|
|
|
|
|
Newsletter | November 2015, Issue 3
|
|
|
|
|
|
|
Tax
|
|
|
|
Precedent and Persuasion – German Company Wins a Supreme Court Decision on Income Classification against Korean Tax Authorities
|
|
|
|
The Supreme Court recently rendered a meaningful decision in the first case in which it reviewed and held that – in the course of supplying a technologically complex plant facility – engineering service fee related to the design and drawing of a blueprint is personal services income.
|
|
|
|
The plaintiff was a German company, which supplied a plant facility for the production of coke to a Korean iron manufacturer. The German plaintiff charged the Korean iron manufacturer a separate fee for the supply of the facility, engineering services, and supervisory services. The Korean iron manufacturer then deducted withholding tax for the engineering service fee by treating it as a royalty1 under the Corporate Income Tax Law and the Korea/Germany tax treaty.
|
|
|
|
The German plaintiff had charged the Korean iron manufacturer an engineering service fee for the design of the plant facility. The entire design and drawing of the blueprint took place in Germany. Since personal services income relating to services not provided in Korea are not subject to tax in Korea, the plaintiff brought an action against the Korean tax authorities. In so doing, the German plaintiff claimed a refund of the tax, which was withheld on the basis that the fee for the engineering service was personal services income.
|
|
|
|
The Supreme Court agreed with the plaintiff, and held that the engineering service fee (i.e., consideration for the design and drawing of the blueprint) is personal services income under Article 7 of the Korea/Germany tax treaty, and should not be subject to withholding tax2. This decision will likely be applied to similar cases involving a supply of technologically complex equipment, such as machinery and automobile parts.
|
|
|
|
In successfully obtaining a favorable judgment at all levels of the judiciary, Kim & Chang served as legal counsel for the German plaintiff.
|
|
|
|
|
|
|
|
|
| 1 |
|
Under Article 93, paragraph 9, of the Corporate Income Tax Law, and Article 12 of the Korea/Germany tax treaty
|
|
| 2 |
|
Some of the Court’s reasons included: (1) Main purpose of the contract between the German plaintiff and the Korean iron manufacturer was the supply of the plant facility, and the engineering service (design and drawing of the blueprint) was an essential service in supplying the plant facility. (2) The contract’s confidentiality provision is typical of general service and sales contracts. (3) The engineering service took place for a long term (i.e., 2 years and 6 months). (4) The engineering service fee related mostly to labor cost, which is commensurate with consideration for personal services contracts. (5) The plaintiff guaranteed the performance and the result of the engineering service.
|
|
|
|
|
|
Back to Main Page
|
|
|
|
|
|
For more information, please visit our website:
|
|
|
|
|
|
|
|