Of the 76.2 billion won in corporate tax imposed on Netflix's Korea unit by the tax authorities, 68.7 billion won was canceled.
The Administrative Division 6 of the Seoul Administrative Court (Presiding Judge Na Jin-yi) on the 28th ruled partly in favor of the plaintiff in a lawsuit filed by Netflix Services Korea (Netflix Korea) seeking to overturn the imposition of corporate tax and other taxes against the head of the Jongno Tax Office and others.
The amount Netflix Korea sought to have canceled was about 76.2 billion won. The court granted the cancellation claim for 68.7 billion won of that.
The issue in this lawsuit was whether the fees Netflix Korea has paid to the overseas entity in the Netherlands, NIBV (Netflix International B.V.), can be viewed as "copyright royalties."
Netflix Korea has paid fees under a contract with NIBV in return for distributing content such as movies and drama to service subscribers. Netflix Korea's position is that these payments constitute NIBV's business income and therefore were not subject to withholding tax in Korea.
By contrast, the tax authorities argued that Netflix Korea holds domestic reproduction and transmission rights to Netflix video content, so the payments should be regarded as NIBV's copyright royalties. If treated as copyright royalties, they fall under "royalty income," which is subject to withholding, the authorities said.
The court accepted Netflix Korea's position. The court said, "It is difficult to view the money paid by the plaintiff as consideration for the use of copyrights in video content, and rather, it appears to be consideration for providing content streaming services to domestic consumers." Netflix Korea's role in Korea was limited to serving as a platform that enables access to Netflix content.
The basis cited by the court was the method for calculating the amount. Netflix Korea pays NIBV the remaining amount after deducting all expenses necessary to perform its operations from the subscription fees collected from end users and guaranteeing a certain operating profit.
The court said, "This method of determining consideration is not a structure in which the plaintiff independently uses copyrights to generate revenue, but rather a structure that guarantees a certain level of operating profit for platform operations, marketing, and user management carried out by the plaintiff."
The court also said, "It is difficult to conclude that Netflix's selling services through the plaintiff as an intermediary is, in itself, a tax avoidance act with the purpose of reducing domestic taxes," adding, "Even if the taxable income realized appears low in light of the income obtained from domestic subscribers, leading to an unreasonable result, it is difficult to deem the disposition in this case lawful."
However, the court found lawful the imposition of corporate tax on Netflix Korea's on-site cache server, "OCA (Open Connect Appliance)." OCA is Netflix's proprietary content delivery network installed on the networks of domestic ISPs (internet service providers). It reduces the hassle of having to fetch content from overseas servers each time.
Netflix Korea argued that OCA was transferred to ISPs free of charge and therefore is not an asset, but the court viewed it as an asset over which Netflix Korea exercises practical control.
The court also dismissed Netflix Korea's claim to cancel the imposition of local corporate income tax, finding there was no practical interest in the suit because it is calculated in linkage with corporate tax. Dismissal means the court ends a case without examining it because it does not meet the requirements for litigation.