Because software falls under technology rather than goods, a court has ruled that corporate tax must be imposed on income earned from selling in Korea the software of a foreign corporation that has no fixed business sites in Korea. In the same situation, if it were goods, no corporate tax would be due.
The 6th Division of the Seoul Administrative Court (Presiding Judge Na Jin-i, Director General) said on Mar. 26 that it had ruled against the plaintiff on Feb. 27 in a lawsuit filed by Ericsson Korea Partners (formerly Ericsson LG, hereinafter Ericsson Korea) seeking to cancel a corporate tax assessment imposed by the Yeoksam Tax Office chief.
Ericsson Korea is a company established through a joint investment by the Swedish telecommunications equipment corporations Ericsson and LG Electronics. EricssonAB, wholly owned by the holding company Ericsson with 100% equity, conducts software and technical support businesses related to wireless network systems and broadcasting systems.
Ericsson Korea purchased wireless communication network equipment and related software from EricssonAB and sold them to domestic mobile carriers SK Telecom, KT, and LG Uplus.
In this process, Ericsson Korea determined that the consideration for software sales and distribution was the "price for purchasing goods" (business income). Under the Corporate Tax Act, the business income of Swedish corporations without a fixed establishment in Korea cannot be taxed.
However, in a tax audit of Ericsson Korea, the Seoul Regional Tax Service determined that the consideration for software sales and distribution constituted "consideration for the use of know-how or technology" (royalty income), and, under the Korea-Sweden tax treaty, ordered the company to pay corporate tax by applying the 10% cap on the withholding tax rate. The corporate tax due on the income Ericsson Korea earned from July 2016 to May 2021 is 14.8 billion won.
During the trial, Ericsson Korea argued, "Software is goods," and said, "It is unlawful for the tax authorities to view the purchase of software as having received a transfer of EricssonAB's know-how or technology and to tax the purchase price as royalty income."
The administrative court panel ruled, "The introduction of EricssonAB's software was the introduction of know-how or technology, not goods," and "It is reasonable to view the income corresponding to that consideration as royalty income."
The panel said, "The software at issue is integrated with the hardware, and without the software, the hardware communication equipment does not operate," adding, "It is the result of the Ericsson Group's technology, experience, and information accumulated over a long period."