The Supreme Court ruled that taxes paid by a foreign corporation with a business in Korea to its home country rather than to a third country are not eligible for foreign tax deductions under the Corporate Tax Act.
The 1st Division of the Supreme Court (Chief Justice Seo Kyung-hwan) announced on the 19th that it had confirmed the lower court ruling that the plaintiff lost in the lawsuit filed by the Bank of China against the head of the Jongro Tax Office to cancel the corporate tax imposition.
The Supreme Court said, “Korea can first exercise taxation rights on income generated in China, the plaintiff’s country of residence, and attributed to the Seoul branch of the Bank of China located in Korea.” He pointed out, “This is done in a way such as providing a tax deduction for the amount of tax paid.”
In addition, “In this case, even if there is tax paid to the country of residence on income, the tax amount cannot be considered eligible for foreign tax credit under Article 97, Paragraph 1 and Article 57, Paragraph 1, Item 1 of the old Corporate Tax Act.”
During the 2011 to 2015 fiscal years, the Seoul branch of the Bank of China deposited the funds raised by the Seoul branch in the Bank of China’s branches in China or lent them to businesses in China and received interest.
The Bank of China’s Seoul branch reported and paid corporate tax in Korea, deducting withholding tax as foreign tax paid and reporting corporate tax. This was because businesses in China had already withheld 10% of interest income from the Seoul branch of the Bank of China and paid it to the Chinese tax authorities.
Article 57, Paragraph 1, Subparagraph 1 of the old Corporate Tax Act stipulates that the corporate tax paid or to be paid to a foreign country on ‘foreign source income’ obtained by a Korean corporation from a foreign country can be deducted from the Korean corporate tax. This is to prevent double taxation, and this rule also applies to foreign corporations with a permanent establishment.
The Commissioner of the Seoul Regional Tax Office conducted a regular tax investigation on the Bank of China’s Seoul branch from January to March 2017 and imposed a total of 35.8 billion won in corporate tax for the 2011 to 2015 fiscal years.
The tax office ruled that “the income in this case is business income under the Korea-China tax treaty, so Korea has taxation rights, and the tax paid to China, the plaintiff’s country of residence, not a third country, cannot be deducted as foreign tax paid.” .
The Bank of China’s Seoul branch dissatisfied with this and filed a request for judgment with the Tax Tribunal, but when it was rejected, it filed a lawsuit. The first trial ruled in favor of the plaintiff, saying, “Cancel all corporate tax impositions.”
The court said, “Under the Korea-China tax treaty, there are no provisions restricting taxation by the country of residence on income attributable to a permanent establishment,” and “withholding tax withheld in China is not subject to foreign tax credit in Korea.” “It will work,” he decided.
In addition, “Article 97, Paragraph 1 of the former Corporate Tax Act applies mutatis mutandis to overseas-generated income attributable to the domestic business of a foreign corporation, and while allowing foreign tax deduction, the scope of the above foreign tax amount is specifically limited. “We are not doing it,” he said.
However, the second trial ruled against the plaintiff, saying, “Under the Korea-China tax treaty, it is reasonable to interpret that Korea, the country where the permanent establishment is located, has preferential taxation rights, and China, the country of residence, has the obligation to avoid double taxation.”
The Supreme Court also dismissed the appeal, finding the original judgment to be correct.
Source: Donga
Mark Jones is a world traveler and journalist for News Rebeat. With a curious mind and a love of adventure, Mark brings a unique perspective to the latest global events and provides in-depth and thought-provoking coverage of the world at large.