Korea: Tax refund opportunities for Luxembourg SICAV entities

Korea: Tax refund opportunities for Luxembourg SICAVs

A case is pending before an appellate court in South Korea that could allow refunds of certain amounts of tax withheld on payments distributed to Luxembourg SICAVs. If the appeals are ultimately decided in favor of the SICAVs, they could be entitled to a refund of the difference between the withholding tax paid at a “standard” rate and the treaty-related rate of withholding tax. Because of the statute of limitations, SICAVs may want to consider filing claims for refunds of withholding tax for 2012 and 2013 before 31 December 2015.

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Background

The Korean Ministry of Strategy and Finance in May 2011 issued a ruling concluding that SICAVs are to be treated as holding companies under Article 28 of the then-applicable Korea-Luxembourgincome tax treaty—and thus excluded from treaty benefits.

Given this ruling, the “standard” withholding rates—22% on dividends and “general interest” payments and 15.4% on interest derived from bonds—were to be applied on Korean income distributed to Luxembourg SICAVs, instead of the “reduced” withholding tax rates (15% on dividends, 10% on dividends for shareholdings with a minimum ownership of 25%, and 10% on interest payments) under the treaty.

In 2012, the Korean tax authorities issued to four Korean custodian banks, tax assessments relating to withholding tax for the period May 2009 to May 2011, in the amounts of KRW 130 billion (approximately U.S. $118 million) for under-withheld tax on amounts distributed to Luxembourg SIVACs.

Refund claims

When the Korean custodian banks filed administrative appeals of the tax assessments, the tax authorities denied these claims. The custodian banks then filed suit before the district courts in Seoul. The courts concluded in January 2015 that the SICAVs were eligible for treaty benefits—even for the period prior to the removal of Article 28 from the Korea-Luxembourg income tax treaty (with the entry into force of a new treaty in 2013).

The tax authorities appealed, and the case is now pending before the Seoul High Court (Court of Appeal). A final decision is not expected for another two to three years, and if the decision is against the tax authorities, it is anticipated that the government would further appeal to the Supreme Court.

New treaty

Meanwhile, a revised income tax treaty between Korea and Luxembourg entered into force on 4 September 2013, and a principal change was the removal of previous Article 28 that had provided the basis for excluding SICAVs from treaty benefits for specific holding companies. Accordingly, SICAVs generally now would be able to claim treaty benefits from this point forward, provided that they are the beneficial owner of the income.

 

Read an August 2015 report [PDF 73 KB] prepared by the KPMG member firm in Luxembourg: New opportunity for SICAVs on WHT tax reclaims to be filed in South Korea

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