외국법인의 국내 고정사업장 과세문제

Taxation of Permanent Establishment of a Foreign Corporation - A Case Study of a Foreign Corporation with Passive Income Effectively Connected With Its Permanent Establishment

This article analyzes the tax implications of a foreign corporation doing business in Korea in association with specially determined facts and suggests solutions thereto, assuming the license fees paid to P Inc. are royalty income under the tax treaty between X country and Korea. Facts: B Korea (“B”) has been the Korean branch of P Inc. (“P”) based in X country (which has a tax treaty with Korea) since January 2001. P has engaged in developing software solutions for call centers and selling the software (more specifically, licensing the software) in many countries. P sells the software to end-users in Korea through distributor(s), while P makes direct sales of the software to end-users. B provides sales support and technical services on behalf of P. Activities of B include contacting distributor(s) and end-users to negotiate prices, and providing ‘after-sales support’ to end-users. P makes license agreements with end-users when the software products are sold to end-users through distributor(s) or alone. For the products sold via distributor(s), end-users pay license fees to distributor(s), and in turn distributor(s) remit certain portion of amounts attributable to P according to the terms and conditions of the contract entered into between P and its distributor(s). B charges service fees for sales support and technical services rendered at a 10% mark-up for costs incurred. On the other hand, P recognizes all license fees including those sold via distributor(s) and technical service fees as revenue in X country. The first problem to be solved based on the suggested facts is whether there is a permanent establishment (“P.E.”) in Korea because without a P.E., business income is exempt even if it is Korean-sourced; passive income, including royalties, is taxed as business income if that passive income is effectively connected with a P.E.. Under the given facts, the main issues are to decide the existence of a P.E. for P, especially whether the activities of B are of preliminary or auxiliary nature, and whether B is a dependent agent of P. This article concludes that there is a P.E. in relation to the activities of B, but no P.E. in terms of the activities of the distributor(s). Next, in case where a P.E. exists, the method to calculate taxable income of the P.E. should be decided. If royalty income is effectively connected with a P.E., that royalty income will not be withheld according to the tax rates prescribed in a separate royalty provision of a tax treaty, but instead be taxed as business income in accordance with a business income provision. Thus, it should be decided whether the license fees paid via the activities of B are effectively connected with a P.E.. This article finds that the license fees earned from direct sales by P are effectively connected with a P.E., because the activities carried on by B are material and essential factors to realize the income derived from that software product sold in Korea. For calculating taxable income attributable to B, the arm’s length principle is applied. Article 132, Paragraph2 (2) or (9) of the Korean Corporation Tax Law provides a method of calculating attributable income in case where the places of manufacture or development and sales are different. Pursuant to the provision income attributable to B arrives by deducting from terminal sales prices those purchase prices, which are decided by applying the comparable uncontrolled price method or the price supplied to distributor(s) by P.