Open Decision Ledger · Tax & international taxation
Interest on over-thin capitalisation as domestic-source income of a foreign head office
Supreme Court, May 12, 2022, 2018Du58332 (judgment)
No holding summary · checked against points at issue. The official text publishes no summary of the holding for this decision. The quotation and factors in this record are copied verbatim from the points at issue; the evidence for each axis is taken from the points at issue, the order and the reasons.
Case name: 소득금액변동통지취소
Official text on the National Law Information Center
Question
Where the branch in Korea of a foreign corporation carrying on financial business borrows from its overseas controlling shareholder more than six times the equity contributed in shares, is the interest on that excess domestic-source income of the foreign controlling shareholder?
Holding
Yes. The Supreme Court found no error in the reasoning of the court below that the thin capitalisation rule reaches the domestic business establishment of a foreign corporation, that the head office which substantially controls the branch is an overseas controlling shareholder, and that the interest on the amount exceeding six times the equity, recharacterised as a dividend under Article 14 of the former International Tax Adjustment Act, is domestic-source income of that head office under Article 93(ii) of the former Corporate Tax Act. It likewise found no error in holding that the interest is interest income under Article 11(4) of the Korea-Australia tax treaty and, because it was borne by the Korean branch as a permanent establishment, arises in Korea under the proviso to Article 11(6).
Points at issue, verbatim
금융업을 영위하는 내국법인의 차입금 중 국외지배주주로부터 차입한 금액이 국외지배주주가 주식 등으로 출자한 출자지분의 6배를 초과하는 경우 그 초과분에 대한 지급이자는 국외지배주주인 외국법인의 국내원천소득이 되는지 여부
Unofficial English translation
Whether, where the amount borrowed from a foreign controlling shareholder among the borrowings of a domestic corporation engaged in the financial business exceeds 6 times the equity interest contributed by the foreign controlling shareholder through investment of shares, etc., the interest paid on such excess constitutes domestic source income of the foreign corporation that is the foreign controlling shareholder
Disposition
Dismissed Stated in the decision
상고를 기각한다. 상고비용은 원고가 부담한다.
Unofficial English translation
The appeal is dismissed. The costs of the final appeal shall be borne by the plaintiff.
Form of the test
Existing test applied Read from the decision
원심판결 이유를 앞서 본 규정과 관련 법리에 비추어 살펴보면, 원심판결에 상고이유 주장과 같이 한·호주 조세조약상 이자소득의 원천지 판정 규정에 관한 법리 등을 오해하여 판결에 영향을 미친 잘못이 없다.
Unofficial English translation
If we examine the reasons for the judgment of the court below in light of the provisions reviewed above and the relevant legal principle, the judgment of the court below is not erroneous in that it misunderstood, as asserted in the grounds for final appeal, the legal principle concerning the rules for determining the source of interest income under the Korea-Australia tax treaty, etc., so as to affect the judgment.
Factors
- 금융업을 영위하는 내국법인의 차입금 중
- 국외지배주주로부터 차입한 금액이 국외지배주주가 주식 등으로 출자한 출자지분의 6배를 초과하는 경우
- 그 초과분에 대한 지급이자는
- 국외지배주주인 외국법인의 국내원천소득이 되는지 여부(적극)
Unofficial English translation
• Among the borrowings of a domestic corporation engaged in the financial business,
• where the amount borrowed from a foreign controlling shareholder exceeds 6 times the equity interest contributed by the foreign controlling shareholder through investment of shares, etc.,
• the interest paid on such excess
• constitutes domestic source income of the foreign corporation that is the foreign controlling shareholder (affirmative)
Relation to precedent
Cannot be determined Not in the decision
Decisions referred to
해당 본문 참조
Burden of proof
Not addressed Not in the decision
Open question and revisit condition
Where a foreign corporation carries on business in Korea through several permanent establishments, which establishment is taken to bear the interest for the purposes of the proviso to Article 11(6) of the Korea-Australia tax treaty?
A change to Article 22(2) or 22(3) of the International Tax Adjustment Act, to Article 49 or 50(1) of its Enforcement Decree, or to Article 93(ii)(m) of the Corporate Tax Act would require this entry to be read again, as would a revision of Article 11 of the Korea-Australia tax treaty or a later decision on the source of interest paid between a head office and its branch.
Cross-family AI independent reading & axis check
6 of 8 axes matched GPT-6 Astra (OpenAI, codex CLI) · 2026-10-25
A reader from another model family (GPT-6 Astra), given the official text but not the primary reading, agreed on 6 of the 8 axes; the readings differed on axis 4 (form of the test), axis 8 (open question and revisit condition).
Axis 4 (Form of the test): Primary “Existing test applied” vs Independent “Elements stated”
Both readings record that the judgment does not address the burden of proof, so the enumeration difference probably comes from how each reader treats the implicit allocation in the thin-capitalization analysis.
국외지배주주로부터 차입한 금액이 국외지배주주가 주식 등으로 출자한 출자지분의 6배를 초과하는 경우 그 초과분에 대한 지급이자는 국외지배주주인 외국법인의 국내원천소득이 되는지 여부(적극)Axis 8 (Open question and revisit condition): Primary “Where a foreign corporation carries on business in Korea through several permanent establishments, which establishment is taken to bear the interest for the purposes of the proviso to Article 11(6) of the Korea-Australia tax treaty?” vs Independent “How should the source of interest be determined when its economic burden is shared between the Korean permanent establishment and the foreign head office?”
The primary asks which of several permanent establishments bears the interest under the treaty proviso, while the independent reading asks how the source is fixed when the burden is split between a Korean permanent establishment and the foreign head office.
금융업을 영위하는 내국법인의 차입금 중 국외지배주주로부터 차입한 금액이 국외지배주주가 주식 등으로 출자한 출자지분의 6배를 초과하는 경우 그 초과분에 대한 지급이자는 국외지배주주인 외국법인의 국내원천소득이 되는지 여부Raw responses and comparison record: Protocol · Blind readings (JSONL) · Axis comparison (JSONL) · SHA-256 (JSON)
Lower-court contrast & scope of application
Lower-court reading vs. Supreme Court holding
Lower-court context: The Seoul High Court, in its judgment of 22 August 2018 (2015Nu70128), held that Article 14(1) of the former International Tax Adjustment Act applies the thin capitalisation rule not only to domestic corporations but also to the domestic business establishment of a foreign corporation, and that the head office of a foreign corporation which substantially controls that establishment is an overseas controlling shareholder. It held that the interest on the amount exceeding six times the equity, recharacterised as a dividend under Article 14 of the former International Tax Adjustment Act, constitutes the domestic-source income of the head office under Article 93(ii) of the former Corporate Tax Act. On the treaty it held that the interest is interest income arising from a debt within Article 11(4) of the Korea-Australia tax treaty and, being borne by the plaintiff's Korean branch as a permanent establishment, falls within the proviso to Article 11(6) and is therefore domestic-source income even though it was not allowed as a deduction.
Supreme Court standard: The Supreme Court examined both grounds of appeal and found no error. Reading the appellate reasons against the relevant provisions and the law on transactions between a head office and a branch, it held that the court below had not misread the law, and it likewise found no misreading of the rules on the source of interest income under the Korea-Australia tax treaty. The Justices unanimously dismissed the plaintiff's appeal and placed the costs of the appeal on the plaintiff.
Distinguishing conditions
- A branch whose borrowing is not from a head office which substantially controls that branch, so that the creditor falls outside the definition of overseas controlling shareholder.
- A loan amount that does not exceed six times the equity contributed in shares by the controlling shareholder, so that there is no excess on which interest is charged.
- Interest that the Korean permanent establishment does not bear, so that the proviso to Article 11(6) of the Korea-Australia tax treaty does not deem it to arise in Korea.
Record verification notes
Set the provisions applied below against the versions then in force: Article 14(1) and (2) of the former International Tax Adjustment Act as amended by Act No. 11606 of 1 January 2013, Articles 25(6) and 26 of its Enforcement Decree as amended by Presidential Decree No. 23600 of 2 February 2012, and Article 93(ii) of the former Corporate Tax Act as amended by Act No. 16008 of 24 December 2018, whose current counterparts the decision lists as Article 22(2), 22(3), 49 and 50(1) and Article 93(ii)(m). Then confirm which tax treaty governs the payment, since the reasoning turned on the wording of Article 11(4) and the proviso to Article 11(6) of the Korea-Australia tax treaty, and another treaty may be drafted differently. Finally, check the branch's own accounts for the amount borrowed from the head office, the equity contributed in shares and each business year concerned, because the notice of change in income amount covered 2007, 2008, 2009 and 2011.
From the official text
Points at issue
금융업을 영위하는 내국법인의 차입금 중 국외지배주주로부터 차입한 금액이 국외지배주주가 주식 등으로 출자한 출자지분의 6배를 초과하는 경우 그 초과분에 대한 지급이자는 국외지배주주인 외국법인의 국내원천소득이 되는지 여부(적극)
Unofficial English translation
Whether, where the amount borrowed from a foreign controlling shareholder among the borrowings of a domestic corporation engaged in the financial business exceeds 6 times the equity interest contributed by the foreign controlling shareholder through investment of shares, etc., the interest paid on such excess constitutes domestic source income of the foreign corporation that is the foreign controlling shareholder (affirmative)
Summary of the holding
The official text publishes no summary of the holding for this decision. The quotation and factors in this record are copied verbatim from the points at issue; the evidence for each axis is taken from the points at issue, the order and the reasons.
Order
상고를 기각한다. 상고비용은 원고가 부담한다.
Unofficial English translation
The appeal is dismissed. The costs of the final appeal shall be borne by the plaintiff.
Provisions referred to
구 국제조세조정에 관한 법률(2013. 1. 1. 법률 제11606호로 개정되기 전의 것) 제14조 제1항(현행 제22조 제2항 참조), 제2항(현행 제22조 제3항 참조), 구 국제조세조정에 관한 법률 시행령(2012. 2. 2. 대통령령 제23600호로 개정되기 전의 것) 제25조 제6항(현행 제49조 참조), 제26조(현행 제50조 제1항 참조), 구 법인세법(2018. 12. 24. 법률 제16008호로 개정되기 전의 것) 제93조 제2호[현행 제93조 제2호 (마)목 참조)]
Read 2026-10-25 · Cross-read 2026-10-25. All quotes matched against the official text. The Chinese-character placeholders the court used for anonymised parties are given in their Korean readings, and parenthetical Chinese-character glosses are omitted.
Every entry is published only after all quotes have been matched character by character against the official text, and audited by an independent second reading from a different model family across all eight axes. Both agreed axes and text-grounded interpretive divergences are recorded openly. The ledger is a research record, not an assessment of the court or advice on any matter.
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