Conclusions diverged between personal comprehensive income taxes and corporate taxes for foreign corporations in a taxes lawsuit involving Yoon Gwan, head of BlueRun Ventures (BRV). Yoon is the husband of Koo Yeon-kyung, head of the LG Welfare Foundation and eldest daughter of Koo Bon-moo of LG Group.
The court acknowledged in both cases that Yoon exerted considerable influence over domestic investment and management activities. However, it found that the requirements differ when taxing an individual versus taxing a foreign corporation.
In the personal income tax case, Yoon's activities in Korea supported his status as a Korean resident. In the foreign corporate tax case, however, the court found it difficult to conclude that an overseas special purpose investment vehicle had a domestic business site based solely on Yoon's influence. The same person's domestic activities were at issue, but the tax prerequisites the court linked them to differed.
◇ For foreign corporations, whether there was "their own establishment" is examined
The Seoul Administrative Court's Division 5 (Presiding Judge Lee Jeong-won, Director General judge) on the 25th canceled the corporate tax assessments on Hong Kong entity BRV Lotus One Limited (BLI) and Seychelles entity Power Empire Group Limited (PEG).
BLI and PEG are not corporations directly owned by Yoon; they are overseas special purpose vehicles established by capital from BRV Fund 2012 for investment in domestic corporations. Yoon is an LP of BRV Partners LP and the largest shareholder and an officer of BRV Partners Ltd., and he exercised strong influence over investment and divestment decisions across the BRV fund group.
The Gangnam District Tax Office viewed BLI and PEG as the substantive recipients of capital gains from investments in domestic corporations and as foreign corporations with domestic business sites in Korea, imposing corporate taxes of about 8 billion won and about 980 million won, respectively. BLI realized about 22.6 billion won in capital gains by disposing of Hironic shares, and PEG realized about 19.4 billion won by disposing of Daesung Industrial shares and convertible bonds.
The court acknowledged that BLI and PEG were the substantive recipients of the capital gains, finding that the entities realizing the profits from selling shares of domestic corporations were the two foreign corporations. However, it held that being the substantive recipient alone does not permit domestic corporate taxation. To levy Korean corporate tax on a foreign corporation, a domestic business site must also be recognized.
A domestic business site is not recognized merely because some related work occurred in Korea. The foreign corporation must have in Korea a fixed place where it conducts its own business activities, and it must have the authority to use or dispose of that place. Its essential business activities must also be carried out there.
In the corporate tax case, a key issue was that BRV Korea employees handled investment execution and that Yoon exercised strong influence over major decisions such as investment and exit. The court, however, did not immediately link this to domestic business sites of BLI and PEG. It found that BRV Korea is a separate domestic corporation, has no equity relationship with the two foreign corporations, and should be seen as performing its own work under an advisory services contract.
The court recognized that Yoon exercised significant influence over investment and exit decisions, but found it could not directly treat Yoon's directions or involvement as instructions from the foreign corporations BLI and PEG. Yoon's influence was acknowledged, but it did not immediately lead to recognizing domestic business sites for the foreign corporations.
◇ For individuals, the "center of life and economic activity" is the issue
The outcome differed in the personal comprehensive income tax case. In Feb. last year, the Seoul Administrative Court's Division 5 ruled against Yoon in his suit to overturn the Gangnam District Tax Office's assessment of comprehensive income tax. The office determined that Yoon had deemed dividend income and other income for the 2016–2020 tax years and imposed a total of 12.37758 billion won in comprehensive income tax.
The issues were whether Yoon was a domestic resident under the Income Tax Act and whether he could also be regarded as a Korean resident under the Korea-U.S. tax treaty. Yoon argued he was not a domestic resident because he is a U.S. citizen and his stays in Korea were limited. The court, however, viewed Korea as the center of his life and economic activities, considering family life, days spent in Korea, asset holdings in Korea, and investment and management activities in domestic corporations.
Taxes specialist Jang Seong-du of BAE, KIM & LEE LLC said, "The standards for individuals and corporations are inherently different," noting, "For individuals, the issue is where the center of life is, and for corporations, it is where the corporation's business activities are conducted; for foreign corporations, whether there is a fixed place of business in Korea." He explained, "Even if a Korea resident establishes a corporation abroad, that does not immediately make the corporation a Korean corporation or mean it has a fixed place of business in Korea."
Jang viewed a fixed place of business and authority to use or dispose of it as crucial to recognizing a foreign corporation's domestic business site. He said, "To find that a foreign corporation used another domestic corporation's place of business, there must be circumstances showing the foreign corporation could use or dispose of the place at its discretion," adding, "Courts tend to apply stricter standards than tax authorities when recognizing fixed places of business."
In the end, the reason the two cases reached different conclusions was that the tax linkage differed. In the personal income tax case, family, stays, assets, and investment and management activities were evaluated as evidence of close ties to Korea. In the foreign corporate tax case, the separation of corporate personality, the advisory contract structure, and the lack of authority to use a domestic office worked against recognizing a domestic business site. The same domestic activities thus operated under different requirements for individual versus corporate taxation.