Korea: Criteria for determining beneficial owner under Austria treaty (tax tribunal decision)

Recipient a dividend that a contractual obligation to transfer dividend to its parent company was not beneficial owner of dividend

Under Austria treaty (tax tribunal decision)

The tax tribunal held that the recipient of a dividend that had a contractual obligation to transfer the dividend to its parent company was not the beneficial owner of the dividend under the Korea-Austria income tax treaty.


The taxpayer was established in Korea in 1984 in the form of a joint-stock company with the main purpose of wholesale/retail, leasing, and system integration business of computer hardware and software products within a multinational corporation. The head office where the company was located (“A US”) owned 44.11%, and a Netherlands corporation (“A Europe”) owned 55.89% of the taxpayer.

A US established A GmbH (“A Austria”) in Austria in August 2002. Through several equity transactions between the group's internal affiliates, A Austria became a wholly-owned subsidiary of A The Hague BV (“A Netherlands”), another Netherlands corporation of A, and acquired 100% shares of the taxpayer held by A US and A Europe for no charge. Meanwhile, the taxpayer changed its organizational structure to a limited company in September 2002.

The taxpayer paid a dividend of U.S. $100 million (about KRW 140 billion) to A Austria in October 2017, in accordance with the Korea-Austria income tax treaty, corporate tax was withheld by applying a limited tax rate of 5% on dividend income.

The National Tax Service conducted a corporate tax audit on the taxpayers from December 2017 to December 2018, and determined that A Austria was established for the purpose of tax avoidance, and that the beneficial owner of dividend income is A Netherlands, the parent company, not A Austria. Therefore, it was reported that the 15% limited tax rate according to the Korea-Netherlands income tax treaty, rather than the Korea-Austrian income tax treaty, were to be applied. In July 2019, the tax authority notified the taxpayer KRW 11,423,000,000 the additional corporate tax attributable to withholding tax including penalty for 2017.

Tax tribunal decision

With the introduction of the Korea-Austria tax treaty, the beneficial owner has a beneficiary right, and the owner does not have any legal or contractual obligation to transfer the received dividend income to another person. The eligibility of beneficial owner is to be judged by all circumstances such as current status of business activities and the actual use of income based on the substance over form rule specified under the Framework Act on National Taxes.

Given the facts and circumstances, A Austria was not an actual beneficial owner of the dividend income as it is believed that A Austria had a contractual obligation that the dividend must be transferred to its parent company, A Netherlands. Therefore, A Austria is not a beneficial owner in accordance with the Korea-Austria tax treaty, but rather the beneficial owner of the dividend income is judged to be A Netherlands.

Read an October 2022 report [PDF 228 KB] prepared by the KPMG member firm in Korea


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