Seocho 2010west 1863 ( December 31, 2010)

No dividend income shall be taxed on any deemed dividends not provided for as domestic source income.

The income of a foreign corporation does not mention before the amendment on December 31, 2005 as to the amount treated as a dividend under Article 14 of the Adjustment of International Taxes Act, because tax liability becomes effective only when there is domestic source income listed in the subparagraphs of Article 93 of the Corporate Tax Act. Since the amount treated as a dividend pursuant to Article 14 of the Adjustment of International Taxes Act is added to the amount treated as a domestic source income of a foreign corporation after the amendment, it is not possible to impose deemed dividend pursuant to Article 14 of the Adjustment of International Taxes Act as dividend income before the amendment

2011Guhap10676 Notice of Change in Income Amount

XX Bank

Seoul Regional Tax Office

July 19, 2011

November 4, 2011

1. On February 25, 2010, the Defendant’s notice of change in the amount of income stated in the separate sheet against the Plaintiff shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. On October 1, 1981, the Plaintiff has its head office in the Republic of Singapore and runs the financial business by opening a branch office in Korea (hereinafter “Plaintiff branch”).

B. The Plaintiff’s branch office is the Adjustment of International Taxes Act during the business year 2003 to 2005 ( January 1, 2010).

Of the loans from the plaintiff's head office that falls under the "foreign controlling shareholder" under Article 2 (1) 11 (b) of the Adjustment of International Taxes Act (amended by Act No. 914), Article 14 (2) of the same Act and Article 26 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19650, Aug. 24, 2006; hereinafter the same shall apply), the foreign controlling shareholder's interest paid in excess of six times the equity shares of the foreign controlling shareholder pursuant to Article 14 (1) 11 (b) of the same Act and Article 26 of the same Act (amended by Presidential Decree No. 19650, Aug. 24, 2006); and 265,49,959 won in the business year of 2004; 1,828,050,69 won in total, and 3,237,59,039 won in excess of the company's income under tax adjustment.

C. As a result of conducting a tax investigation with respect to the Plaintiff branch, the Defendant disposed of the amount of KRW 2,093,50,658 (hereinafter “instant key amount”) in the amount of KRW 265,49,99,959 in the business year 2004 and KRW 1,828,050,69 in the business year 2005 and KRW 1,828,050,69 in the business year 2,093,550,658 (hereinafter “instant key amount”) as “distribution” pursuant to Article 25(5) of the Enforcement Decree of the Adjustment of International Taxes Act, and notified the Plaintiff of the change in the amount

D. The Plaintiff reported and paid the withheld corporate tax 24,136,360 won for the business year 2004, and the withheld corporate tax 166,186,427 won for the business year 2005, which was calculated based on the details of the notice of change in income amount, and filed an appeal with the Tax Tribunal on May 12, 2010, but the Tax Tribunal dismissed the Plaintiff’s claim on December 31, 2010.

[Reasons for Recognition] Unsatisfy, Gap evidence 1, 2, Eul evidence 1, 2, Eul evidence 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition is unlawful for the following reasons.

1) According to Article 14(1) of the Adjustment of International Taxes Act and Article 106(1)3(j) of the Enforcement Decree of the Corporate Tax Act, the key amount in this case should be disposed of as "other outflow from the company", since the amount included in the calculation of earnings in the return, decision or correction of the tax base on income for each business year of the domestic business place of a foreign corporation is "income belonging to that foreign corporation, etc." but the disposition in this case is premised on the disposal

2) A foreign corporation is liable to pay corporate tax only when there is a domestic source income listed in each subparagraph of Article 93 of the Corporate Tax Act. The provisions adding deemed dividend disposed of as dividend pursuant to Article 14 of the Adjustment of International Taxes Act as a domestic source income are amended by Act No. 7838, Dec. 31, 2005; and Article 93 subparagraph 2 (hereinafter referred to as the "amended provisions of this case") of the Corporate Tax Act (amended by Act No. 8831, Dec. 31, 2007; hereinafter referred to as the "Corporate Tax Act") is added to the revised provisions of Article 93 subparagraph 2 (hereinafter referred to as the "amended provisions of this case"). Thus, the provisions of Article 18 (1) of the Addenda of the Corporate Tax Act provide that the revised provisions of this case can be retroactively applied until the previous taxable year, but this cannot be interpreted as violating the principle of retroactive taxation prohibition under Article 13 (2) of the Constitution, and therefore, it cannot be interpreted as the "former Article 2038 (37) of the Corporate Tax Act.38.

3) In a case where a domestic branch of a foreign corporation transfers a certain amount to the head office, there is no room to constitute a domestic source income as provided in each subparagraph of Article 93 of the Corporate Tax Act, because it is merely a legal entity’s internal capital movement

4) Article 28 of the Adjustment of International Taxes Act provides that a tax treaty shall preferentially apply to the classification of domestic source income of a foreign corporation. Thus, even if income prescribed as domestic source income under the Corporate Tax Act is not deemed domestic source in a tax treaty concluded with a foreign country, such income shall not be taxed. However, the key amount of this case deemed a dividend pursuant to Article 14(1) of the Adjustment of International Taxes Act and Article 25(5) of the Enforcement Decree of the Adjustment of International Taxes Act does not fall under anywhere among dividend income under Article 10 of the Korea and Singapore Tax Treaty or interest income under Article 11 of the said

5) Even if it is assumed that the key amount of this case paid by the Plaintiff branch to the Plaintiff constitutes interest income under Article 11 of the Singapore Tax Treaty, the key amount of this case under Article 21(1)2 of the Restriction of Special Taxation Act (amended by Act No. 8827 of Dec. 31, 2007; hereinafter “Special Taxation Restriction Act”) constitutes interest paid for foreign currency obligations that the Plaintiff branch, a foreign financial institution, borrows from the Plaintiff’s head office that is a foreign financial institution under the Foreign Exchange Transactions Act, and thus, is exempt from corporate tax.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Whether it constitutes "other outflow from the company" under the Enforcement Decree of the Corporate Tax Act

Article 106(1)3 of the Enforcement Decree of the Corporate Tax Act provides that when reporting, determining, or correcting the corporate tax base on income for each business year of a domestic business place of a foreign corporation under Article 94 of the Corporate Tax Act, the amount included in gross income shall be treated as income accrued to the foreign corporation, etc. Thus, it may be viewed that the issue amount of this case is part of the interest on loans paid to the Plaintiff’s principal office, which is the domestic business place of the foreign corporation. On the other hand, Article 14(1) of the Adjustment of International Taxes Act provides that the interest on loans in excess of a certain amount of investment shall not be included in deductible expenses, but the income disposition shall be deemed to have been disposed of as a dividend or other outflow under Article 67 of the Corporate Tax Act as prescribed by the Presidential Decree, and Article 25(5) of the Enforcement Decree of the Corporate Tax Act provides that the non-deductible amount among the interest on loans borrowed from a foreign controlling shareholder shall be treated as a dividend under Article 67 of the Corporate Tax Act.

2) Whether the issue amount in this case constitutes a domestic source income under the Corporate Tax Act

A) Income of a foreign corporation becomes liable for tax payment only when there is a domestic source income listed in each subparagraph of Article 93 of the Corporate Tax Act. Article 17(1) of the former Income Tax Act only stipulates the dividend income and the amount treated as a dividend under Article 9 of the Adjustment of International Taxes Act as domestic source income, and does not mention the amount treated as a dividend pursuant to Article 14 of the Adjustment of International Taxes Act. The amended provision of this case added the amount treated as a dividend pursuant to Article 14 of the Adjustment of International Taxes Act to be treated as a foreign corporation’s domestic source income. The amended provision of this case is reasonable to deem that the deemed dividend income subject to taxation was newly established as a source income as an item of the source income, and thus, it cannot be taxed as dividend income under Article 14 of the Adjustment of International Taxes Act (see Supreme Court Decision 2008Du13415, Oct. 9, 2008).

B) Article 1 of the Addenda of the Corporate Tax Act provides that the time of enforcement of the amended Act shall be from January 1, 2006. Article 2 of the Addenda provides that "this Act shall apply from the business year beginning after the enforcement of this Act." However, Article 18 (1) of the Addenda of the same Act (hereinafter referred to as "the Addenda of this case") provides that "the amendment of this case shall apply from the first disposition of dividends after the enforcement of this Act." Since the business year related to the key amount of this case is 2004 and 2005 before the enforcement date of the amended Corporate Tax Act, it is problematic whether the supplementary provision of this case can be imposed only on the period in which the tax claim relationship was established before the enforcement date of the amended Act until the disposition of income is made only after the enforcement date of the Act. However, it is established that the corporation's obligation to withhold corporate tax was established on the date of receiving the notice of change of corporate tax on the date of the establishment of the corporation's corporate tax at the same time until the taxable period of this case's 200.300 9.

C) In accordance with Article 13(2), etc. of the Constitution of the Republic of Korea, it is not permissible to apply mutatis mutandis to the legislation of a suit. However, the interpretation and application of the supplementary provision of this case conflict with the principle of prohibition of retroactive taxation under the Constitution, since there is no circumstance to justify the supplementary provision of this case in this case, on the ground that there is no loss of a party by retroactive legislation, or where there is little minor loss of a party by retroactive legislation, or where there is extremely serious public interest reason which takes precedence over the request for protection of trust (see, e.g., Constitutional Court Order 97HunBa76, Jul. 22, 1999).

D) However, if a variety of interpretations are possible, it shall be interpreted in conformity with the Constitution in principle. Thus, a certain Act should be interpreted as unconstitutional if it is interpreted in accordance with the Constitution. However, if limited interpretation is made in a different way, it shall be interpreted as constitutional (see Constitutional Court Order 89HunMa38, Jul. 21, 1989). The authority to interpret and apply the statutes, including such constitutional interpretation, shall be deemed to belong to the court with the highest court (see Supreme Court Decision 2006Da66272, Oct. 28, 2008). Since the supplementary provision of this case violates the principle of retroactive taxation prohibition, interpreting that the supplementary provision of this case is applied to the matters for which this closing requirement is completed, the supplementary provision of this case violates the principle of retroactive taxation prohibition, so it shall not apply from the first beginning of the business year after this Act enters into force, and the amendment provision of this case shall not apply from the first disposal of dividends after this case’s enforcement of this Act to this case’s domestic source income. Accordingly, the Plaintiff’s assertion that this case’s previous provision of this case’s amendment is not applicable.

3) Sub-decisions

As long as the instant issue amount does not constitute domestic source income of a foreign corporation, the instant disposition was unlawful without further determination on the remainder of the Plaintiff’s assertion.

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is decided as per Disposition.