C&M Co., Ltd. (Attorneys Lee Im-soo et al., Counsel for the defendant-appellant)

Mapo Tax Office (Law Firm LLC, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

May 19, 2016

1. All of the plaintiff's claims are dismissed.

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

Each disposition date stated in the separate sheet No. 1 list by the Defendant is revoked all the disposition of KRW 460,071,560 as corporate tax and additional tax for the business year 201, corporate tax and additional tax for the business year 2012, and KRW 1,012,612,290 as corporate tax and additional tax for the business year 201, and KRW 2,391,284,80 as corporate tax and additional tax for the business year 2012, and KRW 1,012,612,290 for the business year 2013.

1. Details of the disposition;

A. Status of the parties

1) The Plaintiff is a domestic corporation that runs the overall content business. Viacom Group is a global entertainment content group consisting of the film producers, the film producers, and the music channel MTV, which is the final parent company. Viacom Inc. is listed in the New York Stock Exchange, and is a company that provides various kinds of entertainment content, including television, film, Internet content, and video games.

2) Vicom International HFT. (hereinafter referred to as “VIH”) is established on September 8, 2010 by a foreign corporation having a place of business in Hungary, and is established in accordance with the laws of Hungary as a foreign corporation (HUF, approximately KRW 2.5 million) with capital of 500,000,000, as capital of September 8, 2010, under the laws of Hungary, and engages in the distribution of film, video, television program, etc.; and Vicom Glbal (Nelands) B.V. (hereinafter referred to as “VGN”) located in the Netherlands group, holds 100% shares of VH.

B. The License Agreement, etc. of this case

1) On November 1, 2010, VGN entered into a licensing agreement with VGN to grant the exclusive right to distribute the film, television program, etc. in five countries, including Korea, Japan, Israel, Italy, Hungary, and Hungary, among the distribution rights in the entire world, other than Canada, with respect to the film, television program, etc. created by companies belonging to VGN (hereinafter “instant licensing agreement”).

2) From 2006 to the transfer of the instant license agreement, the Plaintiff entered into a contract with VGN (VGN’s Parunit Pic Pobal business division) on the domestic distribution right of motion pictures, etc. produced by film companies, etc. under VAcom Group (hereinafter “the domestic distribution right of this case”) and imported motion pictures, etc. and distributed them to the Plaintiff through TV channel (OCN, Ch. CGV, CGV, Catch, Sup, etc.). As the Plaintiff entered into the instant license agreement between VH and VGN, on May 31, 201, with VH and VGN recognized the domestic distribution right of motion pictures, etc. granted the above domestic distribution right of motion pictures, etc. (hereinafter “domestic distribution right of this case”).

3) From May 201 to December 2013, 2013, the Plaintiff paid royalties of KRW 13,550,913,773 (hereinafter “instant royalties”) to VH as follows.

A person shall be appointed.

C. Disposition of this case

1) The Defendant: (a) was merely a conduit company established for the purpose of tax avoidance, and (b) was the actual owner of the royalty income of this case; (c) thus, the Defendant: (a) was unable to apply “the Convention between the Government of the Republic of Korea and the Government of the Government of the Republic of Hungary for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treaty”); and (d) instead, (c) was subject to 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-Hungary Tax Treaty”); and (d) did not have collected corporate tax on foreign corporation’s domestic source income (15% of corporate tax rate under the Korea- Netherlands Tax Treaty) upon paying the instant royalty; and (e) was not subject to the imposition of corporate tax on foreign corporation’s domestic source income; and (e) accordingly, (e) was subject to the imposition of withholding tax and penalty tax for the pertinent business year as indicated in the separate List 1 List.

2) On July 31, 2014, the Plaintiff appealed to the Tax Tribunal. However, the said claim was dismissed on February 24, 2015.

[Reasons for Recognition] Facts without dispute, Gap evidence 1 through 3, 10, 21 evidence, Eul evidence 1, 6 through 9 (including each number), the purport of the whole pleadings

2. The assertion and judgment

A. The parties' assertion

1) The plaintiff's assertion

VH is a resident of Hungary and the beneficial owner of the royalty income of this case, in which Hungary equipped with human and material facilities and actually conducts business activities. Thus, the instant royalty income does not constitute a domestic source income under Article 12(1) of the Korea-Hungary Tax Treaty, and thus, is not subject to corporate tax withholding. Therefore, the instant disposition is unlawful.

2) The defendant's assertion

The instant royalty income is practically controlled and managed by VGN, and VGN is merely a Do government company to be subject to the Korea-Hungary Tax Treaty, and thus, since VGN is the beneficial owner of the instant royalty income, the instant royalty income pursuant to Article 12(1) of the Korea-Nether Tax Treaty constitutes a domestic source income and is obligated to withhold corporate tax from the Plaintiff. Accordingly, the instant disposition is lawful.

B. Relevant statutes

Attached Form 2 shall be as listed in attached Table 2.

(c) Fact of recognition;

1) From January 1, 2011 to April 30, 2014, VH leased an office of the total area of 341.72 square meters (282 square meters (282 square meters) located in Hungary for the business on October 18, 201, which was established on September 8, 2010 after September 8, 201, to the lease period. From January 1, 2011 to April 30, 2014, the number of employees as of January 7, 2013 were 46. Then, VH leased an office of the total area of 2,910 square meters (2,658 square meters: 2,658 square meters) to the Hungary, and employees as of May 2015 were 120 square meters (20 square meters) and employees as the financial accounting manager (3 square meters) and officers and employees as the financial accounting manager (3 square meters).

2) The main contents of the instant license agreement (No. 10) concluded on November 1, 2010 between VI and VGN are as follows.

(5)For the purpose of this Agreement, the following terms and conditions of the Agreement: (a) no more than 1.1.0 of the following terms and conditions of the Agreement shall be entered into: (b) no more than 5: (c) no more than 5:00,000,000,000,000,000,0000,000,0000,0000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,00,000,00.

3) From around 2006, the Plaintiff entered into a contract with VGN for the use of the domestic distribution right of this case. In the above contract, the explanation, claims, acceptance, notification, etc. required or permitted to be provided under the above contract was sent to the Plaintiff and VGN (Article 23.9). At the same time, the contract was sent to the Plaintiff and VGN (Article 23.2(2) of the contract, which is the subsidiary company of VGN holding 100% shares, a copy of the contract (Article 23.9.2) which includes the provision that the Plaintiff shall send a copy of the contract (Article 23.9.2) (Article 6.7), and the Plaintiff sent a copy of the domestic distribution right contract of this case to the Plaintiff and VGN (Article 28(2)9.2) (Article 28(3) of the contract).

4) According to each tax treaty with Hungary, Japan, Israel, and Italian, each of the tax treaties provides that the royalty related to art may be imposed only in the country of residence.

5) From the corporate tax deduction for 201, VH distributed approximately KRW 27,428,059,00 green ( approximately KRW 1,37.1 billion), approximately KRW 19,584,90,000 green ( approximately KRW 97.9 billion) equivalent to 71% of net income after deducting corporate tax; for 2012, KRW 62,691,751,000 ($ 3,13.4 billion), among net income after deducting corporate tax, KRW 54,245,50,000 green ( around KRW 3,13.4 billion), KRW 200,000 ($ 2,71.2 billion) to each VGN; KRW 200,000 ($ 2,71.2 billion); KRW 2000,000 in Vcom group’s related group’s net income; KRW 2001,529,209,294,2000.2.29)

6) The Plaintiff had discussed between the Nonparty 1 and the Plaintiff, who works for Australia, a Asian officer of the Parmo unit, before acquiring the Republic of Korea monopoly right of motion pictures from VGN and concluding a contract on the right of domestic distribution with VH, as well as the discussion on the distribution of motion pictures, even after concluding the contract.

7) During the tax investigation with respect to the Plaintiff, the Defendant obtained the document “Verification of whether the Plaintiff’s internal documents” kept on Nonparty 2’s computer, an employee of the Plaintiff’s financial team (hereinafter “instant internal documents”). The document contains the following descriptions, which included the concept of beneficial owner due to the Plaintiff’s transfer of domestic film distribution rights from VGN under the instant license agreement:

1) Poolship determination contained in the main text: (1) It is necessary to test whether VH actually reverts to a shareholder: It is difficult for Hungary to consider Hungary as a corporation if it is not owned directly or indirectly by a national resident of the company. Therefore, it is difficult for Hungary to confirm that Hungary owns the actual owner (ex . roster of shareholders). It is difficult for us to consider Hungary as a real beneficiary if the shareholder is not a Hungary resident: us as well as Hungary contracts owner transfer from the Netherlands to Hungary; (2) it is difficult for us to recognize that there is no change in the existing form of contract and its source tax to be carried out by Hungary because there is no need to determine the actual owner of Hungary’s profit and loss (15% to 0% of the existing transfer amount). It is also difficult for us to recognize that there is no change in the existing form of contract terms and conditions, other than the change in the scope of its domestic source tax.

8) With respect to the Plaintiff’s internal document and the settlement amount for eight film films of the Paros unit, the Plaintiff paid approximately KRW 5.4 billion of the film settlement amount from February 2, 2010 to December 12, 2010. In order to handle the excessive remittance amount, the Plaintiff’s negotiation with VH and VGN without negotiating the domestic distribution amount with VH and FGN around 2012, which was after the license agreement between VH and VGN, stated that it shall be offset against the royalty income to be paid to VI.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 10, 12, 14, 21, 23, Eul evidence Nos. 1 through 4, 6 through 8, 9, 11 through 13, and the purport of the whole pleadings

D. Determination

1) substance over form principle and beneficial owner

Article 12(1) of the Korea-Hungary Tax Treaty requires that a person who received a user fee, as a requirement for the imposition of a fee incurred in a Contracting State only in the other Contracting State, be a resident of the other Contracting State as well as a “beneficial owner.” Although the Korea-Hungary Tax Treaty does not separately define the meaning of “beneficial owner”, the term not defined in the Convention has the meaning in the domestic law of the Contracting State “ unless the context otherwise requires that it be interpreted in accordance with the context,” the meaning of “beneficial owner” should be understood through the principle of substantial taxation under the domestic law.

The substance over form principle under Article 14(1) of the Framework Act on National Taxes and Article 4(1) of the Corporate Tax Act, in cases where there is another person to whom the title substantially accrues with respect to the subject matter of taxation, such as income, profit, property, transaction, etc., unlike the nominal owner, should be the person to whom the nominal owner substantially reverts rather than the person to whom the nominal owner belongs, for form or appearance. Thus, the nominal owner of the property has no ability to control and manage it, and there is another person who substantially controls and manages it through the control, etc. over the nominal owner. In cases where the disparity between the nominal owner and the nominal owner arises from the purpose of tax evasion, the income on the property shall be deemed to have been reverted to the person who actually controls and manages the property, and such principle applies as it is, unless there is any special provision excluding the interpretation and application of a tax treaty having the same effect as the law (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012).

In the instant case, the purport of Article 12(1) of the Korea-Hungary Tax Treaty, as seen earlier, demanding that a Hungary resident be a “beneficial owner” as a requirement to refrain from tax liability only in its country on the royalty income that a Hungary resident received from a domestic resident, is understood as a purpose to prevent tax avoidance or tax evasion, and such purport is the same as the substance over form principle and its context.

Therefore, in light of the legal principles as seen earlier and the purport of demanding that the person is a beneficial owner under Article 12(1) of the Korea-Hungary Tax Treaty, it is reasonable to deem that the term “beneficial owner” under Article 12(1) of the Korea-Hungary Tax Treaty is “a person who is deemed to have accrued the income as a result of the application of the substance over form doctrine.

2) Whether VH is a beneficial owner of the pertinent royalty income

A) In cases where income from transactions, which are the basis of external taxation, belongs to the nominal owner of the transaction, the ownership of the income is merely nominal, and thus, in order to determine whether a beneficial owner is a separate owner, the following should be taken into account: (a) if the nominal owner is a corporation, the purpose and details of the establishment; (b) details of business activities; (c) human and physical facilities, including the location of the employee and the office; (d) decision-making process related to the transaction in question; and (e) details of the movement of funds paid in return for the transaction. In particular, in relation to the purpose of establishment, the purpose of tax avoidance should be examined.

B) Examining the following circumstances, based on the aforementioned legal principles and the evidence as seen earlier, and the overall purport of Gap evidence Nos. 7, 16, and 17 (including each number), as well as the entire purport of the arguments, VH is merely a conduit company established to avoid taxation on the pertinent royalty income, and in light of the substance over form principle, VH cannot be deemed as a person to whom the pertinent royalty income actually accrues. Therefore, it is reasonable to view that the actual owner is a VGN. Accordingly, the Plaintiff’s assertion is without merit.

① From around 2006 to May 201, the Plaintiff was permitted to use the instant domestic distribution right from VGN, and concluded a domestic distribution right contract with VH on May 31, 201, thereby allowing VH to use the instant domestic distribution right. However, it is difficult to accept the instant license agreement with the Plaintiff on November 1, 2010, which was established on September 8, 201 and was transferred the instant domestic distribution right from VGN for the purpose of collecting the pertinent domestic distribution right from the Plaintiff’s domestic distribution right, not from the Plaintiff’s domestic distribution right, to the Plaintiff’s domestic distribution right of KRW 1.35 billion, which was established on May 31, 201, which was six months after the said contract, in light of the fact that: (a) concluded the instant domestic distribution right contract with the Plaintiff; (b) concluded the instant domestic distribution right; and (c) concluded the instant domestic distribution right with the Plaintiff on May 1, 2011, it was difficult to accept the instant domestic distribution right from the Plaintiff’s domestic distribution right.

② Around September 8, 2010, at the time of its establishment, VH was limited to KRW 2.5 million with capital limited. At the time of its establishment, executive officers and employees were Nonparty 3 (director on January 1, 201), Nonparty 4 (director on March 16, 201), Nonparty 5, Person in charge of Personnel Management, Nonparty 6, and Nonparty 7 (member on December 1, 2010), and Nonparty 8 (member on May 23, 201), who is an accounting specialist, were merely employees related to the domestic distribution right of this case (member on May 23, 201), but it appears that the domestic distribution right of this case was a major business for receiving user fees.

③ According to the instant licensing agreement between VGN and VGN, VGN shall consult with VGN on the distribution plan prior to the distribution of motion pictures (Article 2(b)), and VGN shall obtain prior written approval from VGN (Article 3(b)); and VGN shall have the right to investigate and audit all accounting books, records, etc. related to motion pictures (Article 6(c)); and in light of such circumstances, VGN shall not be deemed to have performed film distribution business separate from VGN, or to have actually participated in the said business.

④ From May 201 to December 2013, VGN was expected to receive the instant royalty income equivalent to approximately KRW 13.5 billion from May 201 to around 12, 2013. As a result of the instant contract, the price received by VGN was merely US$ 1,00 ($ 1.2 million), and the contractual VGN did not demand VGN to collect dividends from VGN, despite the fact that it had the authority to raise royalties (Roatty). In fact, VGN was anticipated that it would have been able to receive a considerable amount of dividends from VH, and in light of the fact that VGN had a substantial capacity to manage the instant royalty income for 7.1 billion won from corporate tax credit for 2011, and that it appears that the pertinent VGN included the instant royalty income in the annual net profit of 200,000,000 won, or that it appears that it would have been difficult to have actually included in the pertinent royalty income for 27.1 billion won from the instant dividends.

⑤ Even after the license agreement of this case and the domestic distribution right agreement of this case, the Plaintiff had sought advice on the distribution of motion pictures to Asia as before, and around 2010, with respect to the settlement of accounts paid in excess of approximately KRW 5.4 billion to the Parm unit company, the Plaintiff intended to offset the royalty income to be paid to VIH, while the instant domestic distribution right of this case was transferred from VG to VIH, or thereafter, had the Plaintiff notify the PPI company of the contents related to the contract of which VGN holds 10% shares. From the perspective of the Plaintiff, it appears that there was no change in business subjects or contents between the transfer of the instant license agreement and the subsequent transfer of the license agreement of this case.

④ In the Plaintiff’s internal perspective, the Plaintiff tried to prepare for the situation after the conclusion of the instant license agreement and the instant domestic distribution right agreement, based on the following: (a) there is a need for a clear reason that the contracting entity should change to VI because of the decrease in the amount of domestic source tax under the instant domestic distribution right agreement; and (b) there is a risk that Hungary’s shareholders and members of the board of directors may not be considered as a Hungary resident; and (c) considering these circumstances, the Plaintiff also recognized that tax avoidance occurred due to the said agreement and the need to prepare for it.

7) VGN transferred only the right to distribute motion pictures with respect to five countries, including Korea, Japan, Israel, Italy, and Hungary, to the United States VH. This seems to be due to the fact that the above five countries are exempt from source taxes on royalty income, such as motion pictures, under the Tax Treaty between Hungary and the above countries.

④ The Plaintiff asserts that the instant licensing agreement between VGN and VH was a single management judgment, which was rendered for the benefit of the Hungary Government’s foreign-invested enterprises from tax reduction and exemption, government subsidies and special support for the film industry, Hungary’s excellent human resources, geographical points, etc., and for the reorganization of the global structure of the Hungarycom Group. However, in light of the fact that the geographical location of the instant licensing agreement and the business related to the right to distribute motion pictures under the environment where various communications media are developing is not deemed important, it is difficult to deem that the instant license agreement was not for the purpose of tax avoidance, but for the benefit of the Hungary Government and the reorganization of the system within the group.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.

[Attachment Omission]

Judges Yoon Gyeong-do (Presiding Judge)

Note 1) During the year 2010 to 2013, one set was approximately KRW 5-6, and less than 5 won per one set for the convenience of calculation.