Korea: Sales support services subject to zero rate of VAT (Tax Tribunal decision)
Sales support services constituted business support services subject to zero rate of value added tax
The Tax Tribunal held (2018 Goohab 60053) that sales support services provided by the taxpayer were provided to the taxpayer’s parent company, rather than the parent company’s Korean permanent establishment (PE), and thus constituted business support services subject to zero rate of value added tax (VAT).
Summary
The taxpayer, a wholly owned subsidiary of a German parent company, was engaged in automobile parts engineering services and wholesale of electric tools. The taxpayer also provided various sales support services to the parent company, including research of local customers, local market trends, and customer preferences. In accordance with a request made by a local customer, the parent company granted the taxpayer rights under the sales support services agreement between them to negotiate and contract agreements on behalf of the parent company. Accordingly, the parent company registered a PE in Korea.
The taxpayer reported a zero rate of VAT for the service fees it received from the parent company under the sales support services agreement because although the agreement was in form between the taxpayer and the parent company’s Korean PE, in substance the agreement was between the taxpayer and the parent company. Although the parent company was deemed to have a PE in Korea through the grant of rights to the taxpayer, it did not have physical presence in Korea and thus its payments to the taxpayer were subject to zero rate of VAT.
The tax authority claimed, however, that the service fees were subject to 10% VAT as payments between the parent company’s Korean PE and the taxpayer for services rendered to the domestic PE.
The Tax Tribunal agreed with the taxpayer that the service fees were subject to zero rate of VAT because although the agreement was contracted with the Korean PE, the substance of the agreement was that the agreement was between the taxpayer and the parent company. Because the parent company was the actual recipient of the services, and not the Korean PE, the services were subject to zero rate of VAT as business support services provided to the parent company.
Read a January 2024 report [PDF 308 KB] prepared by the KPMG member firm in Korea