Top court rules against Bank of China in foreign tax credit case

Korea’s Supreme Court ruled against the Bank of China in its case against the country’s tax authorities over a corporate tax levy of 35.8 billion won ($26.9 million).

A pedestrian stands beside a Bank of China branch in Beijing. [EPA/YONHAP]

Korea’s Supreme Court ruled against the Bank of China in its case against the country’s tax authorities over a corporate tax levy of 35.8 billion won ($26.9 million).

The top court on Jan. 25 upheld the appellate court’s ruling that dismissed the plaintiff Bank of China’s yearslong lawsuit seeking the cancellation of corporate taxes imposed by the Jongno District Office of the National Tax Service (NTS) in central Seoul.

The Bank of China, headquartered in Beijing, collected interest gains with funding raised through its Seoul office by lending the money to Chinese customers or making bank deposits in Chinese accounts. Therefore, the interest gains made through the Korean-origin funding belonged to its Seoul operation.

The Bank of China paid corporate tax on the income to the Korean authorities while deducting the 10 percent of its revenue that its Chinese office withheld, as Korea’s Corporate Tax Law allows a foreign entity to deduct the amount of corporate tax that has been paid in its home country in its tax payment under a foreign tax credit program aimed at preventing double taxation.

However, interpretations differ on whether a foreign entity’s earnings made through its permanent establishment in Korea are subject to foreign tax credits.

As a result, the local tax authorities argued that the foreign tax credit was not applicable in such cases and imposed 35.87 billion won in corporate taxes on the Bank of China’s income from 2011 to 2015, which the bank filed a lawsuit against.

While the Seoul Administrative Court initially ruled in favor of the Bank of China in May 2020, the higher court overturned the decision in 2021, ruling that local authorities have priority in taxing interest gains belonging to a permanent establishment in Korea.

The Supreme Court echoed the lower court's ruling, deciding that Korea's NTS holds priority over Chinese tax authorities in taxing the interest gains made by the Bank of China's Seoul branch in Korea.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]