Korea: Taxation of fees under trademark license (Supreme Court decision)
A Supreme Court decision concerning taxation of fees under trademark license
A Supreme Court decision concerning taxation of fees under trademark license
The Supreme Court held (2018doo39621) that fees paid by the taxpayer, a Korean credit card company, to a U.S.-based credit card company under a license for use of the U.S. company’s trademark on credit cards issued in Korea constituted a royalty/service fee subject to value added tax (VAT) to the extent the fees were paid in connection with Korea-based transactions. However, fees paid under the license in connection with foreign transactions must be treated as business income not subject to tax in Korea under the Korea-U.S. income tax treaty.
Summary
The taxpayer operates locally under the Credit Specialized Finance Business Act. It has a licensing agreement with a U.S.-based credit card company that does not operate in Korea to use the U.S. company's trademark on credit cards issued in Korea. Under the license, the taxpayer pays the U.S. company an issuer contribution fee with respect to Korea-based transactions and a daily issuer contribution fee with respect to foreign transactions.
The tax authority argued that the fee with respect to Korea-based transactions constituted a royalty/service fee subject to VAT because it was based on services provided in Korea (i.e., use of a payment system developed in Korea). The tax authority conceded that the fee with respect to foreign transactions was business income not subject to VAT.
The taxpayer argued that all of the fees paid to the U.S. company were for advertising, payment approval process support, and network management, and thus constituted business income not subject to VAT.
The court agreed with the tax authority that the fee with respect to the Korea-based transactions must be classified as a royalty/service fee because it was unrelated to the U.S. company's payment system. In addition, although corporate income tax generally applies to income earned with respect to the license of a trademark, because the fee with respect to the foreign transactions was business income, it was not subject to corporate income tax in Korea under the Korea-U.S. income tax treaty.
Read a December 2023 report [PDF 1 MB] prepared by the KPMG member firm in Korea
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.