The Supreme Court has ruled that domestic companies with multiple overseas operations must factor in losses from one foreign country when calculating income for other foreign countries to determine their foreign tax credit limit.
The foreign tax credit system aims to alleviate double taxation by allowing companies to account for taxes paid abroad when calculating their domestic tax obligations.
Legal sources reported on Monday that the Supreme Court’s Second Division, led by Chief Justice Oh Kyung-mi, upheld a lower court’s decision on June 25 to dismiss LG Chem’s appeal against the Yeongdeungpo Tax Office regarding a corporate tax reassessment denial.
LG Chem had calculated its foreign tax credit limit by subtracting losses from its U.S. operations from income generated in other countries, including China, when paying corporate taxes for the 2018 fiscal year.
The company allocated the deduction amount based on income by country. For instance, if Country A incurred losses of 300,000, while Countries B and C generated incomes of 200,000 and 1,000,000 respectively, LG Chem would reflect losses of 200,000 and 100,000 in Countries B and C.
In August 2022, LG Chem filed for a refund of approximately 4.2 billion KRW (about 3 million USD), arguing that U.S. losses should not be deducted from foreign-source income in other countries.
The tax authority rejected LG Chem’s claim in December of that year. Subsequently, in January 2024, LG Chem initiated an administrative lawsuit against the tax authority, asserting that the foreign tax credit limit should be calculated without deducting U.S. losses from foreign-source income in other countries.
The crux of this case is whether domestic corporations with foreign operations in multiple countries should account for losses in one country when calculating income from another for the foreign tax credit limit.
The lower court ruled in favor of the tax authority, stating that if a country incurs losses, those losses must be proportionally deducted from the foreign-source income of other countries to determine the baseline foreign-source income.
The court reasoned that separating profit and loss calculations by country could result in an excessive foreign tax credit.
The lower court explained that the foreign tax credit system is designed to allow deductions only within the scope of domestic corporate tax paid to the Korean tax authority, not to provide refunds for amounts exceeding domestic corporate taxes.
The appeals court dismissed LG Chem’s argument that this ruling violated tax law, stating that the case merely clarifies existing provisions regarding the foreign tax credit limit and does not exceed the scope of the governing law.
The Supreme Court concurred, stating that under the Corporate Tax Act, foreign corporate tax deductions are only allowed within the limits of domestic corporate taxes owed on foreign-source income.
In a similar case, the Supreme Court’s Third Division, then led by Chief Justice Noh Kyung-pil, dismissed an appeal by Hyundai Engineering & Construction on June 24 challenging a corporate tax reassessment denial from the Jongno Tax Office.
A Supreme Court official noted that these two rulings could set a precedent for companies with multiple foreign operations seeking to expand deduction limits based on losses in specific countries when calculating income from other countries.