Newsletter | December 2013
	CORPORATE
	Supreme Court Decision on PEF
	In a lawsuit involving a Cayman limited partnership (“Cayman LP”) that invested in a Korean company through a chain of holding companies, the Supreme Court of Korea recently held that the Cayman LP itself (as opposed to limited partners thereof) should be deemed as beneficial owner of the capital gains resulting from the sale of the shares in the Korean company.
	The purchaser of the shares in the Korean company (the Plaintiff of this case) initially did not withhold any tax on the capital gains when it bought the shares from a Labuan company below the Cayman LP, relying on the Korea-Malaysia Tax Treaty.  In a subsequent tax audit, tax auditors disregarded the Labuan company and all the above level entities (including the Cayman LP) as beneficial owners of the capital gains.  Information on the tax residency of the limited partners of the Cayman LP was submitted to the tax auditors and certain limited partners which are residents of countries having tax treaties with Korea were excluded from taxation on such capital gains. However, the other limited partners from countries having no such tax treaty or whose treaty with Korea do not exempt capital gains from Korean income tax were subject to capital gains tax, which was assessed on the purchaser of the shares in the form of withholding tax.  Under the relevant share purchase agreement, the purchaser could not seek reimbursement of the tax from the seller of the shares and thus, appealed the tax assessment.
	The Supreme Court’s decision is based on following grounds:
	An association, foundation or any other organization that is a for-profit organization which distributes Korean source income to its members should be treated as a taxpayer subject to corporate income tax if it can be treated as a foreign corporation pursuant to the Corporate Income Tax Law.
	Whether an organization can be treated as a foreign corporation pursuant to the Corporate Income Tax Law is based on whether an organization can be viewed as an entity with rights and obligations separate from its members from a Korean private law perspective considering the laws of the country in which the organization was established and the characteristics of the organization.
	Based on the fact that the Cayman LP (i) was established for distributing profits from a joint business; (ii) is composed of a general partner with unlimited liabilities and limited partners with limited liabilities; and (iii) participated in management of the Korean company as a controlling shareholder to increase the corporate value by appointing friendly individuals as directors, it should be considered that the Cayman LP was established with a distinct business objective.  As such, the Cayman LP cannot be viewed as a for-profit organization not having any substantive ability to control or manage the shares of the Korean company.
	The Supreme Court went on to hold that the High Court should have determined whether the Cayman LP should be treated as a taxpayer subject to corporate income tax or whether the limited partners of the Cayman LP should be treated as a taxpayer subject to personal income tax.  (The Supreme Court’s decision is read to mean that the Cayman LP should be treated as a foreign corporation.)
	Based on this decision, the case was remanded to the High Court for retry.
	The Supreme Court’s decision is not final since it ordered the case to be retried at the High Court.  Nonetheless, this case is noteworthy because the Supreme Court further clarified its previous position indirectly provided in other recent Supreme Court, that a Cayman LP itself should be treated as beneficial owner of the capital gains and as a foreign corporation.  In particular, this decision appears to have a greater significance because, unlike in previous Supreme Court cases, the taxpayer had already revealed information on the tax residency of the limited partners and the tax authorities had already applied the tax treaty based on such residency of the limited partners in the Cayman LP.
	Back to Main Page
	If you have any questions regarding this article, please contact below:
	Jong Koo Park jkpark@kimchang.com Wan Suk Kim wansuk.kim@kimchang.com
	For more information, please visit our website:
	www.kimchang.com Mergers & Acquisitions Practice Group