Act to correct and notify the corporate tax withheld for the pertinent business year, the application of the limited tax rate of 15% cannot

[1] The Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”) does not exclude the application of the provisions of tax evasion or the provisions on the prevention of tax evasion, as long as the domestic provisions of a Contracting State of the Republic of Korea and the provisions of the Korea- Germany Tax Treaty are consistent with the principles included in the Korea- Germany Tax Treaty (Article 27(1)(a)). Moreover, Articles 10, 11, 12, and 21 of the Korea- Germany Tax Treaty are the main purpose of the interested parties’ use of the provisions of Articles 10(2), 12(2), and 21 of the Korea- Germany Tax Treaty by establishing or transferring rights such as stocks, etc. without reasonable economic reasons for the operation of the relevant business and by establishing the requirements for the limited tax rates and unfairly reducing the benefits of the relevant treaty as to the abuse of taxes.

Meanwhile, Article 14(1) of the Framework Act on National Taxes provides for the principle of substantial taxation (amended by Act No. 911, Jan. 1, 2010; however, the same shall apply to the current Act), in cases where there is a person to whom the property belongs differently from the name of the person to whom the property belongs with respect to the subject of taxation, such as income, profit, property, transaction, etc., belongs, the person to whom the property belongs shall be the person to whom the property belongs without the name of the nominal owner, depending on form or appearance. In cases where the nominal owner of the property is not capable of controlling and managing it, and there is another person who actually controls and manages it through the control, etc. over the nominal owner, and such disparity between name and substance arises from the purpose of tax evasion, the income on the property shall be deemed to have accrued to the person to whom the property is substantially controlled and managed, and thus, the said person shall be deemed to be the person to whom

In full view of the language and text, contents, structure, purpose, etc. of the aforementioned relevant statutes, Article 27(2) of the Korea- Germany Tax Treaty shall not be deemed as a special provision excluding the principle of substantial taxation in the interpretation and application of the Korea- Germany Tax Treaty. Furthermore, the determination of whether to apply the restrictions prescribed in Articles 10(2), 11(2), 12(2), and 21 of the Korea- Germany Tax Treaty pursuant to Article 27(2) ought to be based on the following circumstances: (a) the developments leading up to the creation or transfer of the right to the payment of dividends, interest, user fees, and other income; (b) the purpose and details of the relevant business; (c) the role of the

[2] The case holding that in a case where a German company Gap, which established Eul and Byung company, obtained 50% of all outstanding shares of Jung company, and thereafter, Byung company established Eul company and Byung company, which received 50% of the total issued shares of Byung company, the tax authority withheld corporate tax by applying 5% of the limited tax rate under Article 10 (2) (a) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”), and the tax authority excluded the application of the Korea- Germany Tax Treaty and corrected and notified the corporate tax withheld for the pertinent business year by applying the 25% tax rate under the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008), the case holding that even if Eul company and Byung company, who is the beneficial owner of the above dividends, were established, and acquired shares issued by Jung company Byung company, it cannot be deemed that Article 10 (2) (15) (b) of the Korea- Germany Tax Treaty is mainly applied to the above.

[1] Articles 10(2), 11(2), 12(2), 21, and 27(1)(a) and (2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital; Article 14(1) of the Framework Act on National Taxes / [2] Articles 10(2)(a) and (b), and 27(2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital / [2] Articles 93(2) and 98(1)3 (see current Article 98(1)2) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008)

[1] Supreme Court en banc Decision 2008Du8499 Decided January 19, 2012 (Gong2012Sang, 359) Supreme Court Decision 2010Du11948 Decided April 26, 2012 (Gong2012Sang, 892)

Seoul High Court Decision 2001Na14484 decided May 1, 201

The director of the tax office

Supreme Court Decision 2013Du7704 Decided May 28, 2015

Seoul High Court Decision 2015Nu1269 decided June 9, 2016

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Residential judgment and the application of the tax treaty to the members of the TMW Property Fund I GmbH & Co. KG (in Germany limited partnership, hereinafter “TMW”) (Plaintiff’s ground of appeal Nos. 1 and 2 and Defendant’s ground of appeal No. 2)

A. At the time of the payment of the instant dividend income, the lower court determined that the 15% limited tax rate should be applied pursuant to Article 10(2)(b) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the amount corresponding to the ratio of the members, who are German residents, out of the instant dividend income, from among the members of TMW, based on a resident certificate, etc., and that the 25% tax rate should be applied to the amount corresponding to the ratio of other members, pursuant to Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008).

B. Examining the reasoning of the lower judgment in light of the evidence duly admitted, the said judgment is justifiable in accordance with the judgment of remanding. In so determining, the lower court did not err by misapprehending the legal doctrine regarding the resident status and the scope of application of the Korea- Germany Tax Treaty, or by misapprehending the legal doctrine on the burden of proof of the percentage of German resident, contrary

2. Whether Article 27(2) of the Korea- Germany Tax Treaty applies to TPP (Defendant’s ground of appeal No. 1)

A. In addition, Articles 10, 11, 12, and 21 of the Korea- Germany Tax Treaty are not applicable in cases where the principal purpose of the interested parties is to use the provisions of Articles 10(2), 11(2), 12(2), and 21 of the Korea- Germany Tax Treaty by establishing or transferring rights, such as stocks, etc. without proper economic reasons, insofar as the domestic provisions of a Contracting State’s domestic law are consistent with the principles contained in the Korea- Germany Tax Treaty (Article 27(2) of the Korea- Germany Tax Treaty). This does not apply to the establishment or transfer of rights, such as stocks, etc. by establishing or transferring the rights, without proper economic reasons, of the relevant business operations, to cope with the abuse of treaties, thereby unfairly reducing the tax by establishing limited tax rates as meeting the requirements for the application of Articles 10, 11, 12, and 21 of the Korea- Germany Tax Treaty.

Meanwhile, Article 14(1) of the Framework Act on National Taxes provides for the principle of substantial taxation (amended by Act No. 911, Jan. 1, 2010; however, the same shall apply to the current Act), where there is a person to whom the property belongs differently from the name of the person to whom the property belongs, such as income, profit, property, and transaction, belongs, the person to whom the property belongs shall be the person to whom the property belongs without the name of the nominal owner depending on form or appearance. In cases where the nominal owner of the property is not capable of controlling and managing it, and there is another person who actually controls and manages it through the control, etc. over the nominal owner, and such disparity between name and substance arises from the purpose of tax evasion, the income on the property shall be deemed to have been reverted to the person to whom the property is substantially controlled and managed, and thus, the said person shall be deemed the person to whom the property is to be liable for tax payment (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012).

In full view of the language and text, contents, structure, purpose, etc. of the aforementioned relevant statutes, Article 27(2) of the Korea- Germany Tax Treaty shall not be deemed as a special provision excluding the principle of substantial taxation in the interpretation and application of the Korea- Germany Tax Treaty. Furthermore, the determination of whether to apply the restrictions prescribed in Articles 10(2), 11(2), 12(2), and 21 of the Korea- Germany Tax Treaty pursuant to Article 27(2) ought to be based on the following circumstances: (a) the developments leading up to the creation or transfer of the right to the payment of dividends, interest, user fees, and other income; (b) the purpose and details of the relevant business; (c) the role of the relevant

B. According to the reasoning of the lower judgment and the record, the following facts are revealed.

(1) TMW was established mainly for the purpose of investing in real estate in Asian countries, including Japan, Australia, Singapore, Thailand, China, Hong Kong, Malaysia, Korea, and India. From May 2003 to October 2009, WT made a total of 29 investments in each Asian country, and owned 1,980,000,000 as of December 31, 2010.

(2) On June 2003, TMW decided by the Investment Committee to acquire the Plaintiff’s shares of the Seoul Metropolitan City Telecommunication Building, and established TMW Property GmbH (hereinafter “GmbH 1”) and TMWH (hereinafter “GmbH 2”), which is a limited liability company in Germany, with the establishment of the Seoul Metropolitan City Realty GmbH (hereinafter “GmbH 1”), and made them acquire all the Plaintiff’s shares by 50%.

(3) GmbH 1 and 2 had no particular business activities except for those holding the Plaintiff’s issued stocks. They were provided by TmbH 1 and 2 with funds necessary to acquire the Plaintiff’s issued stocks, as well as funds necessary to obtain the Plaintiff’s issued stocks, without independent personnel members.

(4) After receiving the instant dividend income from the Plaintiff, GmbH 1 and 2 promptly paid the entire amount excluding the German capital gains tax to TMW.

(5) Around July 2007, TPP decided to sell the Seoul City Telecommunication Building by the Investment Committee’s decision. Accordingly, GmbH 1 and 2 immediately decided to sell the said building at the Plaintiff’s general meeting of shareholders, and the Plaintiff sold it.

C. Examining the foregoing factual basis in light of the legal principles as seen earlier, even if WT established GmbH 1 and 2, which is the beneficial owner of the instant dividend income, and acquired the Plaintiff’s issued stocks, it is difficult to deem that it mainly aims at the application of 15% limited tax rate under Article 10(2) Item (b) of the Korea- Germany Tax Treaty without reasonable economic reasons for the relevant business operations. Accordingly, the application of the said limited tax rate by 15% cannot be excluded on the ground of Article 27(2) of the Korea- Germany Tax Treaty with respect to TPP.

D. In the same purport, the lower court’s assertion that GmbH 1 and 2 should apply the 5% limited tax rate under Article 10(2)(a) of the Korea- Germany Tax Treaty is not permissible pursuant to Article 27(2) of the same Treaty, but it is justifiable to determine that TMW may apply the 15% limited tax rate under Article 10(2)(b) of the same Treaty. In so determining, the lower court did not err by misapprehending the legal doctrine on the interpretation and application of the Korea- Germany Tax Treaty, contrary to what is alleged in the grounds of

3. Conclusion

The grounds of appeal by the plaintiff and the defendant are dismissed in entirety as they are without merit, and the costs of appeal are assessed against each party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Lee Dong-won (Presiding Justice)