Cho Jae-2014- Busan District Court-2351 ( December 10, 2014)

The case of market price, which is the standard for denying wrongful calculation, and the case of a tax haven applied to a person with special interest who is a national of the Republic of Korea

The " charterage," which is the standard for the denial of wrongful calculation, is the market price which is the market price, should be the price which is generally traded with many and unspecified persons who are not related parties or third parties who are not related parties, in the similar situation.

Article 52 of the Corporate Tax Act Article 17 of the Adjustment of International Taxes Act as deemed to include dividends from retained earnings of a specific foreign corporation

2015Guhap20849 Revocation of Disposition of Corporate Tax Imposition

PP Ship Co.

Head of △ District Office

July 1, 2016

July 22, 2016

1. On December 2, 2013, the Defendant’s imposition of corporate tax of KRW 558,064,20 for the Plaintiff on December 2, 2010, exceeding KRW 149,145,362, and exceeding KRW 207,041,243 among the imposition of KRW 618,42,540 for the year 201, and the imposition of KRW 42,229,766 for the corporate tax of KRW 437,414,00 for the year 201.

2. The plaintiff's remaining claims are dismissed.

3. The costs of lawsuit shall be borne by each person;

Each disposition of the Defendant imposed corporate tax of KRW 558,064,20 for the year 2010, corporate tax of KRW 618,442,540 for the year 2011, and corporate tax of KRW 437,414,09 for the year 2012, shall be revoked.

1. Details of the disposition;

A. The Plaintiff is a corporation that provides maritime transportation and loading and unloading services, such as navigation lubs, by tugboating and bargeing.

B. From September 2, 2013 to October 11, 2013, the Defendant: (a) conducted a consolidated corporate tax investigation on the Plaintiff; (b) considered the Plaintiff as a wrongful calculation and non-deductible; (c) considered the Plaintiff’s retained earnings 1,168,888,8148,141 won in charterage from 2010 to 2012 as dividends to the Plaintiff; (d) considered the Plaintiff as a wrongful calculation and non-deductible; and (b) considered the Plaintiff’s retained earnings 1,168,88,141 won in charterage, which are the Hong Kong subsidiary, as dividends to the Plaintiff.

C. Accordingly, on December 2, 2013, the Defendant corrected and notified the Plaintiff of KRW 558,064,20 of the corporate tax for the year 2010, and KRW 618,442,540 of the corporate tax for the year 2011, and KRW 437,414,090 of the corporate tax for the year 2012 (hereinafter “instant disposition”).

D. The Plaintiff was dissatisfied with the instant disposition and tried to the Tax Tribunal, but was dismissed on December 10, 2014.

[Ground of recognition] The non-satisced facts, evidence 1, 2, and evidence 1, 3, 5, and 6 (including each number, hereinafter the same shall apply), and the whole purport of the pleading

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Claim regarding denial of wrongful calculation

A bareboat charter contract between the plaintiff and a related party is not an abnormal contract which lacks economic rationality, and a contract with a third party whose comparison is made by the defendant at all different characteristics of the time charter contract, and thus, it cannot be deemed the market price which is the basis for calculating the amount of income. Furthermore, it is unlawful to compare the costs borne by the plaintiff, including charterage, wages, insurance premiums, etc. of a related party, with the charterage with the third party.

2) The assertion regarding the deeming dividend payment

Article 17(1) of the former Adjustment of International Taxes Act (amended by Act No. 12849, Dec. 23, 2014; hereinafter the same shall apply) provides that a person having a special relationship with respect to the retained earnings of a foreign corporation having its head office or principal office in a state or region in which the amount of tax borne by the corporation is not more than 15/100 of the actually accrued income shall be deemed to have been distributed to the person having a special relationship, and RA is a foreign corporation located in Hong Kong, and RA is not a state subject to the above provision as 16.5% of the corporate tax rate of Hong Kong. Although RA limited liability company did not pay corporate tax in Hong Kong, it is not a tax reduction or exemption, but a tax return is not filed.

B. Relevant statutes

As shown in attached Table 1.

C. Determination of denial of wrongful calculation

1) Facts of recognition

A) During the period from 2010 to 2012, the Plaintiff entered into a bareboat charter between the Plaintiff’s in-house director A and other related parties, and paid charterage as listed below.

Details of charterage payment to persons with special interest (the omission of a list)

B) The sum of the charterage, the gold, the four insurance premiums for each vessel paid by the Plaintiff to a specially related person under a bareboat charter, the amount calculated by adding the charterage, the retirement allowances, the sub-number and communication expenses, the expenses for repair, the expenses for insurance and consumption, the payment fees, the tax and public charges, and the general management expenses, and the shipbuilding of the vessel selected by the Defendant as similar in terms of the shipbuilding of the regular charter that the Plaintiff concluded with a third party, the number of tons, etc., is listed in the annexed

[Reasons for Recognition] Facts without dispute, each evidence before the dispute, Gap evidence No. 3, Eul evidence No. 4, the purport of the whole pleadings

2) Relevant legal principles

Article 52(1) of the Corporate Tax Act provides that the denial of wrongful calculation under Article 52(1) of the Corporate Tax Act shall only apply to a case where a corporation, without a reasonable method of a person having a special relationship, has avoided or reduced tax burden by abusing all the forms of transaction listed in each subparagraph of Article 8(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 26981, Feb. 12, 2016; hereinafter the same shall apply) without using a reasonable method from a person having a special relationship, is deemed to have avoided or reduced tax burden by denying it and having income objectively and reasonably deemed as reasonable in the manner prescribed by the law. In light of the economic person’s perspective, the determination of whether the transaction is reasonable or unreasonable shall be made based on whether the transaction lacks economic rationality in light of sound social norms or commercial practice (see, e.g., Supreme Court Decision 95Nu751, Jul. 26, 196).

On the other hand, Article 88 (1) 7 of the former Enforcement Decree of the Corporate Tax Act provides that "a case where money or other assets or services are borrowed or received at an interest rate, tariff, or rent higher than the market price, and Article 89 (1) of the former Enforcement Decree of the Corporate Tax Act provides that "the market price which serves as the basis for whether a corporation is a case where a person with a special relationship pays money or other assets or services to a person with a special relationship at a higher price than the market price and is provided with money or other assets or services, in a similar situation to the transaction, shall be the price continuously traded with many and unspecified

In the end, the tax authority's burden of proving that the taxpayer's act constitutes a wrongful calculation, and the tax authority's assertion and burden of proving that the taxpayer's act constitutes a wrongful calculation or that the taxpayer's act constitutes a reasonable calculation is against the tax authority that claims the denial of wrongful calculation (see Supreme Court Decision 2003Du15287, May 12, 2005).

3) Determination

The defendant selected the charter party of a bareboat between the charter party that the plaintiff and the related party, and the vessel whose tonnage is similar, and determined that the charterage was the market price stipulated in Article 89 (1) of the former Enforcement Decree of the Corporate Tax Act.

However, in full view of the following circumstances revealed by the aforementioned evidence and the purport of the entire pleadings, it is unlawful to calculate the price of charterage between the plaintiff and its related parties based on the "a similar situation to the transaction between the plaintiff and its related parties" under Article 89 (1) of the former Enforcement Decree of the Corporate Tax Act.

① A charter party used for lending another person’s ship is basically a bareboat charter, a regular charter, and a voyage charter. Of these, a time charter party is a contract under which a shipowner or lessee (hereinafter collectively referred to as a “ship owner”) agrees to have a charterer work on board and have navigation equipment for a given period to allow a charterer to use a ship for navigation, and a charterer agrees to pay a charterer the hire calculated during a given period. It is a factor for a charterer to receive services provided by a shipowner through the actions of a shipmaster and crew appointed by the shipowner. The use of a ship itself is a purpose of a contract, and it is essentially different from a bareboat charter that has a control right to use the ship in its own like the ship (see Supreme Court Decision 200Da65977, Aug. 22, 2003). Therefore, the sum of the amount of charterage, the amount of wages, the fixed number of insurance premiums, the cost of repair, the cost of telecommunication, the cost of compensation, and other public charges.

② According to the annexed charterage 2, the Defendant did not have any assertion or proof as to the circumstances that: (a) calculated the market price of each hull charter between the Plaintiff and its specially related persons in comparison with those of the time charter party, and the shipbuilding date of the responding vessel was between two and twenty-three years; (b) the number of crew members determined charterage as well as the number of crew members determined in charterage, and other factors, such as vessel specifications and engine performance, are the same or similar; or (c) the difference is merely a minor degree to disregard it by social norms.

D. Determination as to the recommendation of dividend

The fact that the plaintiff holds 90% of the shares issued by the RR Co., Ltd., Hong Kong, and the net income of the RR Co., Ltd is 693,436,118 won in 2010, 656,962,755 won in 201, and 81,263,672 in 2012, and the fact that the RR Co., Ltd has not been imposed or has not paid corporate tax from 2010 to 2012 is recognized by the statement in subparagraph (6).

The plaintiff asserts that "the corporate tax rate of Hong Kong is 16.5%, and RR limited companies have not yet paid corporate tax because they did not file a tax return, and they cannot make dividends on retained earnings." However, according to Article 30 of the Enforcement Decree of the International Tax Adjustment Act, a state or a region in which the corporate tax burden under Article 17 (1) of the International Tax Adjustment Act is not more than 15% of the actual income generated from the corporation under the tax laws of the resident state "if the corporate tax rate of Hong Kong is less than 3 business years, the period of the business year concerned) before deducting the corporate tax of the corporation for the latest 3 business years including the relevant business year of the resident state is less than 15% of the total net income before deducting the corporate tax of the corporation for the recent 3 business years, and the premise that the withholding income is less than 2 years and 6 months since the previous business year, and the premise that the R limited Company was imposed corporate tax for the pertinent business year and the Hong Kong is less than 210 years under the international Tax Adjustment Act.

3. Conclusion

Therefore, the part of the tax imposed due to the rejection of wrongful calculation is without merit, and thus, the plaintiff's claim of this case is justified within the above scope of recognition, and the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.