NTS wins four-year legal dogfight

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NTS wins four-year legal dogfight

The National Tax Service (NTS) has finally succeeded in slapping 68 billion won in corporate taxes on a TMW Fund, a German investment company that it claims manipulated a tax loophole.

The Korean tax agency said it hopes this week’s Supreme Court ruling, four years in the making, will act as a warning to other foreign investors planning on manipulating tax laws.

The dispute between the Korean tax agency and TMW Fund dates back to 2003 when TMW Hansol, a company created by the fund, created a limited company, Tiger Securitization Specialty. Tiger purchased a building in Yeoksam, which is located in the heart of the posh Gangnam, southern Seoul, in 2003.

Tiger later paid TMW Hansol 302 billion won, which is the rent it earned from the building’s tenant between 2006 and 2008, in the form of a dividend.

TMW Hansol paid 13.7 billion won, or 5 percent, in taxes on the dividend handout according to the preferential rate accorded by a Korea-Germany tax treaty.

But the tax agency’s Yeoksam office slapped the company with 67.9 billion won in taxes, which is the amount it would have collected when applying the normal 25-percent corporate rate, in March 2011. The tax agency said it only found out later that TMW Hansol was purposely created so that the TMW Fund could manipulate the local tax law’s loophole and profit from the low rate under the treaty.

The Korean tax office claimed that when a German investor receives a dividend from a direct investment it has made, either the 5-percent tax rate is not applied or the investor is subjected to a 15-percent or 25-percent corporate tax.

Tiger Securitization Specialty immediately requested the court force the NTS to drop the excessive taxation. In the first two rulings, the court favored the German investor, stating that TMW Hansol was an entity independent of TMW Fund and that it was therefore rational to apply the 5-percent rate.

In its final decision, however, the court ruled that TMW Hansol didn’t have the ability to govern or manage stock issuances or dividend income, and that TMW Fund was the actual managing company. As a result, the low tax rate applied according to the tax treaty between Korea and Germany does not apply to TMW Hansol.

“Some foreign investors have profited using paper companies since the financial crisis of the late 1990s,” said an NTS official. “But this ruling will send out a warning against such practices.”
BY KIM DONG-HO [ lee.hojeong@joongang.co.kr ]
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