[1] The case holding that the judgment below erred in the misapprehension of legal principles, in case where British Dondo's limited partnership Gap, etc. transferred domestic stocks through Malaysia Eul to Byung corporation through Malaysia Eul, and Byung corporation did not withhold corporate tax when it paid Eul corporation the transfer price of stocks to Byung corporation, and the tax authority imposed a tax payment notice of withheld corporate tax on Byung corporation, the case holding that Gap's limited partnership et al. can be seen as a foreign corporation under the former Corporate Tax Act and judged whether to collect corporate tax

[2] The meaning of “income amount”, “paid amount”, or “acquisition value” under Articles 92(2)2 and 98(1)4 of the former Corporate Tax Act (=actual transaction value) and where a person who pays domestic source securities transfer income to a foreign corporation is confirmed the real transfer value of the securities, whether the method of calculating the tax amount withheld as corporate tax on the income and whether the foreign corporation transferred securities through an exchange (negative)

[1] The case holding that the judgment below erred in the misapprehension of legal principle on the ground that the tax authority did not withhold corporate tax when it paid the transfer price of stocks to Eul corporation pursuant to Article 13 (4) of the Convention between the Government of the Republic of Korea and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, Byung's limited partnership Gap et al. acquired domestic stocks through Malaysia's corporation Eul and transferred it to Byung corporation, and the tax authority did not withhold corporate tax on the ground that it is not Eul corporation but Eul corporation, but Eul corporation's investors such as limited partnership Gap et al. (amended by Act No. 6293 of Dec. 29, 200; hereinafter the same shall apply).

[2] In light of the text and purport of Articles 92(2)2 and 98(1)4 of the former Corporate Tax Act (amended by Act No. 6293, Dec. 29, 200; hereinafter the same), it is reasonable to view that the “income amount”, “paid amount”, or “acquisition value” mean the actual transaction value. Thus, where the actual transaction value of securities is confirmed, a person who pays domestic source securities capital gains to a foreign corporation is liable to withhold a smaller amount between the amount equivalent to 10/100 of the actual transfer value and the amount equivalent to 25/100 of the amount calculated by deducting the actual acquisition value from the actual transfer value, whichever is smaller, as corporate tax. It is reasonable to interpret that a foreign corporation has transferred securities through an exchange of securities through the exchange of securities as the corporate tax regardless of whether the actual transaction value is the exchange or exchange of real estate transfer value.

[1] Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007), Article 93 subparag. 10 (see current Article 93 subparag. 9), Article 98(1)4 (see current Article 98(1)5) of the former Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 2000), Article 119 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 200), Article 13(4) of the Convention between the Government of the Republic of Korea and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income / [2] Article 92(2) subparag. 2(9) of the former Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 200), Article 98(1)9(3) of the current Act

KT Co., Ltd. (Law Firm Sejong, Attorneys Kim Yong-dam et al., Counsel for the plaintiff-appellant)

Head of Sungnam Tax Office

Seoul High Court Decision 2009Nu21835 decided January 18, 2011

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. As to the Plaintiff’s ground of appeal Nos. 3 through 6

A. The substance over form principle under Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 8830, Dec. 31, 2007; hereinafter the same) refers to a person to whom the property belongs, if there is another person to whom the income, profit, property, transaction, etc. belongs differently from the nominal owner, the nominal owner of the property is not the person to whom the property belongs, but the person to whom the property belongs, because of form or appearance, is not the person to whom the property belongs, and there is another person who actually controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, the income on the property shall be deemed to have accrued to the person who actually controls and manages the property and shall be the person to whom the property belongs (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 2012). This principle applies to interpretation and application of tax treaties with the same effect as the Act (see, 20101.

B. The lower court acknowledged the following facts by citing the reasoning of the first instance judgment.

① An AIG-AF LP (hereinafter referred to as “AIF LP”), which is a partner of the UK-U.K., was called the “AI-AF LP” (hereinafter referred to as the “AIG-AIF LP”), the AI G G Asian 2 L.P. (hereinafter referred to as the “AIG-AI II LP”) and the UK-U.K.'s limited partnership of the GG-AF II LP (hereinafter referred to as the “LP”) which was established by adding it to the above AI-AF LAI 2 LAI 1, 198, and the following shares acquisition contract (hereinafter referred to as the “AIF 98GF 1, 198, hereinafter referred to as the “M-1, hereinafter referred to as the “M-8, 198, 198.31, 198.

② Before entering into the aforesaid acquisition contract, the AI LG LG LG Corporation obtained approval for the acquisition of the instant shares from the Investment Committee of the AI mother fund, and the acquisition contract stipulates that part of its members, such as the board of directors, the audit committee, and the executive committee, are designated from the AI mother fund, and that various contacts, such as notification, were also made to the AI mother fund, and the AI mother fund, other than the AI LG subsidiary corporation, was participating in the contract. The directors and agents of the AI LGbubu Corporation were also the major executives of the AIG Investment Ltd. (hereinafter referred to as “AIGIC”) in Hong Kong where they make a decision on Asian investment in the Asia region.

③ According to the application for foreign investment registration of the AIG Lbuan corporation, each representative is the Nonparty, the representative of the AIGIC, and each contact point is (the telephone number omitted) (the Hong Kong number, which is not the Malaysian, but the Malaysian). The total amount of assets was 40 million won on December 31, 199, respectively, and all of them were composed of the instant stocks. The AI Lbuan corporation has no separate office and employees, and three employees of the entrusted management company manage and record various company documents, including the AIG Dbuan corporation, on behalf of all of them.

④ On July 25, 2000, the AIG Lbuan entered into a contract to transfer the instant shares with the Plaintiff. The Plaintiff did not withhold corporate tax on July 26, 2000 when it pays the instant shares transfer price (hereinafter “instant shares transfer income”) to the AIG Lbuan corporation as Korean won, US dollars, promissory notes, and KS telecom shares (hereinafter “SK shares”) on the ground that income accrued from the transfer of shares pursuant to Article 13(4) of the Convention between the Government of the Republic of Korea and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Malaysia Tax Treaty”).

⑤ On August 4, 2005, the Defendant: (a) issued the instant disposition to notify the Plaintiff of the corporate tax withheld at source pursuant to Articles 98(1)4 and 93 subparag. 10 of the former Corporate Tax Act (amended by Act No. 6293, Dec. 29, 2000; hereinafter the same) regarding the transfer income earned by the investors residing in the source country, which is not subject to the taxation of the country of residence regarding the income accruing from the transfer of stocks, on the ground that the actual person to whom the transfer income of the instant shares was attributed is not an AIG Lbuan corporation but the investors of the AI fund.

Based on the above facts, the court below held that the principle of substantial taxation can be used as a standard for interpreting and applying the provisions of the tax treaty, and that the disposition of this case where the tax withholding notice was issued to the Plaintiff by deeming the actual owner of the transfer income of this case as the investor of the AI mother fund and the actual owner of this case was legitimate since the actual owner performed only the role of the transaction party in the form of transaction with respect to the acquisition and transfer of the stocks of this case, and the disparity between the form and substance was derived from the purpose of tax avoidance.

C. In light of the aforementioned legal principles and records, the judgment of the court below did not err by misapprehending the legal principles as to the principle of substantial taxation, interpretation and application of the Korea-end Tax Treaty, or the principle of non-discrimination, etc., as otherwise alleged in the ground of appeal, on the part that the AI Corporation was not the actual owner of the transfer income of the instant stocks.

D. However, the part of the lower court’s determination that the actual partner of the instant capital gains is the investors of AIFF funds is difficult to accept for the following reasons.

(1) In a case where a foreign unincorporated association, foundation, or other organization is a profit-making organization that obtains domestic source income under Article 119 of the former Income Tax Act (amended by Act No. 6292 of Dec. 29, 200; hereinafter the same) or Article 93 of the former Corporate Tax Act and distributes it to its members, if it can be deemed a foreign corporation under the former Corporate Tax Act, it shall be liable for tax payment and shall collect corporate tax on domestic source income from its members. If it cannot be deemed a foreign corporation under the former Corporate Tax Act, the income tax or corporate tax shall be collected depending on the status of its members as to the income amount distributed to each of its members, who is liable for tax payment. Whether it can be deemed a foreign corporation under the former Corporate Tax Act should be determined depending on whether it can be deemed as a separate subject of rights and obligations independent from its members under Korean law in light of the content of its head office or principal office and substance of the organization established (see Supreme Court Decision 201Du53101, Dec. 27, 2012).

(2) However, as seen earlier, the following circumstances acknowledged by the process of acquiring the instant shares through the AI Corporation of the AI mother fund and duly admitted evidence, namely, the AI mother fund, upon acquiring and holding the instant shares through the AIG Corporation with funds collected from investors in the U.S., and transferring them, was a substantial role in supplying the instant shares. In full view of the fact that the AI mother fund has engaged in a number of investment transactions in the Asian region in addition to the investment trading of the instant shares, it cannot be deemed that the AI mother fund was a profit-making organization established with a clear business purpose to earn high profit by transferring the instant shares through the acquisition of the instant shares, and it cannot be deemed that it was merely a nominal organization that has no ability to substantially control and manage the instant shares from investors in the U.S., and thus, it cannot be deemed that it can be deemed that it is a foreign corporation entity whose corporate tax should have been attributed to the entity that is an independent entity in charge of collecting the instant shares under the laws and regulations of the Korea AI Fund. Therefore, the lower court should have determined whether it belongs to the entity’s corporate tax independent judicial entity.

(3) Nevertheless, without examining the above, the lower court determined that the instant disposition was lawful where the Defendant deemed the investors of AIG fund as a corporate tax obligor for the transfer income of the instant shares. In so doing, the lower court erred by misapprehending the legal doctrine on the method of withholding taxes on a foreign non-legal entity, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The Plaintiff’s ground of appeal pointing this out has merit.

2. As to the Defendant’s ground of appeal

A. Article 92(2)2 of the former Corporate Tax Act provides that “The amount of capital gains from the transfer of domestic source securities of a foreign corporation provided for in Article 93 subparag. 10 shall be the revenue amount, but if the acquisition value of securities is confirmed, it shall be the amount calculated by deducting the acquisition value from the revenue amount.” Article 98(1)4 of the former Corporate Tax Act provides that “The tax amount to be withheld from the income from the transfer of domestic source securities of a foreign corporation shall be 10/100 of the payment amount, but if the acquisition value of securities is confirmed, it shall be the smaller of the amount equivalent to 10/100 of the payment amount, or the amount equivalent to 25/100 of the amount calculated by deducting the acquisition value from the revenue amount.”

In light of the language and purport of these regulations, it is reasonable to deem that both the “amount of income”, “amount of payment”, or “acquisition value” as referred to in these regulations mean the actual transaction value. As such, if the actual transfer value of the securities is confirmed, the person who pays the foreign corporation the amount of capital gains on domestic source with the amount equivalent to 10/100 of the actual transfer value or the amount equivalent to 25/100 of the amount calculated by deducting the actual acquisition value from the actual transfer value, whichever is smaller, is liable to withhold the corporate tax on such income, and the foreign corporation is not deemed to have transferred the amount by means of exchange of securities. It is reasonable to interpret the same as above, even if Articles 92(2)1 and 99(3) of the former Corporate Tax Act provide that the amount of capital gains on domestic source real estate of the foreign corporation is calculated on the basis of the actual transaction

B. According to the evidence duly admitted, the Plaintiff is aware of the fact that the value of the instant shares was set at KRW 390,000 per share in the payment of the purchase price of the instant shares to the AIbuanananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananananan

C. If so, the lower court first determined whether the value, etc. of the SKS stocks paid by the Plaintiff to the AI Corporation as the transfer price of the instant stocks can be seen as the actual transaction price, and then determined whether the instant disposition was unlawful.

D. Nevertheless, without examining the actual transaction value in the stock transfer transaction of this case, the lower court determined that the portion of calculating the withholding tax amount is unlawful, without examining the actual transaction value in the stock transfer transaction of this case, by applying Article 72(1)5 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 2000) by analogy of Article 72(1)5 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 200), on the basis of the market price at the time of acquisition (39,000 won per stock, which is the closing price of the Korea Stock Exchange, on July 26, 2000, which is the acquisition date of the stocks of this case). In so doing, the lower court erred by misapprehending the legal doctrine on the calculation of the amount of

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Shin Young-chul (Presiding Justice)