Supreme Court limits tax breaks for foreign investor dividends

The Supreme Court on Feb. 12 ruled that tax breaks for foreign investors are limited strictly to dividends generated from capital increases that have received specific government approval.

In a case involving a dispute over corporate taxation, the high court emphasized that tax laws must be interpreted exactly as written without unreasonable expansion. It stated that provisions granting special tax benefits require strict interpretation to ensure fairness.

The ruling centered on how tax exemption decisions apply when a company raises additional capital. The court found that the requirement for a formal tax exemption decision is an essential prerequisite to identify the portion of income genuinely contributed by the foreign investor. This restriction ensures that tax relief applies only to the income derived from the specific new investment approved by authorities.

This judgment stems from a lawsuit filed by a foreign-invested enterprise engaged in the display and parts manufacturing business. The plaintiff had increased its capital in February 2006 by issuing 15 million shares worth 150 billion won, with a foreign investor contributing 75 billion won for half of the new shares.

Between November 2010 and November 2012, the company paid approximately 3.05 trillion won in dividends to the foreign investor using profits earned from 2007 to 2010. The core legal question was whether these payments qualified for tax reductions under laws governing special tax treatment for foreign investment.

The court concluded that the tax reduction must be restricted to dividends received from shares acquired through the approved capital increase project. Dividends attributable to existing investments made prior to the specific exemption decision do not qualify for the benefit.