Korea vs CJ E&M Co., Ltd., November 2018, Supreme Court Case no. 2018Du38376

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In 2011, a Korean company, CJ E&M Co., Ltd concluded a license agreement relating to the domestic distribution of Paramount films, etc. with Hungary-based entity Viacom International Hungary Kft (hereinafter “VIHâ€), which is affiliated with the global entertainment content group Viacom that owns the film producing company Paramount and music channel MTV. From around that time to December 2013, the Plaintiff paid VIH royalties amounting to roughly KRW 13.5 billion (hereinafter “pertinent royalty incomeâ€).

CJ E&M Co., Ltd did not withhold the corporate tax regarding the pertinent royalty income according to Article 12(1) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea-Hungary Tax Treatyâ€).

The Hungarian company was interposed between the Korean entertainment company and a Dutch company which previously licensed the rights to the Korean entertainment company.

The Korean Tax Authorities (a) deemed that VIH was merely a conduit company established for the purpose of tax avoidance and that the de facto beneficial owner of the pertinent royalty income was Viacom Global Netherlands BV (hereinafter “VGNâ€), the parent company of VIH based in the Netherlands; (b) applied the Convention between the Government of the Republic of Korea and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter “Korea- Netherlands Tax Treatyâ€), rather than the Korea-Hungary Tax Treaty; and (c) imposed the corporate tax withheld totaling KRW 2,391 million (including penalty tax) against the Plaintiff on May 2, 2014 and July 1, 2014, respectively (hereinafter “instant dispositionâ€).

The High Court ruled in favor of the tax authorities and held that the Hungarian company was a mere conduit used for treaty shopping purposes.

The Korean Supreme Court reversed the High Court’s decision on the grounds that beneficial ownership should not be denied by the mere fact that tax benefits were derived from the relevant tax treaty if the foreign entity was otherwise engaged in genuine business activities in line with the entity’s business purpose.

The Supreme Court decided that the Hungarian entity should be entitled to the treaty benefits because it did not bear any legal or contractual obligation to transfer the royalty income and thus should be regarded as the beneficial owner; and  it had the ability to manage and control the license rights that gave rise to the royalty income, and therefore the GAAR should not apply.

 

8-2017Du33008





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