Under Article 39 of Korea’s Framework Act on National Taxes, unpaid taxes owed to the Korean government are enforceable against certain “ologopolistic” shareholders of respective debtor company’s shareholder. This secondary liability of shareholders is codified within the Framework Act on National Taxation. Article 39 of the Framework Act on National Taxes, specifically, notes that:
“Where the property of a corporation is not enough to pay national taxes, additional dues and disposition fees for arrears imposed upon or to be paid by the corporation, any person who falls under any of the following as of the date on which the national tax liability is established shall have the secondary tax liability for the amount of such money shortage: Provided, That in case of an oligopolistic stockholder under subparagraph 2, his/her secondary tax liability shall be limited to the amount calculated by multiplying the amount obtained by dividing the amount of such money shortage by the total number of issued stocks (excluding non-voting stocks; hereinafter in this Article the same shall apply) or the total amount of investments of the corporation by the number of stocks to which the relevant oligopolistic stockholder actually exercises the rights (excluding non-voting stocks) or the amount of investments of the oligopolistic stockholder:
2. A stockholder or one limited partner and a person prescribed by Presidential Decree from among his/her related parties, whose total amount of stocks held or investments exceeds 50/100 of the total number of outstanding stocks or investments of the juristic person concerned and who actually exercise the rights thereto (hereinafter referred to as “oligopolistic stockholder”).”
An issue, recently, arose where an “oligopolisitc shareholder” of a insolvent company was, also, insolvent and the National Tax Service of Korea (“NTS”) attempted to collect from the shareholders of oligopolisitc shareholder. The shareholder of the shareholder was a deep pocket Korean veteran’s association. Thus, the shareholders of the shareholders of the insolvent company were imposed tax by the NTS and the association appealed the decision of the NTS.
The Supreme Court of Korea in 2017NU64578 Decided Feb. 24, 2018 noted, in short, that:
“The second taxation obligation stipulated in Article 39 of the Framework Act on National Taxes is applied only to the oligopolistic shareholder of the taxpayer and cannot be extended to the oligopolistic shareholder of the first oligopolistic shareholder.
It is a stretching of interpretation that the oligopolistic shareholder of the oligopolistic shareholder is obliged to pay secondary taxation, although the Framework Act on National Taxes does not make the oligopolistic shareholder of the oligopolistic shareholder a secondary taxpayer.
The issue of exclusion of the obligation of secondary taxation through delinquent corporations . . . should be solved by the principle of real taxation according to the case.
If the unlimited secondary tax liability is recognized, there is a concern that it will not only violate the principle of self-responsibility under the Tax Law and Constitution Law, but may also misguide the application of the statute of limitations. Therefore, it is reasonable to restrict it.”
The Korean Supreme Court, thus, ruled that the extension of liability to shareholders of shareholders is not authorized by the statute, since if it is extended to shareholders of shareholder it “violates the principle of self-responsibility under the Tax Law and Constitution Law . . . [and] may also misguide the application of the statute of limitations.”
It is advisable to consider this reality when establishing a company in Korea. Often unpaid taxes may become the obligation of the shareholder of a company. Structural formalities are useful in shielding shareholders from downstream liabilities.
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