[Invest&Law] "Guarantee fees received from Chinese corporations are not interest, taxation is justified"

Hanwha Solutions Loses Corporate Tax Reassessment Lawsuit

The Supreme Court has ruled that fees received by a domestic corporation for providing payment guarantees to its Chinese subsidiary cannot be considered 'interest income' under the tax treaty between Korea and China, and therefore are excluded from tax credit eligibility.

According to the court on the 3rd, the Supreme Court Administrative Division 3 (Presiding Justice Lee Heung-gu) overturned the lower court's ruling in favor of Hanwha Solutions in a lawsuit against Namdaemun Tax Office seeking cancellation of a refusal to amend tax assessment, and remanded the case to the Seoul High Court on the 8th of last month (2021Du32248).

In 2014, Hanwha Solutions received a fee of 1,067.1 million KRW as compensation for providing a payment guarantee when its Chinese subsidiary, Hanwha Chemical Co., Ltd., obtained a loan. Hanwha Chemical regarded this fee as 'interest income' under the "Agreement between the Government of the Republic of Korea and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Korea-China Tax Treaty)" and applied a 10% withholding tax rate, paying 106.71 million KRW to the Chinese tax authorities.

Supreme Court

Hanwha Solutions requested a correction from the Korean tax authorities to refund the corporate tax already paid, based on the foreign tax credit system, since part of the tax had already been paid to the Chinese government.

The foreign tax credit system allows foreign corporations paying corporate tax in Korea to deduct the amount of tax paid abroad to prevent double taxation.

The first-instance court dismissed the plaintiff's (Hanwha Solutions) claim, but the second-instance court ruled in favor of the plaintiff.

The key issue was whether the payment guarantee fee in this case qualifies as interest income under the Korea-China tax treaty. If it qualifies as interest income, the Chinese government can tax it at 10% under the treaty, and foreign tax credit is applicable. Conversely, if it is classified as 'other income' rather than interest income, only the Korean government has taxing rights, and credit is not possible.

The Supreme Court agreed with the tax authorities' position that the payment guarantee fee should be classified as other income. The court stated, "For any income to be considered interest under the Korea-China tax treaty, the income must be compensation for the provision of funds by the recipient," and added, "Since the payment guarantee fee is merely compensation for the guarantee, it does not qualify as interest."

Reporter Hong Yoon-ji, Legal Times

This content was produced with the assistance of AI translation services.