Assessability of income derived by an Australian resident company from the provision of services in South Korea

Is the income derived from the provision of services in South Korea by an Australian resident company (being incorporated in Australia) which has its central management and control in South Korea assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The income derived from the provision of services in South Korea by an Australian resident company (being incorporated in Australia) which has its central management and control in South Korea is not assessable under subsection 6-5(2) of the ITAA 1997.

The company is incorporated in Australia.

The same person is both the sole shareholder and director of the company.

The shareholder/director will be located in Korea for the period during which the services are being performed by the company in South Korea (the relevant period).

During the relevant period, all general and directors meetings including the development of corporate policies will take place in South Korea. The shareholder/director will carry out all management and other day-to-day business activities of the company in South Korea.

The services which the company is required to provide will be performed by the shareholder/director for and on behalf of the company.

The company is taxed on its worldwide income in South Korea.

Income derived from the provision of services in South Korea by a company resident in Australia is generally ordinary income under subsection 6-5(2) of the ITAA 1997.

The term 'resident' in subsection 995-1(1) of the ITAA 1997 has the same meaning as the definition of 'resident' in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). In terms of that definition, a company which has been incorporated in Australia is a resident of Australia for the purposes of the Australian domestic income tax law. If a company has been incorporated in Australia, the company continues to be regarded as an Australian resident even if the central management and control of the company is exercised outside Australia. Similarly, such a company continues to be regarded as an Australian resident for the purposes of the Australian domestic income tax law even if it is also treated as a resident of some other country. The company in this case is incorporated in Australia and therefore it is considered to be a resident of Australia.

In the present case, all general and directors meetings including the development of corporate policies take place in South Korea. The shareholder/director carries out all the management and other day-to-day business activities of the company in South Korea. Therefore, the central management and control of the company is considered to be situated in South Korea. This makes the company a resident of South Korea as well as Australia. Therefore, the company would be a dual resident as it would be considered to be a resident of both Australia and South Korea.

In determining liability to tax on income received by a dual resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited provisions).

Schedule 22 to the Agreements Act contains the convention between Australia and the Republic of Korea (the Korean Convention). The Korean Convention operates to avoid the double taxation of income received by Australian and Korean residents.

In particular, when applying the Korean Convention to a dual resident, it is necessary to consider the effect of the tie-breaker provision contained in Article 4(4) of the Korean Convention. This clause applies where the company is both a resident of Australia and South Korea and is liable to income tax on its world wide income in both Australia and South Korea. In the present case, as set out above, the company is both a resident of Australia and South Korea and is liable to taxation on its worldwide income in both countries. In these circumstances, the tie-breaker provision deems the dual resident taxpayer, for the purposes of the Korean Convention, to be a treaty resident of the country where the company's place of 'effective management' is situated. 'Effective management' has a similar meaning to 'central management and control'.

Paragraph 22 of the OECD Commentary on Article 4 of the OECD Model Tax Convention explains that the tie-breaker test attaches importance to the place where the company is actually managed.

In the present case, the same person is both the sole shareholder and director of the company. All the general and directors meetings are held in South Korea and the management decisions including those relating to the day-to-day business activities of the company are also made in South Korea.

It is considered that, for these reasons, the place of 'effective management' (which has a meaning similar to 'central management and control) of the company is situated in South Korea making the company a treaty resident of South Korea for the purposes of the Korean Convention.

Accordingly, the company is a prescribed dual resident in accordance with the definition in paragraph (a) of subsection 6(1) of the ITAA 1936.

It is therefore concluded that the income derived from the services provided in South Korea by the Australian resident company which has its central management and control in South Korea is not assessable under subsection 6-5(2) of the ITAA 1997.