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Supreme Court Decision 2014Du8896 Decided January 14, 2016【Revocation of Disposition Imposing Corporate Tax】
Magilink Pte Ltd. (“Plaintiff”), established pursuant to Singapore’s Companies Act and headquartered in Singapore, purchased corporate bonds (hereinafter “CS bonds”) issued by a Korean company from Credit Suisse’s Hong Kong branch and received redemption payment in the Republic of Korea. The Head of Yeoksam Tax Office (“Defendant”), deeming that the Plaintiff’s actual business management place was located in the Republic of Korea pursuant to Article 1 subparag. 1 of the former Corporate Tax Act, rendered a disposition imposing corporate tax. The Plaintiff asserts that the above disposition ― rendered on the assumption that the actual business management place was located in the Republic of Korea ― was unlawful by citing that: the Plaintiff, since its establishment, generated considerable revenue while offering Internet service to five-star hotels in Singapore; the Plaintiff negotiated transaction terms of the CS bonds in Hong Kong and payment was made through an offshore clearing house; the Board of Directors in fiscal year 2009 consisted of three members (i.e., a permanent resident of Singapore, a resident of the Republic of Korea, and a resident of the United States); meetings of the Board of Directors as to investing in the CS bonds took place through exchange of e-mails at home and abroad, and such investment-related decisions by the Plaintiff’s CEO were also made at home and abroad; and accounting documents pertaining to the CS bonds were kept in the Republic of Korea while other accounting documents were kept in Singapore and taxes were paid in Singapore.
【Main Issues and Holdings】
[1] Meaning and method of determining “actual business management place” prescribed under Article 1 subparags. 1 and 3 of the former Corporate Tax Act, which is one of the standards for classifying a domestic corporation and a foreign corporation / Where a corporation, in which actual business management place is based abroad, only carried out specific business activities in the Republic of Korea for a short period, whether the corporation can be deemed as having relocated the actual business management place to the Republic of Korea (negative in principle)
[2] Elements to deem that a Singapore corporation’s fixed place of business (also referred to as “permanent establishment”) is located in the Republic of Korea and that it operates the fixed place of business in the Republic of Korea through a dependent agent, and method of determining whether business activities carried out are essential and important / Where a Singapore corporation’s business activities conducted through a fixed place of business or an agent in the Republic of Korea are merely preparatory or auxiliary in nature, whether the Singapore corporation can be seen as operating a deemed permanent establishment through a fixed place of business or a dependent agent in the Republic of Korea (negative)
【Summary of Decision】
[1] Article 2(1), etc. of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that a foreign corporation in principle is liable to pay corporate tax on only income in the Republic of Korea. Pursuant to Article 1 of the same Act, “domestic corporation” is defined as “a corporation with its headquarters, main office, or actual business management place located in the Republic of Korea,” (subparag. 1) and “foreign corporation” as “an organization that has its head office or principal place of business in a foreign country in the form of a corporation (limited to such a corporation that does not have a place for actual management of its business in the Republic of Korea)” (subparag. 3).
“Actual business management place” ― one of the standards for classifying a domestic corporation and a foreign corporation ― means a place where critical management and commercial decisions are made in order for a corporation to carry out business activities. “Critical management and commercial decisions” relate to a corporation’s long-term management strategy, basic policy, finance and investment, management and disposal of key assets, core revenue generating activities, etc. A corporation’s actual business management place should be determined depending on individual cases by considering the following circumstances as a whole: the place where meetings of the Board of Directors or other equivalent decision-making bodies generally convene; the place where the chief executive officer (CEO) and other executives normally conduct business; the place where senior managers carry out responsibilities on a daily basis; and the place where accounting documents are recorded and kept. Provided, a corporation’s actual business management place needs to ensure continuity of activity or operation given that decisions are made and managerial acts are performed routinely at such a place. Therefore, where a corporation developed/finalized its overall business plan at the actual business management place based in a foreign country and only carried out specific business activities for a short period in the Republic of Korea, it cannot be easily concluded that the corporation relocated its actual business management place to the Republic of Korea unless special circumstances exist (e.g., severed connection between the corporation and the actual business management place).
[2] In order to deem that a Singapore corporation’s fixed place of business (also referred to as “permanent establishment”) is located in the Republic of Korea, an employee of the Singapore corporation or a person receiving instructions from the Singapore corporation must perform essential and important business activities ― not preparatory or auxiliary business activities ― using a building, facility, equipment, or any other permanent establishment in the Republic of Korea for which the Singapore corporation is authorized to dispose of and use. Furthermore, in order for the Singapore corporation to be deemed as operating a permanent establishment through a dependent agent in the Republic of Korea, the agent should have the authority to continuously exercise the right to conclude contracts and to dispose of/use such permanent establishment, and such exercise of authority should relate to performing essential and important (rather than preparatory or auxiliary) business activities. Whether business activities can be seen as “essential and important” must be determined by comprehensively taking account of the nature and scale of the pertinent business activity, the importance and function of such business activity within the entire scope of business, etc. Therefore, if the Singapore corporation’s business activities conducted in the Republic of Korea through a fixed place of business or an agent are merely preparatory or auxiliary in nature rather than essential and important, the Singapore corporation cannot be seen as operating a deemed permanent establishment through a fixed place of business or a dependent agent in the Republic of Korea.
【Reference Provisions】 [1] Article 1 subparags. 1 and 3 and Article 2(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010) / [2] Articles 5(1), (3) item e, (5) item (a), and 7(1) of the Convention between the Republic of Korea and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
Article 1 of the Corporate Tax Act (Definitions)
The terms used in this Act shall be defined as follows:
1. The term “domestic corporation” means a corporation with its headquarters, main office or actual business management place located in the Republic of Korea;
3. The term “foreign corporation” means an organization that has its head office or principal place of business in a foreign country in the form of a corporation that meets the standards prescribed by Presidential Decree (limited to such a corporation that does not have a place for actual management of its business in the Republic of Korea)[.]
Article 2 of the Corporate Tax Act (Tax Liability)
(1) Both of the following corporations shall be liable to pay corporate tax on any income under this Act:
1. A domestic corporation;
2. A foreign corporation which has income in the Republic of Korea.
Article 5 of the Convention between the Republic of Korea and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Permanent Establishment)
1. For the purpose of this Convention, the term “permanent establishment” means a fixed place of business in which business of the enterprise is wholly or partly carried on.
3. The term “permanent establishment” shall not be deemed to include:
(e) The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.
5. A person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of an independent status to whom paragraph 6 applies) notwithstanding he has no fixed place of business in the first-mentioned Contracting State shall be deemed to be a permanent establishment in that Contracting State if:
(a) He has, and habitually exercises an authority in the first-mentioned Contracting State to conclude contracts in the name of the enterprise[.]
Article 7 of the Convention between the Republic of Korea and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Business Profits)
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as attributable to that permanent establishment.
【Reference Case】 [2] Supreme Court Decision 2009Du19229, 19236 decided Apr. 28, 2011 (Gong2011Sang, 1066)
【Plaintiff-Appellee】 Magilink Pte Ltd. (Attorneys Kim Soo-hyeong et al., Counsel for plaintiff-appellee)
【Defendant-Appellant】 Chief of Yeoksam District Tax Office (Law Firm Sehan, Attorneys Kang Nam-gyu et al., Counsel for defendant-appellant)
【Judgment of the court below】 Seoul High Court Decision 2013Nu18584 decided May 22, 2014
【Disposition】The appeal is dismissed and the cost of appeal is assessed against the Defendant.
【Reasoning】 The grounds of appeal (to the extent of supplement in case of supplemental appellate briefs not timely filed) are examined.
1. As to the ground of appeal regarding “actual business management place”
a. Article 2(1), etc. of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; the same applies hereinafter) provides that a foreign corporation in principle is liable to pay corporate tax on only income in the Republic of Korea. Pursuant to Article 1 of the same Act, “domestic corporation” is defined as “a corporation with its headquarters, main office, or actual business management place located in the Republic of Korea,” (subparag. 1) and “foreign corporation” as “an organization that has its head office or principal place of business in a foreign country in the form of a corporation (limited to such a corporation that does not have a place for actual management of its business in the Republic of Korea)” (subparag. 3).
“Actual business management place” ― one of the standards for classifying a domestic corporation and a foreign corporation ― means a place where critical management and commercial decisions are made in order for a corporation to carry out business activities. “Critical management and commercial decisions” relate to a corporation’s long-term management strategy, basic policy, finance and investment, management and disposal of key assets, core revenue generating activities, etc. A corporation’s actual business management place should be determined depending on individual cases by considering the following circumstances as a whole: the place where meetings of the Board of Directors or other equivalent decision-making bodies generally convene; the place where the chief executive officer (CEO) and other executives normally conduct business; the place where senior managers carry out responsibilities on a daily basis; and the place where accounting documents are recorded and kept. Provided, a corporation’s actual business management place needs to ensure continuity of activity or operation given that decisions are made and managerial acts are performed routinely at such a place. Therefore, where a corporation developed/finalized its overall business plan at the actual business management place based in a foreign country and only carried out specific business activities for a short period in the Republic of Korea, it cannot be easily concluded that the corporation relocated its actual business management place to the Republic of Korea unless special circumstances exist (e.g., severed connection between the corporation and the actual business management place).
b. The lower court acknowledged the following facts: (i) The Plaintiff, established pursuant to Singapore’s Companies Act and headquartered in Singapore, purchased corporate bonds (hereinafter “CS bonds”) issued by a Korean company from Credit Suisse’s Hong Kong branch and incurred income in the fiscal year of 2009 on redemption in the Republic of Korea. (ii) The Defendant, deeming that the Plaintiff’s actual business management place was located in the Republic of Korea, rendered a disposition imposing corporate tax (hereinafter “this case’s disposition”) for the 2009 fiscal year against the Plaintiff on July 2, 2010.
Then, the lower court took into account the following points: (i) Since its establishment (March 2, 2000) to around 2008, the Plaintiff generated considerable revenue while offering Internet service to five-star hotels in Singapore. (ii) The Plaintiff negotiated transaction terms of the CS bonds in Hong Kong and payment was made through an offshore clearing house. (iii) In fiscal year 2009, the Plaintiff’s Board of Directors consisted of three members (i.e., a permanent resident of Singapore, a resident of the Republic of Korea, and a resident of the United States). Meetings of the Board of Directors as to investing in the CS bonds took place through exchange of e-mails at home and abroad, and such investment-related decisions by the Plaintiff’s CEO (“Non-Party 1”) were also made at home and abroad. (iv) Accounting documents pertaining to the CS bonds were kept in the Republic of Korea while other accounting documents were kept in Singapore and taxes were paid in Singapore. (v) From January 5 to around September 2009, the Plaintiff carried out various business activities, such as purchase/recovery of CS bonds, energy project in Kenya, and real estate investment projects in the U.S. and Singapore.
In light of the above, the lower court rejected the Defendant’s assertion that the Plaintiff should be deemed a domestic corporation on grounds that: (i) Critical management and commercial decisions in order for the Plaintiff to conduct business activities cannot be seen as having been continuously made in the Republic of Korea, solely on the fact that the purchase/recovery of the CS bonds partially took place in the Republic of Korea for a short period; and (ii) The Plaintiff cannot be seen has having relocated its actual business management place (originally based in Singapore) to the Republic of Korea by severing connections with Singapore headquarters.
c. Examining the records in light of the aforementioned legal provisions and legal principles, the above determination is justifiable and acceptable. In so doing, the lower court did not err by misapprehending legal principles as to the method of determining a corporation’s actual business management place, etc. or by exceeding the bounds of the principle of free evaluation of evidence against the principle of logic and experience, as otherwise stated in the ground of appeal.
2. As to the ground of appeal regarding “permanent establishment in the Republic of Korea”
a. The main text of Article 7(1) of the Convention between the Republic of Korea and Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Singapore Tax Treaty”) provides that “The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as attributable to that permanent establishment”; Article 5(1) of the same Tax Treaty defines “permanent establishment” as “a fixed place of business in which business of the enterprise is wholly or partly carried on,” and paragraph 3(e) provides that “[t]he term ‘permanent establishment’ shall not be deemed to include the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.”
Meanwhile, Article 5(5) of the Korea-Singapore Tax Treaty provides that “A person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of an independent status to whom paragraph (6) applies) notwithstanding he/she has no fixed place of business in the first-mentioned Contracting State shall be deemed to be a permanent establishment in that Contracting State if: (a) He/she has, and habitually exercises an authority in the first-mentioned Contracting State to conclude contracts in the name of the enterprise.”
In order to deem that a Singapore corporation’s fixed place of business (also referred to as “permanent establishment”) is located in the Republic of Korea, an employee of the Singapore corporation or a person receiving instructions from the Singapore corporation must perform essential and important business activities ― not preparatory or auxiliary business activities ― using a building, facility, equipment, or any other permanent establishment in the Republic of Korea for which the Singapore corporation is authorized to dispose of and use (see Supreme Court Decision 2009Du19229, 19236, Apr. 28, 2011).
Furthermore, in order for the Singapore corporation to be deemed as operating a permanent establishment through a dependent agent in the Republic of Korea, the agent should have the authority to continuously exercise the right to conclude contracts and to dispose of/use such permanent establishment, and such exercise of authority should relate to performing essential and important (rather than preparatory or auxiliary) business activities. Whether business activities can be seen as “essential and important” must be determined by comprehensively taking account of the nature and scale of the pertinent business activity, the importance and function of such business activity within the entire scope of business, etc. Therefore, if the Singapore corporation’s business activities conducted in the Republic of Korea through a fixed place of business or an agent are merely preparatory or auxiliary in nature rather than essential and important, the Singapore corporation cannot be seen as operating a deemed permanent establishment through a fixed place of business or a dependent agent in the Republic of Korea.
b. The lower court determined that the Plaintiff cannot be seen as operating a deemed permanent establishment, pursuant to the Korea-Singapore Tax Treaty, through a permanent establishment or a dependent agent in the Republic of Korea on the grounds following: (i) Notwithstanding the fact that Y&Y Research Co., Ltd. (a domestic corporation delegated by the Plaintiff) handled the recovery of CS bonds in the Republic of Korea and the Plaintiff’s non-registered director (“Non-Party 2”), etc. reported/disclosed matters on the recovery of CS bonds in the Republic of Korea, such activities are routine and repetitive in nature and cannot be deemed as the Plaintiff’s essential and important business activities related to CS bond investments; and (ii) The Plaintiff cannot be seen as operating a permanent establishment in the Republic of Korea or operating a deemed permanent establishment through a dependent agent in the Republic of Korea, solely based on evidence submitted by the Defendant.
c. Examining the records in light of the aforementioned legal provisions and legal principles, the above determination is justifiable and acceptable. In so doing, the lower court did not err by misapprehending legal principles as to the meaning and scope of “essential and important business activities” (an element to constitute a permanent establishment or a dependent agent under the Korea-Singapore Tax Treaty) or by exceeding the bounds of the principle of free evaluation of evidence against the principle of logic and experience, as otherwise stated in the ground of appeal.
3. Conclusion
Therefore, the appeal is dismissed and the cost of appeal is assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.
Justices Kwon Soon-il (Presiding Justice)
Kim Yong-deok
Park Poe-young (Justice in charge)
Kim Shin |
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