Open Decision Ledger · Tax & international taxation
Allocating a foreign business establishment deficit against each country's income
Supreme Court, June 25, 2026, 2026Du30340 (judgment)
Case name: 법인세경정거부처분취소
Official text on the National Law Information Center
Question
Where a domestic corporation has foreign business establishments in two or more countries and the income of one of them is a deficit, must foreign-source income under Article 57(1)(i) of the former Corporate Tax Act be computed by allocating that deficit against each country's income in proportion to its share of total income, and does Article 4 of the Second Protocol to the Korea-China double taxation treaty confine the method and scope of the foreign tax credit?
Holding
It must. Reading the language, structure and purpose of Article 57(1)(i) of the former Corporate Tax Act and Article 94(7) of its Enforcement Decree together, the Court held that the deficit is allocated in proportion to each country's contribution to the corporation tax, so that the tax on domestic-source income is not eroded. Article 4 of the Second Protocol to the Korea-China treaty lays down the general principle that the credit must be allowed, but leaves the concrete method and scope of the credit to Korean tax law.
Summary of the holding, verbatim
2개 이상의 국외사업장을 가진 내국법인의 외국납부세액 공제한도를 정할 때, 어느 국가의 소득금액이 결손인 경우 구 법인세법 제57조 제1항 제1호에 따른 ‘국외원천소득’은 그 결손금액을 총소득금액에 대한 국가별 소득금액 비율에 따라 안분하여 국가별 소득금액에서 차감하는 방식으로 계산하여야 한다고 봄이 타당하다.
Unofficial English translation
When determining the limit on credit for foreign taxes paid of a domestic corporation having two or more foreign business sites, where the amount of income of a certain country is a loss, it is reasonable to view that the 'foreign source income' under paragraph (1), subparagraph 1 of Article 57 of the former Corporate Tax Act must be calculated by apportioning the amount of such loss in accordance with the ratio of the amount of income of each country to the total amount of income and deducting it from the amount of income of each country.
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
Elements stated Stated in the decision
구 법인세법 제57조 제1항 제1호에 따른 ‘국외원천소득’은 그 결손금액을 총소득금액에 대한 국가별 소득금액 비율에 따라 안분하여 국가별 소득금액에서 차감하는 방식으로 계산하여야 한다고 봄이 타당하다.
Unofficial English translation
It is reasonable to view that the 'foreign source income' under paragraph (1), subparagraph 1 of Article 57 of the former Corporate Tax Act must be calculated by apportioning the amount of such loss in accordance with the ratio of the amount of income of each country to the total amount of income and deducting it from the amount of income of each country.
Factors
- 2개 이상의 국외사업장을 가진 내국법인의 외국납부세액 공제한도를 정할 때
- 구 법인세법(2018. 12. 24. 법률 제16008호로 개정되기 전의 것, 이하 같다) 제57조 제1항 제1호 및 구 법인세법 시행령(2019. 2. 12. 대통령령 제29529호로 개정되기 전의 것) 제94조 제7항 등 관련 규정의 문언과 체계, 취지를 종합적으로 고려하면
- 위 제4조의 규정만으로 체약국의 의사에 따라 외국납부세액의 구체적인 공제방법이나 공제범위가 명확히 한정되어 있다고 보기 어렵고
- 구체적인 공제방법이나 공제범위 등에 관하여는 한국 세법에 따르도록 정한 것으로 보아야 한다
Unofficial English translation
• When determining the limit on credit for foreign taxes paid of a domestic corporation having two or more foreign business sites,
• Upon comprehensively considering the wording, system, and purport of the relevant provisions, including paragraph (1), subparagraph 1 of Article 57 of the former Corporate Tax Act (as in force prior to its amendment by Act No. 16008 on December 24, 2018; hereinafter the same) and paragraph (7) of Article 94 of the former Enforcement Decree of the Corporate Tax Act (as in force prior to its amendment by Presidential Decree No. 29529 on February 12, 2019),
• It is difficult to regard that the specific method of credit for foreign taxes paid or the scope of credit is clearly limited by the intent of the Contracting States by the provision of the aforesaid Article 4 alone, and
• It must be regarded that the specific method of credit or the scope of credit, etc. shall be governed by Korean tax law
Relation to precedent
Follows earlier decisions Stated in the decision
대법원 2024. 1. 11. 선고 2023두44634 판결(공2024상, 386)
Unofficial English translation
Supreme Court Decision 2023Du44634 rendered January 11, 2024 (Gong 2024 Sang, 386)
Decisions referred to
[2] 대법원 2024. 1. 11. 선고 2023두44634 판결(공2024상, 386)
Burden of proof
Not addressed Not in the decision
Open question and revisit condition
Where the income of more than one country is a deficit, or where a country's deficit is larger than the income of the remaining countries, may the same proportional allocation still be applied?
An amendment to Article 57(1) of the Corporation Tax Act or to Article 94(7) of its Enforcement Decree on the treatment of a foreign business establishment deficit would call for this entry to be read again. So would a decision of the Supreme Court that reads Article 4 of the Second Protocol to the Korea-China treaty differently from Supreme Court Decision 2023Du44634.
Cross-family AI independent reading & axis check
8 of 8 axes matched GPT-6 Astra (OpenAI, codex CLI) · 2026-10-24
A reader from another model family (GPT-6 Astra), given the official text but not the primary reading, agreed on all 8 axes.
Raw 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 16 January 2026 (2025Nu5939), held that the plaintiff's deficit at its United States establishment had to be allocated against the income of Korea, China and the other countries in proportion to each country's share of total income, so that the Commissioner's refusal of the refund request was lawful. It also rejected the claim that the Korea-China treaty had been breached, reasoning that Article 4 of the Second Protocol adopted the credit method but left the calculation of the limit to Korean law, and that Article 23B of the OECD Model Tax Convention says nothing about whether a deficit in one country is reflected in another country's foreign-source income.
Supreme Court standard: The Supreme Court found no error in either holding. The court below had not misread the language, structure and purpose of Article 57(1)(i) of the former Corporate Tax Act or of Article 94(7) of its Enforcement Decree, nor the principle of legality in taxation. It had also correctly construed Article 4 of the Second Protocol to the Korea-China treaty, and the Justices unanimously dismissed the appeal with costs on the plaintiff.
Distinguishing conditions
- A domestic corporation whose foreign business establishments lie in only one country, since the allocation rule was stated for corporations with establishments in two or more countries.
- A corporation that chose the expense-inclusion method under Article 57(1) of the Corporate Tax Act rather than the foreign tax credit, since the credit limit was the subject of the rule.
- A double taxation treaty whose protocol itself fixes the concrete method or scope of the credit, since the Court read the Korea-China Second Protocol as leaving those points to Korean tax law only after weighing its content, context, subject and purpose.
Record verification notes
Confirm which version of the Corporation Tax Act and its Enforcement Decree governed the business year in issue: the decision applied the Act as it stood before the amendment by Act No. 16008 of 24 December 2018 and the Decree as it stood before the amendment by Presidential Decree No. 29529 of 12 February 2019. Then check whether the taxpayer in fact elected the credit method rather than the expense-inclusion method, and match the treaty relied on with Article 4 of the Second Protocol rather than Article 23(1) of the 1994 treaty, which that article replaced.
From the official text
Points at issue
[1] 2개 이상의 국외사업장을 가진 내국법인의 외국납부세액 공제한도를 정할 때 어느 국가의 소득금액이 결손인 경우, 구 법인세법 제57조 제1항 제1호에 따른 ‘국외원천소득’을 계산하는 방식 [2] 대한민국 정부와 중화인민공화국 정부 간의 소득에 대한 조세의 이중과세회피와 탈세방지를 위한 협정의 제2의정서 제4조는 한국 거주자에 대한 이중과세를 방지하는 방법으로 외국납부세액의 세액공제를 허용하여야 한다는 일반원칙을 정하면서도, 구체적인 공제방법이나 공제범위 등에 관하여는 한국 세법에 따르도록 정한 것인지 여부(적극)
Unofficial English translation
[1] The method of calculating 'foreign source income' under paragraph (1), subparagraph 1 of Article 57 of the former Corporate Tax Act, where the amount of income of a certain country is a loss, when determining the limit on credit for foreign taxes paid of a domestic corporation having two or more foreign business sites [2] Whether Article 4 of the Second Protocol to the Agreement between the Government of the Republic of Korea and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income establishes the general principle that a tax credit for foreign taxes paid shall be allowed as the method of preventing double taxation on Korean residents, while providing that the specific method of credit or the scope of credit, etc. shall be governed by Korean tax law (affirmative)
Summary of the holding
[1] 구 법인세법(2018. 12. 24. 법률 제16008호로 개정되기 전의 것, 이하 같다) 제57조 제1항 제1호 및 구 법인세법 시행령(2019. 2. 12. 대통령령 제29529호로 개정되기 전의 것) 제94조 제7항 등 관련 규정의 문언과 체계, 취지를 종합적으로 고려하면, 2개 이상의 국외사업장을 가진 내국법인의 외국납부세액 공제한도를 정할 때, 어느 국가의 소득금액이 결손인 경우 구 법인세법 제57조 제1항 제1호에 따른 ‘국외원천소득’은 그 결손금액을 총소득금액에 대한 국가별 소득금액 비율에 따라 안분하여 국가별 소득금액에서 차감하는 방식으로 계산하여야 한다고 봄이 타당하다. [2] 대한민국 정부와 중화인민공화국 정부 간의 소득에 대한 조세의 이중과세회피와 탈세방지를 위한 협정의 제2의정서 제4조의 내용과 문맥, 조약의 대상과 목적 등을 종합하면, 위 제4조의 규정만으로 체약국의 의사에 따라 외국납부세액의 구체적인 공제방법이나 공제범위가 명확히 한정되어 있다고 보기 어렵고, 위 의정서 규정은 한국 거주자에 대한 이중과세를 방지하는 방법으로 외국납부세액의 세액공제를 허용하여야 한다는 일반원칙을 정하면서도, 구체적인 공제방법이나 공제범위 등에 관하여는 한국 세법에 따르도록 정한 것으로 보아야 한다.
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
[1] 구 법인세법(2018. 12. 24. 법률 제16008호로 개정되기 전의 것) 제57조 제1항 제1호(현행 제57조 제1항 참조), 제7항(현행 제57조 제8항 참조), 구 법인세법 시행령(2019. 2. 12. 대통령령 제29529호로 개정되기 전의 것) 제94조 제7항, 제15항 / [2] 대한민국 정부와 중화인민공화국 정부 간의 소득에 대한 조세의 이중과세회피와 탈세방지를 위한 협정의 제2의정서 제4조
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