Korea: Permanent establishment found based on cost and profit sharing agreement (Tax Tribunal decision)
Taxpayer and Korean company effectively operated a joint business in Korea and thus the taxpayer had formed a PE in Korea
Taxpayer and Korean company effectively operated a joint business in Korea
The Tax Tribunal held (2017 Joong 0661) that the taxpayer had a permanent establishment (PE) in Korea by virtue of its cost and profit sharing agreement with a Korean company.
Summary
The taxpayer, an Italian limited liability company, entered into an agreement with a Korea company to develop a combined vaccine for five major pediatric diseases. Under the agreement, the taxpayer and the Korean company jointly owned the underlying technology and managed the business through an operating committee. The taxpayer and the Korean company shared both research and development (R&D) costs, and profits and losses, in a 60/40 ratio.
The tax authority determined that the taxpayer had formed a PE in Korea under the agreement, but had failed to report and pay corporate tax on Korea-source income attributable to the PE.
The tribunal agreed with the tax authority, holding that the taxpayer and the Korean company effectively operated a joint business in Korea and thus the taxpayer had formed a PE in Korea.
Read a May 2024 report prepared by the KPMG member firm in Korea
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