In cases where a domestic corporation that operates a financial business (including a domestic place of business of a foreign corporation) borrowed money from a foreign controlling shareholder and such borrowed amount exceeds six times the amount invested in shares or equity interests by the foreign controlling shareholder, a certain amount of the interest paid in relation to the exceeding amount shall be excluded from deductible expenses of the domestic corporation and subsequently deemed to have been disposed of as a dividend of the domestic corporation pursuant to Article 67 of the Corporate Tax Act. In that sense, the interest paid in relation to the exceeding amount borrowed is regarded as a domestic source income of a foreign corporation, which is a foreign controlling shareholder.
The Convention between the Republic of Korea and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which allows dividend income and interest income to be taxed by both a residence country and a source country, defines the meaning of dividend income in Article 10(4) and the meaning of interest income in Article 11(5). Moreover, Article 28 of the former Adjustment of International Taxes Act stipulates that the relevant tax treaty preferentially applies to the classification of a domestic source income of a foreign corporation, notwithstanding Article 93 of the Corporate Tax Act.
In view of the contents, structure, etc. of the pertinent statutory provisions, where a domestic corporation, including a domestic place of business of a foreign corporation, borrowed money from a foreign controlling shareholder, the interest paid in relation to the exceeding amount borrowed is regarded as a dividend and consequentially deemed a domestic source income of a foreign controlling shareholder, thereby falling under a dividend income in principle. However, the matter of whether to acknowledge a source country’s right to tax, as dividend income, the interest paid in relation to the exceeding amount borrowed under the applicable tax treaty ought to be determined depending on the tax treaty that the Republic of Korea concluded with the country where the relevant foreign corporation (foreign controlling shareholder) is a residence. In such a case where the interest paid constitutes another type of income (e.g., interest income), rather than dividend income, under the relevant tax treaty, then that classification should be the basis for either acknowledging the source country’s right to tax or setting the applicable limited tax rate.
TP-cases-Korea-2015Du2710-1520228264005_143744