Korea: Software fees paid to Irish affiliate treated as royalties paid to U.S. parent (Tax Tribunal decision)

A Tax Tribunal decision concerning software fees paid to Irish affiliate treated as royalties paid to U.S. parent.

Software fees paid to Irish affiliate treated as royalties paid to U.S. parent

The Tax Tribunal held (2023 Seo 7289, 23 November 2023) that software fees paid by a Korean taxpayer to an Irish affiliate were royalties paid to the taxpayer’s U.S. parent (the actual beneficial owner) subject to withholding tax under the Korea-U.S. income tax treaty.


The Korean taxpayer until 2007 paid software fees to its U.S. parent under a software distribution agreement and withheld tax at the reduced rate applicable to royalties under the Korea-U.S. income tax treaty. In 2008, the taxpayer began paying the fees to an Irish affiliate without withholding tax, treating the Irish affiliate as the beneficial owner under the Korea-Ireland income tax treaty. The tax authority determined that the U.S. parent, and not the Irish affiliate, was the beneficial owner of the royalties, and thus tax must be withheld under the Korea-U.S. treaty.

The taxpayer contested the tax authority’s determination on the grounds that the Irish affiliate operated as an Irish resident under Irish tax law and employed staff to fulfill its role as a major software supplier, providing services to affiliate companies within the group and directly engaged in significant operational activities. The taxpayer also argued that the royalties were business income (rather than royalties) because they were payment for the introduction of pre-developed off-the-shelf software, and thus do not qualify as compensation for know-how or copyrights. The taxpayer claimed that it never exercised reproduction rights, modified, or customized the software, and that the group strictly managed the source code of the software internally and the software was directly delivered to end customers through websites managed by group-affiliated companies, including the Irish affiliate.

The tax authority contended that the fees were royalties because the taxpayer provided related services with the software to enable the final consumer to use it on domestic computer systems. Also, if necessary, the taxpayer granted the final consumer the authority to replicate the program. In addition, the taxpayer was entitled under the distribution agreement to obtain the source code upon request. The tax authority also contended that the Irish affiliate was merely a conduit because it transferred most of the software fees received from foreign related parties to the U.S. parent and the U.S. parent remained the owner of the intellectual property rights.

The tribunal agreed with the tax authority, finding that the fees were royalties and that the U.S. parent was the beneficial owner because the Irish affiliate employed only a few management personnel and held only the right to sell and distribute the software and collect the consideration on behalf of the U.S. parent.

Read a February 2024 report [PDF 1 MB] prepared by the KPMG member firm in Korea


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