Supreme Court Rules "Overseas Branch Losses Must Be Deducted from Other Countries' Income"... LG Chem and Hyundai E&C Lose Cases

Overseas Losses Must Be Deducted Proportionally From Other Countries' Income
Supreme Court: "Prevents Erosion of Domestic Taxation Rights"

The Supreme Court has delivered its first definitive ruling that, when domestic companies with overseas branches calculate the foreign tax credit limit, losses incurred in a specific country must be allocated and deducted in proportion to the income earned in other countries.

The court flag is flying at the Supreme Court in Seocho-gu, Seoul. Photo by Yonhap News

The Supreme Court's Second Division (Presiding Justice Oh Kyung-mi) upheld the lower court's ruling against the plaintiff in the appeal filed by LG Chem seeking to reverse the decision of the Yeongdeungpo Tax Office Chief, thereby dismissing LG Chem's claim.

While determining the foreign tax credit limit for the 2018 fiscal year, LG Chem apportioned losses from its U.S. operations based on the proportion of income earned in Korea, China, and other countries, before calculating and paying corporate tax. Later, however, LG Chem claimed that the deduction of losses from a specific country should not be reflected in the income of other countries, arguing that this would increase the credit limit and filed for a tax correction seeking a refund of approximately 4.2 billion won in corporate tax.

Both the first and second instance courts sided with the tax authorities. The courts reasoned that if the losses from a specific country are not reflected in the income of other countries, it can distort the proportion of foreign-sourced income to exceed 100%, and effectively allows the loss to only be deducted from domestic income, thereby infringing on domestic taxation rights.

The Supreme Court also dismissed the appeal, stating, "If the income from a certain country is in deficit, it is reasonable to allocate and deduct the loss amount in proportion to the country-specific share of total income," and emphasized, "If losses are not deducted from the income of other countries, it results in the losses being effectively deducted only from domestic income, which undermines the purpose of the foreign tax credit system."

The Supreme Court's First Division (Presiding Justice Noh Kyung-pil) also upheld a lower court's ruling against Hyundai Engineering & Construction in a similar case involving a claim for a refund on corporate tax against the Jongno Tax Office Chief. The Supreme Court dismissed the company's appeal regarding overseas branch losses for the fiscal years 2015 to 2017, applying the same legal principle.

This content was produced with the assistance of AI translation services.