The Bank of China has lost its lawsuit against South Korea’s tax authorities to cancel a 35.8 billion won (US$26.8 million) corporate tax penalty in a Supreme Court ruling in South Korea. The Supreme Court has confirmed the original ruling that the plaintiffs lost the case against the Jongno Tax Office in Seoul, the court said on Feb. 19.
The Bank of China earned interest income by depositing funds from its Seoul branch in the Jongno district of Seoul or lending them to Chinese businesses. The income went to the Seoul branch.
The bank paid corporate tax to the South Korean government, deducting the 10 percent of income withheld by the Chinese government. Under the Corporate Tax Act, when a foreign corporation pays corporate tax in Korea, it can deduct and pay the amount paid to the foreign corporation’s home country. This is called the foreign tax credit to prevent double taxation.
However, the Jongno Tax Office said, “The business income of a foreign corporation with a permanent establishment in Korea is taxable in Korea, and the tax paid to China, the plaintiff’s home country, rather than a third country, cannot be deducted as foreign taxes paid,” imposing corporate taxes of about 35.8 billion won on the Bank of China for the 2011-2015 business years. The bank did not accept the decision and filed a lawsuit.
The court ruled in favor of the bank in the first trial but the ruling was overturned in the second trial. “Based on the Korea-China tax treaty, Korea has the right to preferential taxation of income in this case as the Seoul office of the Bank of China ran its business in Korea,” the court said. “Considering the purpose of the Corporate Income Tax Act, a foreign tax credit is not allowed for income in this case.”
The Supreme Court also agreed with the first trial court and dismissed the Bank of China’s appeal. “Korea has the right to tax the income in this case as it was generated in China and went to the permanent business establishment in Korea first,” the Supreme Court said. “An adjustment of double taxation is accomplished by allowing a tax credit for the tax paid to Korea by China, the country of residence, afterwards.”
The Supreme Court explained that the ruling is the first to explicitly clarify criteria on determining whether a foreign corporation can claim a foreign tax credit under the Corporate Income Tax Act for the amount of tax on income which was earned in a resident country and paid to that country.”