법무법인(유한) 율촌 | Yulchon LLC

Tax Group successfully persuaded the joint session of the Tax Tribunal to rule that the corporate income tax assessment against LG Electronics is illegal because provisions on exclusion from gross income apply to dividends that a subsidiary of a Korean corporation receives from an overseas second-tier subsidiary under the Corporate Income Tax Law.

Article 18-3(1) of the former Corporate Income Tax Law Article (prior to amendment by Law No. 9267 on December 26, 2008) stipulated in principle that dividend income from a related party (i.e., dividend payor) was not to be included in gross income. However, in order to fulfill the purpose of the Monopoly Regulation and Fair Trade Act that seeks to deter indiscriminate expansion of business conglomerates, the same provision makesan exception where part of the dividends received is included in gross income if a dividend payor contributes capital to its affiliate.

In this case, LG Electronics received dividends from its subsidiaries including LG Innotek Co., Ltd. Without considering the fact that the subsidiaries contributed capital to overseas second-tier subsidiaries including LG DTW, LG Electronics excluded the dividends from its gross income, then paid its corporate income tax. Based on the premise that foreign corporations including LG DTW, to which LG Electronic's subsidiaries contributed capital, are considered affiliates under Article 18-3(1)(4) of the former Corporate Income Tax Law, the tax authority included part of the dividends in LG Electronic's gross income, and then notified LG Electronics of additional corporate income tax of approximately KRW 7 billion.

This case mainly focused on whether the overseas second-tier subsidiaries to which the dividend payors contributed capital may be considered affiliates as defined by Article 18-3(1)(4) of the former Corporate Income Tax Law. Yulchon thoroughly analyzed the legislative purpose and provisions of Article 18-3(1)(4) of the former Corporate Income Tax Law, and claimed that limitation of exclusion of dividends from gross income under Article 18-3(1)(4) does not apply to capital contributions to overseas second-tier subsidiaries. Through such argument, Yulchon successfully persuaded the joint session of the Tax Tribunal to rule that the corporate income tax assessment against LG Electronics is illegal.