Thursday, 20 July 2017

Korea - Tribunal rules lease and maintenance fees for software constitute royalties

Korea’s tax tribunal issued a decision on 13 February 2017, ruling that lease and maintenance fees paid for the use of software constituted royalties under the 1980 Korea-US tax treaty.
The case involved a Korean company that entered into a lease and maintenance contract with a US software developer for the use of software, and paid fees accordingly. The company did not regard the payment as a royalty, so it did not deduct or pay withholding tax. As a result of a tax audit, the Korean tax authorities determined that the lease and maintenance fees paid were royalties and, therefore, assessed additional corporate income tax. The company appealed the decision of the tax authorities to the tax tribunal.
The tax tribunal agreed with the tax authorities that the lease and maintenance fees paid should be treated as royalties, subject to the 15% withholding tax rate under the treaty, for the following reasons:

  • The fees were significant, and the software was so sophisticated that the software developer either had to send its employees to install the software for the company or the installation process had to be carried out according to instructions of the software developer through video calls;
  • The lease and maintenance contract was mainly for the provision of technical support to resolve issues that arose while the company was operating the software; and
  • The software contained know-how of the developer, the core data of which was available to the Korean company. 

Source: Deloitte