[1] Where the nominal owner of the property lacks the ability to control and manage the property, there is another person who substantially controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the substance arises from the purpose of tax avoidance, the person liable to pay the income from the property (i.e., the person who actually controls and manages the property), and whether this principle applies to the interpretation

[2] The case affirming the judgment below holding that in case where a partnership-type private equity fund established under the Belgium Act and invested by investors of the United States as limited liability company Gap et al. with limited liability company Eul et al. acquired Byung bank stocks as purchaser Eul corporation established under the Belgium Act, and where Byung bank distributed dividends to Eul corporation several times under the condition that Eul corporation and Eul corporation formed a storage service contract with Eul kept Byung bank stocks, the Byung bank did so, and Eul corporation paid dividends to Eul corporation several times, as administrator of Eul corporation, it paid 15% limited tax rate under Article 10 (2) of the Convention between the Republic of Korea and Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Republic of Korea and Belgium, and the tax authority denied the application of the above limited tax rate under the treaty, and the tax authority corrected and notified the withheld corporate tax for the pertinent business year by applying the withholding tax rate of 25% or 20% under the Corporate Tax Act for each business year

[3] 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 or Article 93 of the former Corporate Tax Act and distributes such income to its members, the method of imposing taxation on the pertinent income and the standard of determining whether the organization is a foreign corporation

[4] Whether the person who pays the domestic source dividend income is liable to withhold the corporate tax on the basis of the actual person to whom the income actually accrues after investigating whether there is a separate person to whom the income actually accrues (affirmative in principle), and whether the person who pays the domestic source dividend income is liable to withhold the corporate tax on the basis of the actual person to whom the income actually accrues even if it was not known that there is another person to whom the income actually accrues through faithfully investigating and securing materials

[5] The meaning of “person acting as a partner” under the proviso of Article 3(1)(b)(ii) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment

[1] The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes, in cases where there is a separate person to whom the income, profit, property, transaction, etc., belongs differently from the person to whom such income, profit, etc., belongs, the nominal owner of the property is not the person to whom such income, etc., belongs, but the person to whom such income, etc., belongs is the person to whom such income, etc., actually controls and manages the property through the control, etc. over the nominal owner, and where 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 been reverted to the person to whom the property is substantially controlled and managed, and the person to whom such income, etc., is the person to whom such income,

[2] The case affirming the judgment below holding that where a partnership-type private equity fund established under the Belgium Act and invested by investors of the United States as limited liability company Gap et al. with limited liability company Gap et al. was acquired as purchaser Eul corporation incorporated under the Belgium Act (hereinafter "Belgium") and Byung bank shares were distributed to Eul corporation several times under the condition that Byung bank shares were held by Eul corporation and Eul corporation were held as an administrator of Eul corporation, and the company paid the remaining balance after paying the limited tax rate of 15% pursuant to Article 10 (2) of the Convention between the Republic of Korea and Belgium for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income between the Republic of Korea and Belgium, and the tax authority denied the application of the limited tax rate of the above treaty and imposed corporate tax on the dividend income accrued from the above dividends (hereinafter "dividend income"), and thus, it can be deemed that the corporation was subject to the disposition of tax withholding and notification as to the above corporation's dividend income accrued to the pertinent corporation under the name of Belgium corporation.

[3] In a case where an unincorporated association, foundation, or other foreign organization acquires domestic source income under Article 119 of the former Income Tax Act (amended by Act No. 11611, Jan. 1, 2013) or Article 93 of the former Corporate Tax Act (amended by Act No. 11607, Jan. 1, 2013; hereinafter the same) and distributes it to its members, if it can be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable for tax payment and shall be subject to corporate tax on domestic source income. If it cannot be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable for tax payment and shall be subject to income tax or corporate tax on the income distributed to each of its members, depending on its member’s status. In this context, whether the organization 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 of its members under Korean judicial (judicial) in light of the content and substance of the country established.

[4] The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes applies to withholding tax on domestic source income under Article 98(1) of the former Corporate Tax Act (amended by Act No. 11607, Jan. 1, 2013). Thus, barring any special circumstance, a person who pays domestic source income is obligated to withhold corporate tax on the income based on the actual person to whom the income actually accrues, after investigating whether there is a person to whom the income substantially accrues, different from the nominal owner, barring any special circumstance. However, the person who pays domestic source income bears the duty of withholding taxes upon public interest requests, such as securing tax revenue early and promoting tax collection efficiency, while the person who pays tax on the income does not have the authority of investigation, such as the right of questioning and inspection, which is granted by the tax authority. In light of the above, even if the person who pays domestic source income is faithfully investigated in the course of transaction or payment of income, it cannot be deemed that the person to whom the income substantially

[5] Article 12(1) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Treaty”) provides that “The dividend received from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by the two Contracting States.” In addition, Article 3(1)(b) provides that “the term “resident of the United States” means the following: (i) the term “U.S. corporation” is defined in subparagraph (ii); and (ii) the term “other person residing in the United States (excluding a corporation or any organization treated as a corporation under the laws of the United States) for the purposes of U.S. tax purposes; Provided, That in the case of a person acting as a partner or a trustee, income generated by such a person shall be limited to the scope that the

In light of the language, structure, etc. of the proviso of Article 3(1)(b)(ii) of the Korea-U.S. Tax Treaty, the term “person acting as a partner” in this context shall be deemed to mean an organization liable for tax in the United States with respect to the income derived from its activities as a constituent member under the U.S. tax law, and the term “only to the extent that the income derived from such person is subject to the U.S. tax as the income of a resident” means that such an organization is treated as a resident of the United States under the Korea-U.S. Tax Treaty to the extent that the member is liable for the U.S. tax with respect to the income of the entity. In such a case, whether the member is liable for the U.S.

[1] Article 14(1) of the Framework Act on National Taxes / [2] Article 98(1) of the former Corporate Tax Act (Amended by Act No. 11607, Jan. 1, 2013); Article 10(2) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income / [3] Article 119 of the former Income Tax Act (Amended by Act No. 11611, Jan. 1, 2013); Article 93 of the former Corporate Tax Act (Amended by Act No. 11607, Jan. 1, 2013); Article 14(1) of the Framework Act on National Taxes / [4] Article 14(1) of the Framework Act on National Taxes; Article 98(1) of the former Corporate Tax Act (Amended by Act No. 11607, Jan. 1, 2013);

[1] [5] Supreme Court Decision 2015Du5134, 5141 Decided July 11, 2017 (Gong2017Ha, 1663) / [1] Supreme Court en banc Decision 2008Du8499 Decided January 19, 2012 (Gong2012Sang, 359), Supreme Court Decision 2010Du11948 Decided April 26, 2012 (Gong2012Sang, 892) / [3] Supreme Court Decision 2010Du5950 Decided January 27, 2012 (Gong2012Sang, 379), Supreme Court Decision 201Du12917 Decided September 26, 2013 / [2013Du138194 Decided April 13, 2013] Supreme Court Decision 2015Du37194 decided September 26, 2013

Korea C&T Bank (Law Firm LLC, Attorneys Yoon Sejong-ri et al., Counsel for the plaintiff-appellant)

The Head of Nam-gu Tax Office (Law Firm Namsan, Attorneys Lee Chang-soo et al., Counsel for the plaintiff-appellant

Seoul High Court Decision 2017Nu38111 decided August 16, 2017

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. Judgment on the Plaintiff’s grounds of appeal

A. Regarding ground of appeal No. 2

(1) The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes, in cases where there is a separate person to whom the income, profit, property, transaction, etc., belongs differently from the person to whom such income, profit, etc., belongs, the nominal owner of the property is not the person to whom such income, etc., belongs, but the person to whom such income, etc., actually belongs, is not the person to whom such income, etc., is to be the person to whom such income, etc., belongs. In cases where the nominal owner of the property lacks the ability to control and manage it, and there is a separate person who substantially controls and manages it 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 from the property shall be deemed to have been reverted to the person to whom the property, and the person to whom the income, etc., belongs shall be the person to whom the tax payment is made (see, e.g., Supreme Court en banc Decision 2008Du8499, Apr. 26, 2015).

(2) The lower court acknowledged the following facts in full view of the admitted evidence.

① Lone Star Fund was first established by Nonparty 1 (English name omitted) in the middle of the 1990s as a private equity fund in which financial institutions or general companies whose asset value was low and whose assets were low, purchase of non-performing loans, and real estate investment were created in the middle of the 1990s. On the completion of each investment, Lone Star Fund was created from “Lone Star Fund IV” to “Lone Star Fund IV” in the form of constituting a new fund.

② Lone Star Fund Holdings (LSSS.), L.S. L. L.S. L. L.S. (hereinafter “L.S.”) is a community corporation established by the laws of the State of L.S. to provide investment opportunities to its officers and employees within the Republic of Korea. L.S. (hereinafter “L.S.”)’s L. L.S. (hereinafter “L.S.”)’s investment partners (L.S.) and L.S. investors’ investment partners (hereinafter “L.S.) were established under the laws of the State of L.S.; L.S. (hereinafter “L.”)’s investment partners (L.S.). L.S. (L.S.)’s investment partners (excluding L.S.) are 6 L.S. investors’ investment partners (hereinafter “L.S.). L.S., Ltd.)’s investment partners (excluding L.S.).

③ Lone Star Fund has Lone Star Global Squiis (hereinafter “lsGA”) Lone Star Fund, a corporation wholly owned by Nonparty 1, for the purpose of identifying and assessing investment targets. For the purpose of managing the invested assets in each country, Nonparty 1 and the corporation under its control owns all of the equity interests, and has Hudson Loneson LALC (hereinafter “HAL”). Lone Star Fund is a company affiliated with an affiliated company, which signed a contract on the discovery and asset management of LSG, HAL and its investment targets, and is a subsidiary company established in each country for the investment and asset management, and the company’s subsidiaries in the Republic of Korea are Korea, and the company and the corporation under its control are hudson LAL C, established in each country. Lone Star Fund and HAL are Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone Star Korea’s Lone.

④ Nonparty 2, a domestic manager of Lone Star Fund IV, recommended LSG and LSP to purchase a domestic bank as an opportunity for high profits. On October 2002, Nonparty 3, a representative director of HAK, visited the foreign exchange bank and officially expressed Lone Star Fund’s investment intent. On February 10, 2003, Nonparty 3 started official acquisition work, including submitting a preliminary proposal for acquiring the foreign exchange bank to the president of the foreign exchange bank. Nonparty 2, as well as Nonparty 2, participated in negotiations for acquiring the foreign exchange bank.

⑤ On August 27, 2003, the acquisition contract for the shares of the foreign exchange bank was concluded on August 27, 2003. The purchaser of the contract was a corporation incorporated on August 21, 2003 under the laws of the Belgium (hereinafter “Belgium”). The instant top investors were in succession holding Lone Star Global Holdings Holdings (Lone Lone Star Holdings, Ltd, Ltd, L.) established in the Republic of Luxembourg, and the case was in possession of 9% shares of 9% of the equity through LB Holdings LF L. L.S. established in the Republic of Luxembourg and L.S. established in the Republic of Luxembourg.

(6) Around January 1, 2008, the Plaintiff entered into a storage service agreement with S.C. (hereinafter referred to as “instant storage agreement”) and kept 329,042,672 share (hereinafter referred to as “instant share”) from among the total outstanding shares of the foreign exchange bank owned by S.C. Around January 1, 2008, the foreign exchange bank paid a total of KRW 1,293,137,70,960 to S.A. From April 11, 2008 to July 20, 201 (hereinafter referred to as “instant dividend income”). The Plaintiff, as an administrator of S.C, paid the dividend income of KRW 1,293,137,70,960 to S.A. under the Convention between the Republic of Korea and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to the income of the instant case, the Plaintiff paid the remainder to S.C. (hereinafter referred to as “instant dividend income”).

7) On March 11, 2013, the Defendant rendered the instant disposition to rectify and notify the difference between the tax amount withheld and paid by applying the withholding tax rate of 25% or 20% under the Corporate Tax Act for each business year and the corporate tax amount withheld and paid at 103,187,781,960 (including additional tax) in total, as to the difference between the tax amount withheld and paid at 2008 or 20% under the Korea-Belgium Tax Treaty, on the ground that E was not a beneficial owner of the instant dividend income as a Do government company for the purpose of tax avoidance.

(3) On the following grounds, the lower court determined that the instant dividend income did not have been attributed to S.C. on the grounds that S. is merely an authorized company established to acquire the Belgium resident qualification in order to avoid taxation on the instant dividend income.

① At the time of the acquisition of the instant stocks, Belgium was in use by multi-national investment institutions as a means of tax reduction using the equity exemption system, capital gains non-taxation system, Korea-Belgium Tax Treaty, etc., and was classified into the OECD as a coloring national group to ensure that the OECD would comply with international tax standards.

② On August 21, 2003, before entering into the Agreement on the Purchase of the instant shares, Lone Star Fund IV established E.C. on August 21, 2003 and acquired the instant shares on August 27, 2003, with the intention to benefit from taxation exemption on stock transfer income, dividend income, etc. in accordance with the Korea-Belgium Tax Treaty.

③ Under the instant underwriting agreement and the subsequent transfer agreement, the parties involved in the instant shares are under the name of SP, but this was conducted in accordance with the order of investment and governance of Lone Star Fund IV, and the investment funds were raised from the instant top-tier investors’ funds. The practice of the instant underwriting agreement was led by Nonparty 2 and Nonparty 3, the officer of Lone Star Fund IV, the domestic asset management company of Lone Star Fund IV, and Nonparty 2, the officer of Lone Star Fund IV, and the transfer agreement was led by Nonparty 1, the general partner of LSP, the representative of LSC, the representative of Lone Star Fund IV, and Nonparty 1.

④ E.C. did not have an employee under its jurisdiction and did not pay wages, rent, fixtures, etc. which are essential for business activities. 9% of the total assets of this case were the shares of this case. The remainder was the same as the credit purchase amount, cash, etc. related to the investment company, and the address was the same as the location of Lone Star’s other Belgium-related company.

⑤ E. E.C is only used in the optimal investment structure by the instant top-tier investors, and there is no circumstance that Lone Star Fund IV did not perform any other business purpose or activity as a holding company for investment in Lone Star Fund IV, and it does not perform only the intermediate role in the process of allocating the instant dividend income to top-tier investors. Thus, E.C. does not constitute the beneficial owner of the instant dividend income.

(4) Examining the aforementioned legal principles and records, the lower court did not err in its judgment by misapprehending the legal doctrine on the requirements for determining the beneficial owner, contrary to what is alleged in the grounds of appeal, thereby failing to exhaust all necessary deliberations or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

B. Regarding ground of appeal No. 3

(1) In a case where an unincorporated association, foundation, or other foreign organization acquires domestic source income under Article 119 of the former Income Tax Act (amended by Act No. 11611, Jan. 1, 2013) or Article 93 of the former Corporate Tax Act (amended by Act No. 11607, Jan. 1, 2013; hereinafter the same) and distributes it to its members, if it can be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable to pay corporate tax on domestic source income. If it cannot be deemed a foreign corporation under the former Corporate Tax Act, the organization shall be liable to pay corporate tax on the income distributed to its members, and if it cannot be deemed a foreign corporation under the former Corporate Tax Act, the income tax or corporate tax shall be imposed on the income of its members, depending on its members’ status. In this context, as to whether the organization can be deemed a foreign corporation under the former Corporate Tax Act, the specific requirements of the foreign corporation shall be determined depending on whether it belongs to independent rights and obligations under Korean judicial (judicial).

(2) In full view of the following circumstances, the lower court determined that the instant higher-tier investors were profit-making organizations established with the purpose of obtaining the instant dividend income or acquiring high profits by transferring the instant shares by purchasing the instant shares and increasing their value by participating in the management of the foreign exchange bank, and that it constitutes a foreign corporation under the former Corporate Tax Act, and that the instant dividend income belongs to the instant higher-tier investors, on the ground that in light of the content of the laws and regulations of the establishment state and the substance of the organization, etc., it is deemed that it constitutes a separate entity independent of its members, and thus, it is reasonable to deem that it constitutes a foreign corporation under the former Corporate Tax

① Of Lone Star Fund IV’s investment structure related to the instant shares, all the other corporations located between the instant top-tier investors and SC are established by the instant top-tier investors, and it is difficult to recognize that the instant top-tier investors have been equipped with human and physical facilities.

② The instant top-tier investors are organizations established with the unique investment purpose of obtaining dividend income, etc. through the instant shares, and consisting of general partners performing daily business and limited partners with unlimited liability within the investment limit. As the instant top-tier investors were operated by lsP, they play a role in inviting final investors to recruit final investors, supplying the instant stocks, and distributing profits therefrom.

③ The six top-tier investors of the instant case were established in Austria for the purpose of opening and operating an overseas bank account without restriction on foreign exchange regulations, and may possess property and acquire and sell the subject-matter of investment, separate from the members who are legal members of Austria, and may file a lawsuit in their names in certain cases.

④ Some of the instant top-tier investors were composed of limited partners as well as partners with unlimited liability, and the investment structure was established to make investments to subordinate partners without going through the pertinent organization, which was established to cause them to be made. These organizations were established for the same purpose as the remaining top-tier investors with multiple limited partners and constituted the same phase as the investment structure.

(3) Examining the aforementioned legal principles and records, contrary to what is alleged in the grounds of appeal, the lower court did not err in its judgment by misapprehending the legal doctrine on substance over form doctrine and the standards for determining foreign corporations under the former Corporate Tax Act, thereby failing to exhaust all necessary deliberations, or by exceeding the bounds of the principle of free evaluation of evidence

C. Regarding ground of appeal No. 4

The lower court determined that the agreement between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and the promotion of international trade and investment (hereinafter “Korea-U.S. Tax Treaty”) cannot be applied with respect to the dividend income attributed to the instant upper-tier investors, other than Lone StarS, on the grounds that the said upper-tier investors’ residence country is not applicable, on the grounds that the tax treaty has not been concluded between the Republic of Korea and the Republic of Korea.

In light of the relevant legal principles and records, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the application standards of tax treaties, contrary to what is alleged in the grounds of appeal. The Supreme Court precedents cited in the grounds of appeal are different from those cited in the grounds

D. As to the grounds of appeal Nos. 1 and 5

The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes applies to withholding tax on domestic source income under Article 98(1) of the former Corporate Tax Act. Thus, barring any special circumstance, a person who pays domestic source income is obligated to withhold corporate tax on the income based on the actual person to whom the income actually accrues after investigating whether there is a separate person to whom the income actually accrues, unlike the nominal person to whom the income accrues: Provided, That a person who pays domestic source income is liable to withhold corporate tax on the request of public interest, such as securing early tax revenue and promoting tax collection efficiency, while no other investigation authority granted by tax-related Acts, such as the right of questioning and inspection, is available, even if the person who pays domestic source income is faithfully investigated in the course of transaction or paying the income amount, and the actual person to whom the income actually accrues, cannot be deemed liable to withhold corporate tax on the income based on the actual person to whom the income actually accrues (see Supreme Court Decision 2011Du3159, Apr. 11,

In light of the circumstances stated in its holding, the lower court determined that imposing an additional tax for failure to pay withholding taxes on the Plaintiff on the ground that it was difficult to find it difficult to find that the actual owner of the dividend income was not SC even though the Plaintiff faithfully investigated in the course of paying the dividend income of this case.

In light of the aforementioned legal principles and records, the above judgment below is justifiable in imposing penalty taxes on the Plaintiff, who is a withholding agent, on the premise that the withholding agent is liable to withhold taxes based on the beneficial owner. Therefore, contrary to what is alleged in the grounds of appeal, there were no errors

2. Judgment on the Defendant’s grounds of appeal

Article 12(1) of the Korea-U.S. Tax Treaty provides that “the dividend received by a resident of the other Contracting State from sources within one Contracting State may be taxed by both Contracting States.” In addition, Article 3(1)(b) provides that “the term “resident of the United States” means the following: (i) the term “resident of the United States” is defined as “a corporation of the United States; and (ii) the term “other persons (excluding corporations or organizations treated as corporations under the laws of the United States) resident in the United States for tax purposes” (excluding corporations or organizations treated as corporations under the laws of the United States), but in the case of a person acting as a partner or trustee, the income derived from such person shall be limited to the extent that the income is subject to the

In light of the language, structure, etc. of the proviso to Article 3(1)(b)(ii) of the Korea-U.S. Tax Treaty, the term “person acting as a partner” in this context shall be deemed to mean an organization liable for tax in the United States with respect to the income derived from its activities as a constituent member, etc. under the U.S. tax law, and the term “only to the extent that the income derived from such a person shall be subject to the U.S. tax as the income of a resident” means that such an organization is treated as a resident of the United States under the Korea-U.S. Tax Treaty to the extent that the member is liable for the U.S. tax (see Supreme Court Decision 2012Du1836, Jun. 26, 2014). In such cases, whether a member is liable for tax in the U.S. should be determined based on whether an abstract and comprehensive tax liability arises, rather than whether it is actually imposed (see Supreme Court Decision 2015Du5134, Jul. 11, 2017).

After finding the facts as indicated in its reasoning based on its adopted evidence, the lower court determined that the Korea-U.S. Tax Treaty applies to the portion attributable to the final investor of Lone Star E, a partner with unlimited liability and 38 limited liability (hereinafter “the instant final investor”), among the instant dividend income in each corresponding year, even though the details of the share of 4 of the final investors were partially changed before and after the instant dividend income in each corresponding year, the instant final investors including the said 4 are all U.S. residents, and it is clear that Lone Star E’s income would be distributed according to the investment shares stated in the partnership agreement. As such, it is reasonable to view that the instant final investor is a U.S. resident and is liable for tax in the United States.

Examining the record in light of the aforementioned legal principles, the lower court did not err in its judgment by misapprehending the legal doctrine regarding the interpretation of “the scope of compliance with U.S. tax” under the proviso of Article 3(1)(b)(ii) of the Korea-U.S. Tax Treaty, or by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jae-hyung (Presiding Justice)