Korea: Beneficial owner of royalties determined by examination of facts and circumstances (Tax Tribunal decision)
A Tax Tribunal decision to determine actual beneficial owner of royalties paid by a Korean entity to taxpayer
Beneficial owner of royalties determined by examination of facts and circumstances
The Tax Tribunal held (2021 Suh 5598, 9 August 2023) that the facts and circumstances must be examined to determine the actual beneficial owner of royalties paid by a Korean entity to the taxpayer, the legal owner of the underlying intangible property (IP).
Summary
The taxpayer was organized by its parent company to operate a global coffee chain business. The taxpayer in October 2019 purchased the trademark rights and global coffee franchise business rights from related parties. A Korean entity in the group subsequently paid royalties to the taxpayer and withheld a 22% tax.
The taxpayer sought a refund of the withheld tax, claiming that the royalties were not subject to withholding tax under the relevant income tax treaty. The tax authority rejected the taxpayer’s request on the grounds that it was not clear who was the beneficial owner of the royalties. In particular, the tax authority argued that the taxpayer was established only to receive the royalties and all key functions and decision making were performed by the parent company. The taxpayer argued in response that it performed independent decision making regarding key business matters including holding meetings of its board that consisted of members with sufficient experience and qualifications.
The tribunal found that neither the tax authority nor the taxpayer provided substantial evidence of who was the beneficial owner of the royalties, and thus it was appropriate to perform a full examination of the facts and circumstances to determine the actual beneficial owner of the royalties and to further investigate the claims of the taxpayer.
Read a November 2023 report [PDF 1 MB] prepared by the KPMG member firm in Korea
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