Court: "90% Taxation on Borrowed Name Accounts Confirmed by Prosecution is Illegal"

[Asia Economy Reporter Kim Heung-soon] Financial companies that were subjected to a 90% tax rate on non-face-to-face financial assets, such as nominee accounts, confirmed through prosecution investigations, filed appeals and won in the second trial.

The Administrative Division 9 of the Seoul High Court (Presiding Judges Kim Si-cheol, Lee Kyung-hoon, Song Min-kyung) ruled on the 23rd in favor of the plaintiffs in all five cases, including income tax cancellation lawsuits and corporate tax cancellation lawsuits, filed by five commercial banks including Hana Bank and Kookmin Bank, and Shin Young Securities against the tax authorities.

According to Article 5 of the Financial Real Name Act, interest and dividend income generated from non-face-to-face financial assets are subject to a withholding tax of 90% in principle. Including local income tax, the tax rate reaches 99%.

The Financial Services Commission issued a new interpretation in 2017 regarding whether nominee accounts fall under non-face-to-face financial assets. Previously, nominee accounts opened after going through real-name verification procedures were not considered non-face-to-face financial assets.

However, in 2017, the interpretation was changed to consider accounts retroactively identified as nominee accounts through investigations by the National Tax Service or prosecution as non-face-to-face financial assets. Accordingly, the tax authorities notified a 90% tax rate, and financial companies filed lawsuits in objection.

In the first trial, rulings varied with some plaintiffs winning and others losing depending on the case, but the second trial ruled entirely in favor of the plaintiffs. The court pointed out that this tax imposition violates the principle of legality in taxation, and under the 2017 interpretation by the Financial Services Commission, even cases where a spouse manages the other spouse’s account for living expenses could be considered nominee accounts and subjected to a 90% tax rate, resulting in unreasonable outcomes.

The second trial explained, "In light of the strict interpretation principle required by the principle of legality in taxation, the financial assets in the accounts in question do not correspond to non-face-to-face financial assets, and this provision does not apply to corporate tax; therefore, this tax imposition is illegal."

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