Korea: Software installation fee is royalty subject to withholding tax under income tax treaty (Tax Tribunal decision)
A Tax Tribunal decision concerning whether software installation fee was royalty subject to withholding tax under income tax treaty
Software installation fee is royalty subject to withholding tax under income tax treaty
The Tax Tribunal held (2022 Joong 2207, 8 February 2023) that a software implementation fee paid by the taxpayer, a Korean company, to a Swiss corporation was royalty income under Article 93, Subparagraph 8 of the Corporate Tax Act, subject to withholding tax under Article 12 of the Korea-Switzerland income tax treaty.
Summary
The taxpayer was a Korean company that paid a fee to a Swiss corporation that did not have a Korean permanent establishment for implementing a software system. The taxpayer initially treated the fee as royalty income under Article 93, Subparagraph 8 of the Corporate Tax Act and withheld tax accordingly under Article 12 of the Korea-Switzerland income tax treaty. The taxpayer subsequently filed a refund request for the tax withheld, claiming that the fee was business income under Article 93, Subparagraph 5 of the Corporate Tax Act, not subject to withholding tax under Article 7 of the Korea-Switzerland income tax treaty. The tax authority rejected the taxpayer’s refund request, and the taxpayer appealed to the Tax Tribunal.
The taxpayer argued before the tribunal that the fee was business income because the taxpayer merely purchased the software from the Swiss corporation and installed the software on the “set-top box.” The transaction was simply a purchase and installation of specific parts (raw materials) rather than the receipt of know-how from the Swiss corporation as undisclosed source codes were not provided.
The tribunal rejected the taxpayer’s position for the following reasons:
- The software was not generally available to the public.
- The contract for the implementation of the software was concluded as a license and service contract.
- The taxpayer did not treat the software implementation fee as a purchase for accounting purposes.
- The taxpayer used accumulated information or know-how of the Swiss corporation.
- The implementation process and software used by the taxpayer required an authentication stage, and the software was customized to make the software more compatible with the taxpayer’s hardware.
Read a May 2023 report [PDF 415 KB] prepared by the KPMG member firm in Korea
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