Executive With Overseas Subsidiary Hit With 14.7 Billion Won 'Tax Bomb'... The Pitfall of the Foreign Tax Credit [Case Analysis]

A ruling has emerged holding that using an overseas subsidiary executive's business card while actually performing the work domestically, or having a mismatch between the actual place of work and the remuneration payment structure, can escalate into a tax dispute worth tens of billions of won.

The court has put the brakes on such a practice, where actual employment and the remuneration structure do not match. The court judged that the requirements for recognizing the foreign tax credit, designed to prevent double taxation, must be interpreted strictly.

The Suwon District Court recently ruled in favor of the tax authorities in a suit (2025-Guhap-61063) in which Mr. A, chairman of a Korean corporation, sought to cancel the imposition of comprehensive income tax totaling about 14.7 billion won for the 2019–2021 tax years, against the tax authorities.

Mr. A paid about 11.4 billion won in income tax locally on approximately 27 billion won in remuneration he received while acting as the substantive manager of a Chinese subsidiary.

Mr. A subsequently sought to have this fully credited as a "foreign tax amount" in the process of filing his domestic comprehensive income tax. However, the tax authorities did not accept this and additionally imposed about 14.7 billion won, and the court also judged that disposition lawful.

◆ Key Issue... The Pitfall of the Foreign Tax Credit

The significance of this ruling lies in that it first examined not simply whether tax was paid abroad, but to whom the right to tax originally belonged under the tax treaty.

The foreign tax credit is not automatically granted merely because tax was paid abroad; it presupposes whether that country held a lawful right to tax under the treaty.

The plaintiff argued that, as the substantive chief executive officer, he fell under the "member of the board of directors" defined in Article 16 of the Korea-China tax treaty, and therefore China held the right to tax.

However, the court limited the "member of the board of directors" under the tax treaty to a person literally holding lawful director qualification, and firmly ruled that it could not be expanded and interpreted as the comprehensive concept of "executive" under Korean tax law.

Article 16 of the OECD Model Tax Convention also regulates the right to tax directors' remuneration on the premise of legal director qualification, so it is difficult to receive treaty protection through substantive management involvement alone.

In the end, since the plaintiff had never been lawfully appointed as a director of the Chinese subsidiary and stayed in Korea for most of the remuneration receipt period, the remuneration was recognized as compensation for labor performed in Korea.

This ruling requires companies with overseas subsidiaries to re-examine their executive remuneration systems and tax filing procedures from scratch.

Companies must check internal risks against three criteria: △whether the position under the tax treaty matches the actual qualification △proof of the actual place of stay and place of labor provision △review of the remuneration payer and the cost attribution structure.

To receive treaty protection, one must actually hold lawful "member of the board of directors" qualification under local law, beyond de facto management involvement.

Next, to clearly prove the place of stay and place of labor provision, one must document that the work of the Korean parent company and the overseas subsidiary is separated in time and space, through board meeting minutes, immigration records, job regulations, and the like.

In addition, even if a local corporation pays the remuneration, if the Korean parent company actually bears the cost or if personnel evaluation and command/supervision are carried out in Korea, there is a high possibility that the substantive place of labor provision will be regarded as Korea.

This case was an individual income tax dispute, but depending on the form of overseas management activity, it is difficult to rule out the possibility that it could escalate into a corporate-level permanent establishment (PE) recognition or a transfer pricing taxation issue.

To avoid double taxation, one must review the applicability of the tax treaty from the stage of appointing an overseas executive, and design the remuneration payer, place of work, and director appointment procedure without mismatches.

Josailbo / Daeryun LLC Attorney Park Sung-joon

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Executive With Overseas Subsidiary Hit With 14.7 Billion Won 'Tax Bomb'... The Pitfall of the Foreign Tax Credit [Case Analysis] (Go to Link)