Is the Principle of Taxing the Beneficial Owner Excluded in the Interpretation and Application of Tax Treaties? Whether Article 27 (2) Constitutes a Special Provision

Starting Point of the Case and the Core Legal Question

Supreme Court Decision 2016Du841 rendered on June 27, 2019 (Revocation of Corporate Tax Assessment) squarely addresses the following question: may the application of the limited tax rate under a tax treaty be denied to dividends paid through two companies established by a German fund?

The Supreme Court's core conclusions may be summarised as follows. The Court held that the principle of substance over form under Article 14 (1) of the Framework Act on National Taxes applies as such to the interpretation and application of tax treaties, unless a special provision excludes it. Article 27 (2) of the Korea–Germany Tax Treaty is a provision that denies treaty benefits to abuse whose principal purpose is to create, without proper economic reasons, the appearance of satisfying the requirements for the limited tax rate by establishing rights. Whether it applies is determined by considering together the circumstances in which the rights were established, the business purpose and activities, the roles of the persons concerned, and whether they controlled and managed the income. It was established that GmbH 1 and GmbH 2 had no significant business activities other than holding shares, that all of their funds were provided by TMW, and that they passed the dividends on to TMW immediately. The Court held that the 5% rate under Article 10 (2) item (a) is not available to the nominee companies. The 15% rate under Article 10 (2) item (b) for the beneficial owner, however, cannot be denied, because it is difficult to regard its application as having been the principal purpose. The disposition reads: "All appeals are dismissed. Each party shall bear its own costs of appeal." The judgment's method of determination is comprehensive consideration (following existing precedent).

This analysis follows the structure of the issues and the criteria for determination shown in the public judgment, and examines why the Supreme Court upheld the conclusion of the court below.

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center

Structure of the Issues Set by the Holdings and Referenced Provisions

The framework of the holdings as set out in the judgment is as follows. [1] Whether the principle of taxing the beneficial owner under Article 14 (1) of the Framework Act on National Taxes applies as such to the interpretation and application of tax treaties (affirmative, in principle) / Whether Article 27 (2) of the 'Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital' constitutes a special provision excluding the principle of substance over form in the interpretation and application of that treaty (negative), and the criteria for determining whether, pursuant to that provision, the limitations prescribed in Articles 10 (2), 11 (2), 12 (2) and 21 of the same treaty apply [2] The case in which German Company A established German Company B and German Company C and caused them to acquire 50% each of all the issued shares of Company D. Company D then withheld corporate tax on the dividends it paid to Company B and Company C by applying the limited tax rate of 5% under Article 10 (2) item (a) of the 'Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital', and paid the tax to the tax authority. The tax authority excluded the application of that treaty, applied the 25% rate under the former Corporate Tax Act, and corrected and notified Company D of the withheld corporate tax for the relevant business year. The Court held that, in light of all the circumstances, the application of the 15% limited tax rate could not be denied to Company A on the ground of Article 27 (2) of that treaty.

The referenced provisions to be read together in this case are: [1] Articles 10 (2), 11 (2), 12 (2), 21, 27 (1) item (a) and 27 (2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, and Article 14 (1) of the Framework Act on National Taxes; [2] Article 10 (2) items (a) and (b) and Article 27 (2) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, and Article 93 subparagraph 2 and Article 98 (1) subparagraph 3 of the former Corporate Tax Act (before its amendment by Act No. 9267 on December 26, 2008) (see current Article 98 (1) subparagraph 2). The first step is to separate the constituent elements or the requirements for the arising of rights laid down by the text of the provisions. One must ask how far they fall within the domain of statutory interpretation, and where the domain of fact-finding in the individual case begins.

In relation to prior precedent, this judgment follows existing case law. Read alongside the referenced precedents ([1] Supreme Court en banc Decision 2008Du8499 rendered on January 19, 2012 (Gong2012Sang, 359) and Supreme Court Decision 2010Du11948 rendered on April 26, 2012 (Gong2012Sang, 892)), it shows how the Court kept the outer bounds of the existing legal principles while rearranging the factual elements of the specific case.

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center

Analysis of the Summary of Judgment and the Key Holdings of the Supreme Court

The core of the summary of judgment set out by the Supreme Court is as follows. [1] The Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (hereinafter the 'Korea–Germany Tax Treaty') does not exclude the application of provisions to prevent tax evasion or tax avoidance under the domestic law of a Contracting State, insofar as those provisions are consistent with the principles contained in the Korea–Germany Tax Treaty [Article 27 (1) item (a) of the Korea–Germany Tax Treaty]. Further, where the principal purpose of the persons concerned is to take advantage of Articles 10, 11, 12 and 21 by establishing or assigning rights such as shares without proper economic reasons for the operation of the relevant business, the limitations prescribed in Articles 10 (2), 11 (2), 12 (2) and 21 of the Korea–Germany Tax Treaty do not apply (Article 27 (2) of the Korea–Germany Tax Treaty). This provision is intended to address treaty abuse whose principal purpose is to reduce taxes unjustly by establishing or assigning rights such as shares, without proper economic reasons for the operation of the relevant business, so as to create the appearance of satisfying the requirements for the limited tax rates prescribed in Articles 10, 11, 12 and 21 of the Korea–Germany Tax Treaty. It provides that the limited tax rates, which may be described as a benefit under the Korea–Germany Tax Treaty, are not to be applied to such treaty abuse. Meanwhile, Article 14 (1) of the Framework Act on National Taxes lays down the principle of substance over form (the Framework Act on National Taxes before its amendment by Act No. 9911 on January 1, 2010; the statute was subsequently amended, but this part remains the same under the current statute). Under that principle, where income, revenue, property, transactions or other objects of taxation substantively belong to a person other than the person in whose name they are held, the person who substantively owns them, and not the nominal owner, is to be treated as the taxpayer, regardless of form or appearance. The nominal owner of property may lack the capacity to control and manage it, while another person substantively controls and manages it through, for example, control over the nominal owner. Where that gap between name and substance arises from a purpose of tax avoidance, the income from the property must be regarded as belonging to the person who substantively controls and manages the property, and that person must be taxed as the taxpayer. This principle applies as such to the interpretation and application of tax treaties, which have the same effect as statutes, unless a special provision excludes it. Taking together the text, content, structure and purpose of the relevant laws described above, Article 27 (2) of the Korea–Germany Tax Treaty must not be regarded as a special provision excluding the principle of substance over form in the interpretation and application of the Korea–Germany Tax Treaty. Whether, pursuant to Article 27 (2) of the Korea–Germany Tax Treaty, the limitations prescribed in Articles 10 (2), 11 (2), 12 (2) and 21 of the same treaty apply must be determined by considering together various circumstances. These include the circumstances in which rights relating to the payment of dividends, interest, royalties or other income were established or assigned, the purpose and activities of the relevant business, the roles of the persons concerned in the operation of the business, and whether they controlled and managed the income in question. [2] German Company A established German Company B and German Company C and caused them to acquire 50% each of all the issued shares of Company D. Company D then withheld corporate tax on the dividends it paid to Company B and Company C by applying the limited tax rate of 5% under Article 10 (2) item (a) of the 'Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital' (hereinafter the 'Korea–Germany Tax Treaty'), and paid the tax to the tax authority. The tax authority excluded the application of the Korea–Germany Tax Treaty, applied the 25% rate under the former Corporate Tax Act (before its amendment by Act No. 9267 on December 26, 2008), and corrected and notified Company D of the withheld corporate tax for the relevant business year. The Court held as follows. In light of all the circumstances, Company A, the beneficial owner of the dividends, established Company B and Company C, which were merely nominal owners, and acquired the issued shares of Company D. Even so, it is difficult to regard Company A as having made the application of the 15% limited tax rate under Article 10 (2) item (b) of the Korea–Germany Tax Treaty its principal purpose, without proper economic reasons for the operation of the relevant business. Accordingly, the application of the 15% limited tax rate could not be denied to Company A on the ground of Article 27 (2) of the Korea–Germany Tax Treaty.

In particular, the passage in the judgment that directly supports the conclusion is the following: "[1] The Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital (hereinafter the 'Korea–Germany Tax Treaty') does not exclude the application of provisions to prevent tax evasion or tax avoidance under the domestic law of a Contracting State, insofar as those provisions are consistent with the principles contained in the Korea–Germany Tax Treaty [Article 27 (1) item (a) of the Korea–Germany Tax Treaty]. Further, where the principal purpose of the persons concerned is to take advantage of Articles 10, 11, 12 and 21 by establishing or assigning rights such as shares without proper economic reasons for the operation of the relevant business, the limitations prescribed in Articles 10 (2), 11 (2), 12 (2) and 21 of the Korea–Germany Tax Treaty do not apply (Article 27 (2) of the Korea–Germany Tax Treaty). This provision is intended to address treaty abuse whose principal purpose is to reduce taxes unjustly by establishing or assigning rights such as shares, without proper economic reasons for the operation of the relevant business, so as to create the appearance of satisfying the requirements for the limited tax rates prescribed in Articles 10, 11, 12 and 21 of the Korea–Germany Tax Treaty. It provides that the limited tax rates, which may be described as a benefit under the Korea–Germany Tax Treaty, are not to be applied to such treaty abuse."

This passage is not merely an abstract declaration. It serves as the reference point for confirming the legal premise on which the determination of the court below was upheld.

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center

Key Factors Identified in the Judgment and a Record Comparison Table

The table below sets out the factors the Court emphasised in Decision 2016Du841 and the role each factor played in the disposition (dismissal).

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center

Competing Readings of the Same Facts

In this case, the tax authority excluded the application of the Korea–Germany Tax Treaty, and corrected and notified the withheld corporate tax at the rate under the former Corporate Tax Act. The court below rejected, under Article 27 (2) of the Treaty, the claim that the 5% limited tax rate should be applied to the two German companies. It held, however, that the 15% limited tax rate under Article 10 (2) item (b) could be applied to TMW. Under the Supreme Court's legal principles, the question is determined by considering together various circumstances. These include the circumstances in which rights relating to the payment of dividends, interest, royalties or other income were established or assigned, the purpose and activities of the relevant business, the roles of the persons concerned in the operation of the business, and whether they controlled and managed the income in question.

Accordingly, an analysis of a similar case should not merely quote the concluding sentence. It should test, as a counter-hypothesis, how the conclusion would change if any one of the factors listed in the table above were absent.

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center

Remaining Questions and Conditions for Re-examination

A follow-up question remains after reading this judgment. Where companies are established that create an appearance, but economic reasons are also present, to what extent should treaty benefits be preserved?

It is also clear what subsequent materials or precedents would call for this analytical framework to be re-examined. It may be revisited if different facts emerge concerning the circumstances in which the rights were established, the business purpose, or control and management.

This is a research analysis prepared by comparing, as of October 21, 2026, the original text of Supreme Court Decision 2016Du841 rendered on June 27, 2019, as published by the Korea Law Information Center, with the referenced provisions. It does not substitute for the conduct of litigation by any particular party or for legal advice.

Sources for this section: Supreme Court Decision 2016Du841 rendered on June 27, 2019 — Official judgment text, Korea Law Information Center