Yoon & Yang LLC said on the 29th that it won in full on appeal in a lawsuit to overturn a rejection of a corporate tax rectification claim filed by U.S. IT company A against the tax authorities, reversing the first-instance ruling.
The Administrative Division 3 of the Suwon High Court on the 28th found unlawful the tax authorities' disposition that treated payments made by a domestic smartphone manufacturer to U.S. IT company A as "royalty income," withheld tax at source, and then rejected A's corporate tax rectification claim. The appellate panel overturned the first-instance ruling that had dismissed the plaintiff's claim and ordered the cancellation of the rejection of the rectification claim.
The dispute arose when A signed a contract to integrate and provide caller identification, spam blocking, and directory search services into the native app on a domestic smartphone maker's handsets. Under the contract, the domestic company received the services from A and paid a fixed fee.
The issue was how to classify the income from the payment. The domestic company treated the payment as "royalty income" and withheld corporate tax at the 15% reduced rate under the Korea-U.S. tax treaty. A, on the other hand, filed a rectification claim, arguing the payment constituted "business income" and was not taxable in Korea because it had no permanent establishment in Korea, but the tax authorities rejected the claim, leading to the lawsuit.
The first trial found the tax authorities' disposition lawful. The first-instance panel held it constituted royalty income for the provision of know-how, citing that the contract described the fee as a "license fee" and that the technology (Whitepages Technology) was used in Korea.
On appeal, the core issues were the service delivery structure and the substance of the contract. Yoon & Yang LLC emphasized that the "Whitepages Client" program provided by A was not a transfer of technology with independent value, but merely a technical prerequisite to connect to A's cloud databases, which are updated in real time, in order to receive services.
The appellate panel found, "The income at issue is properly viewed as business income as consideration for services performed by the plaintiff to provide services to end users, and therefore is not taxable in Korea." The panel also said, "Granting the right to use the program is only an incidental means to provide services and cannot be separately identified and calculated as royalty income."
Yoon & Yang LLC said the ruling reaffirms the criteria for distinguishing "business income" and "royalty income" under the Korea-U.S. taxes treaty and the Corporate Tax Act. Attorney Lee Hwan-gu, who handled the case, said, "Depending on the contract language, the fee calculation method, and the scope of technology provided, the income classification and tax outcomes can differ, so domestic corporations need to reexamine their withholding risks."