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South Korea: Another taxpayer win at the Supreme Court on a beneficial ownership case


The Supreme Court recently held that a UK holding company was the beneficial owner of dividends it received from a Korean taxpayer for purposes of the Korea-UK income tax treaty (the treaty). The court reached its decision despite the existence of certain facts that put the taxpayer at a disadvantage when looking at earlier beneficial ownership decisions that applied the substance-over-form doctrine in a treaty context.


Jay Shim

Steve H. Oh

This decision (2015du2451, 2016 7.14.) is of significance since the Carrefour decision (2012du16466, 2014. 7. 10) has been the only major beneficial ownership case that the Supreme Court ruled in favour of the taxpayer. This latest case would serve as a meaningful precedent for foreign investors who wish to ascertain the application of a tax treaty in regards to overseas holding companies.

Case Background

A publicly traded business group based in France has substantial business presence in the UK through a chain of UK holding companies, UK intermediary holding companies and UK operating companies. The UK holding company, among other investments, has certain interest in a Korean joint venture from which it received dividends. When paying the dividends, the Korean joint venture withheld tax at a rate of 5% pursuant to the treaty. However, the Korean tax authorities took the stance that the UK company was a conduit entity and that the French parent was the beneficial owner of the dividends. Therefore, the Korea-French double tax treaty should be applied and accordingly a 15% withholding tax rate should have been imposed on the dividends.

Application of domestic substance-over-form doctrine in a treaty context

In applying the substance-over-form doctrine, the Supreme Court, further taking into account the extensive history of the investment activities undertaken by the holding company, held that the mere facts below should not be construed as definitive factors to affect the existence of discrepancy between substance and form solely arising from a tax avoidance scheme:

  • Most of the day-to-day work at the holding company level has been done by the employees of its affiliates;

  • The French parent is actively involved in a strategic decision making process in the joint venture arrangement; and

  • The treaty is more favourable than the Korea-France tax treaty.

Rather, various factors appear to have been taken into account in a comprehensive manner in applying the substance-over-form doctrine in the context of a tax treaty application, including:

  • Details of transacting party's business activities, existence of directors, employees and offices, and who has the investment decision making authority, as well as the discretionary authority over the proceeds received;

  • Duties and rights the board of directors had (or any restrictions) in connection with the Korean investment; and

  • Whether the establishment of the treaty claimant was so artificial from a commercial and business perspective that it has no independent existence as a bona-fide entity engaged in business activities other than to take advantage of a tax treaty.


While the Korean courts have denied treaty benefits of foreign companies that lacked substance with a primary focus on the materiality of physical business facilities and personnel that can handle investment decisions relating to Korean investments, the Supreme Court's decision provides further clarification of the circumstances under which taxpayers may arrange for payments to be made to a company in a treaty jurisdiction without loss of treaty relief for Korean sourced payments.

Jay Shim ( and Steve H. Oh (, Seoul

Lee & Ko

Tel: +82 2 2191 3235 and +82 2 772 4349


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