Kim & Chang successfully argued an appeal against a lower court ruling that an intermediate holding company could not be deemed the beneficial owner of a Korean subsidiary. The first instance court ruled that a multinational enterprise’s intermediary holding company that had received dividends from the Korean subsidiary cannot be deemed as a beneficial owner in against the tax authorities to revoke the assessment of corporate income tax. However, the Seoul High Court reversed the first instance ruling and rendered a decision in favor of the Korean subsidiary (as the taxpayer) on the ground that the intermediary holding company had been incorporated for certain business purposes other than tax evasion. The Seoul High Court’s decision became final and conclusive following the Supreme Court’s dismissal of the case without further deliberation.
In this case, the Korean subsidiary had applied a withholding tax rate of 5% pursuant to the Korea-Malta tax treaty with respect to dividends paid to the Maltese entity (as the shareholder). However, viewing the Maltese intermediary holding company as a “conduit company,” the Korean tax authorities argued that the parent company of the conduit company, a Norwegian multinational group, should instead be deemed as a beneficial owner or substantive recipient. For this reason, the tax authorities applied the Korea-Norway tax treaty and imposed a withholding tax rate of 15% on the dividends paid to the Maltese shareholder. The Korean subsidiary filed an administrative lawsuit seeking cancellation of this assessment.
Our Representation
The Supreme Court recently held that if the tax authorities wish to deny the application of favorable tax rates under a particular tax treaty, they should review, in the following order, (i) whether the recipient of the dividends corresponded to a beneficial owner; and (ii) whether the application of the tax treaty can be rejected pursuant to the “substance-over-form principle” of the Framework Act on National Taxes. Kim & Chang successfully argued that (i) the Maltese intermediary holding company has no contractual and statutory obligations to transfer dividends to its Norwegian parent company; and (ii) there was no discrepancy in form and substance in terms of income and even if there was a discrepancy, it did not arise for the purpose of tax evasion.
Specifically, Kim & Chang pointed out the following facts:
- The Norwegian multinational group to which the Plaintiff is affiliated established the intermediary holding company to comply with European fair trade rules and EU Merger Regulation in establishing a cooperative relationship, including a de facto merger, with a Swedish counterpart.
- The necessity of establishing an intermediary holding company was thoroughly reviewed based on the legal advice provided by a Norwegian law firm.
- Due to some unique circumstances regarding Norway’s tonnage tax system, the intermediary holding company had to be established outside of Norway; the group chose Malta because other group companies were incorporated there and it provides favorable treatment for shipping companies.
Further, Kim & Chang also argued that even if the Maltese company did not have sufficient human and physical resources to be an actual operating company, this cannot be the grounds for acknowledging the Maltese company was a conduit company and denying its status as a beneficial owner of dividends as it was incorporated as a pure holding company for legitimate business purposes.
Following these lines of argument, the Seoul High Court ruled that the application of the Korea-Malta tax treaty to the dividends of this case cannot be denied by the “substance-over-form principle” of the Framework Act on National Taxes. The Court made this decision despite recognizing that: (i) the establishment of the intermediary holding company resulted in lower taxes on dividends than would have been applied to the ultimate parent company, and (ii) the business-friendly environment of Malta, including its relatively lower tax rates in tax treaties, was one of the deciding factors for choosing it as the place of incorporation for the holding company.
Significance
This case marks the third court judgment issued in favor of a taxpayer represented by Kim & Chang in a dispute regarding beneficial ownership, following two Supreme Court decisions.1 This ruling is meaningful because it evidences that the Supreme Court will comprehensively take into account a company’s legitimate business purposes and the need to establish holding companies in determining beneficial ownership, rather than just focusing on differences in tax rates.