This article provides an overview of a Supreme Court decision (2021Du53054, January 17, 2022; affirmed without further review) that bears a precedential value for determining a dual resident’s tax residency status.

In this case, the plaintiff, who is a Korean citizen, started a business in Indonesia several decades ago and has since created a huge business in Indonesia.  In case a Korean citizen is treated as an Indonesian tax resident under the Korea-Indonesia Tax Treaty, the Korean tax obligations of said Korean citizen only extend to Korean-sourced income.  As such, while the plaintiff reported and paid income tax in Korea on his Korean-sourced income, he did not report any income earned outside of Korea.  The Korean tax authorities disagreed with the position taken by the plaintiff, and asserted that the plaintiff was in fact a Korean resident under the Korea-Indonesia Tax Treaty on grounds that the plaintiff maintained an address in Korea.  Accordingly, the tax authorities assessed additional income tax on the income earned outside of Korea, including Indonesia.

The plaintiff is a dual resident, i.e., a Korean resident under the Korean Personal Income Tax Law and an Indonesian resident under the Indonesian tax law.  In such a case, tie-breaker rules provided under Article 4 of the Korea-Indonesia Tax Treaty should be applied to determine the tax residency of the plaintiff.  The lower court first reviewed the “permanent home” and “centre of vital interests” standards, and determined that the plaintiff had a permanent home status in both Korea and Indonesia, and it was uncertain whether the plaintiff’s “centre of vital interests” was in Korea or Indonesia due to the ambiguity in determining the country with which the plaintiff had closer personal and economic ties.  The court clarified that the “centre of vital interests” can be determined only when there is a country to which the individual’s personal and economic relations are indisputably closer.

Accordingly, the lower court moved on to the third standard (i.e., habitual abode) and found that the plaintiff had a habitual abode in Indonesia on grounds that (i) during the period at dispute, which encompassed from 2002 to 2012, the plaintiff resided in Indonesia longer than in Korea, and (ii) the plaintiff resided in Indonesia mainly for business reasons, and his irregular and occasional visits to Korea lacked business purposes.  Thus, the lower court concluded that the plaintiff was an Indonesian resident during the period at issue under the Korea-Indonesia Tax Treaty, and cancelled the entire tax assessment made by the Korean tax authorities.  Subsequently, the Supreme Court dismissed the tax authorities’ appeal and affirmed the lower court’s decision.

Many tax treaties in addition to the Korea-Indonesia Tax Treaty also include the “habitual abode” standard which is applicable in case it is impossible to determine which country is the “centre of vital interests” of a dual resident.  However, one of the issues with this case was determining to what extent the “centre of vital interests” standard can be applied in practice to determine a dual resident’s tax residency.

This case provided some guidance on this issue by stating that “the centre of vital interests is the country to which the individual’s personal and economic relations are indisputably closer.”  This means that when the “centre of vital interests” is unclear or questionable because a number of elements comprising an individual’s personal and economic ties are scattered across the two contracting states at issue, it is reasonable to determine the country of residence based on the “habitual abode” standard.  This court decision is particularly meaningful for dual residents because where the “centre of vital interests” is unclear, the country of residence may now be determined based on the element of “habitual abode” which relies on more objective factors (i.e., the number of days spent in a certain country) compared to the “centre of vital interests” standard.  Going forward, this will provide higher legal stability and predictability on this issue.