Crossing back the Rubicon? - A Thought on Whether Korea Can Tax Capital Gain Arising from a Sale of Real Property Company Shares under its Tax Treaty with the U.S.

Abstract

The OECD Model Tax Treaty has a clause that taxes gain arising from transfer of shares in a real property holding company in a way similar to that arising from transfer of real property itself. In spite of absence of such an express clause, Korea has long taxed such a gain derived by a U.S. resident provided that the relevant real property is situated in Korea. It is asserted by the Korean tax authorities that this practice is based on a mutual agreement reached between the competent authorities of Korea and the U.S. However, it seems that whether there really was such a mutual agreement as legitimates the said practice is at least arguable, and deserves closer scrutiny. This issue, which had long been ignored, was recently raised and fought over in some of the court cases where huge amount of tax revenue is at stake. This article deals with this controversial issue, and examines whether the tax assessments issued by the Korean tax authorities can be indeed justified under the Korea – U.S. Tax Treaty.