Executive summary

The Korean Supreme Court (the Supreme Court) recently issued a decision on whether a foreign private equity fund (the Fund) had a permanent establishment (PE) in Korea. The Supreme Court ruled that the Fund did not have a PE in Korea, where investment supporting activities were performed by the directors of the Korean subsidiaries (the Korean Advisors) of the Fund's foreign general partner (the GP).

Detailed discussion

The Supreme Court held that the GP was a foreign limited partnership and its limited partner was a nonresident individual, appointed as a director of the Korean Advisors. The Korean Advisors and its directors provided certain investment supporting services to the Fund with respect to the Fund's investments in Korean companies.

The Korean tax authorities (the tax authorities) argued that the Fund has a PE in Korea as the directors of the Korean Advisors performed important and essential activities of the Fund. Accordingly, the tax authorities assessed taxes on the Fund's Korean source income based on the statutory tax rate. The tax authorities also argued that the Fund has a PE in Korea, based on the argument that the directors should be treated as dependent agents who continuously and repeatedly exercised authority to conclude contracts on behalf of the Fund.

The Supreme Court, however, held that the Fund did not have a PE in Korea based on the following reasons:

• Important decisions on raising funds from investors investing in the shares of the Korean companies and selling the shares were all made by the GP outside of Korea.
• The activities of the directors were performed as the directors of the Korean Advisors that were separate legal entities from the Fund.
• The activities conducted by the directors could be considered to be preparatory activities that assisted the GP to make investment decisions, as well as auxiliary activities that assisted in deciding when to dispose of the assets acquired.
• Although the directors participated in negotiating and signing agreements in an acquisition of the Korean company, such activities were carried out in the capacity as the directors of the Korean Advisors and there was no evidence that the directors had continuously and repeatedly exercised the authority to conclude contracts on behalf of the Fund.

Prior to this Supreme Court decision, the activities performed by the Korean advisors of foreign funds might be treated as an essential and important part of the investment made by the foreign funds and therefore would constitute the PE of the foreign funds. However, the Supreme Court decision has clarified that such activities performed by the Korean advisors should be treated as a preparatory and auxiliary part of the investment and there is little possibility that the foreign funds will be deemed to have a PE in Korea so long as the investment decisions are made outside of Korea and the Korean advisors do not have the authority to conclude contracts continuously and repeatedly even if the foreign funds have Korean advisors.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Han Young, Seoul

• Min Yong Kwon
  min-yong.kwon@kr.ey.com
• Jin Hyun Seok
  jin-hyun.seok@kr.ey.com

Ernst & Young LLP, Korean Tax Desk, New York

• Shuck Il Cho
  shuckil.cho@ey.com

Ernst & Young LLP, Asia Pacific Business Group, New York

• Chris Finnerty
  chris.finnerty@ey.com
• Kaz Parsch
  kazuyo.parsch@ey.com
• Bee-Khun Yap
  bee-khun.yap@ey.com

Ernst & Young LLP, Asia Pacific Business Group, Houston

• Trang Martin
  trang.martin@ey.com

Ernst & Young LLP, International Tax Services, New York

• Hae-Young Kim
  haeyoung.kim@ey.com

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ATTACHMENT

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