Advertisement Fees paid to Foreign Entrepreneurs
Date: Sept 4, 2020
When a domestic corporation pays fees to aforeign entrepreneurs there are two ways for payment. One is to regard thepayment as a source of domestic income. The other is to redeem it as foreignsource of income. This post will look into the two cases above.
II. Taxation on foreign entrepreneurs
1. Tax litigation of foreign corporation
A foreign corporation is liable for the incomegenerated from the domestic source of income. Compared to a domesticcorporation which has unlimited tax liability based on increased net assettheory, a foreign corporation has limited tax obligation based on income sourcetheory.
2. Where a domestic corporation paysadvertisement fees to a foreign corporation it is regarded as domestic sourceof income and the fees are imposed as royalty income.
The lower of the limited tax rate provided by atax treaty or any of the following tax rates shall apply to interest,dividends, or royalties on intellectual property, etc. that constitute adomestic source income of a nonresident or foreign corporation under the taxtreaty.
Where any income generated from the rental ofindustrial, commercial, or scientific machinery, facilities, equipment, etc. isclassified as a royalty on intellectual property under the tax treaty,including such royalty.
☞ Royalty Income
1) Copyrights, patent rights, trademarkrights, designs, forms, and sketches of academic or artistic works (includingmovie films) or secret formulae or processes, film and tapes for radio andtelevision broadcasts, and other similar assets or rights
2) Information or know-how related toindustrial, commercial, or scientific knowledge and experience;
3) Where theplace of use rule applies, under an agreement for preventing double taxation onincome, to determine whether the relevant income is domestic source income, theremuneration for rights, etc., used overseas shall not be deemed domesticsource income, regardless of whether it was paid in the Republic of Korea. Insuch cases, rights requiring registration to exercise thereof, such as patentrights, utility model rights, trademark rights, and design rights shall bedeemed used in the Republic of Korea, irrespective of whether they wereregistered in the Republic of Korea, where the relevant patent rights, etc.,were registered overseas and have been used for manufacture, sale, etc., in theRepublic of Korea:
☞ Royalty Income vs Service income
1) Royalty Income
Where a non-resident or a foreign corporation offerssecret technological information or know-how to a Korean company it is deemedroyalty income.
2) Service Income
Where advice on technologies offered by anon-resident is expertise or a person with special techniques offers one’sknowledge or techniques and those techniques and knowledge does not include know-howit is deemed service income.
II. Laws and Regulations
Article 99 (Special Cases concerning Reports onand Payment of Corporate Tax on Domestic Source Income of Foreign Corporationfrom Personal Services)
(1) Aforeign corporation whose domestic source income accrued by rendering personalservices in subparagraph 6 of Article 93 is withheld at the tax rate prescribedin Article 98 (1) 4 may file a report on and pay an amount (hereafter in thisArticle, referred to as "tax base") computed by subtracting expensesproved to be in relation to the domestic source income accrued by renderingpersonal services in subparagraph 6 of Article 93 accrued during the supplyperiod of services in the Republic of Korea (referring to the period from thedate of arrival in the Republic of Korea to the date of departure therefrom,where such period is unclear) from such income to the head of the tax officehaving jurisdiction over the place of tax payment of the person liable forwithholding within three months from the last day of the supply period ofservices, as prescribed by Presidential Decree.
(2) Where any income withheld under Article 98 (1) 4 is included in the taxbase in applying paragraph (1), the amount of the withheld tax shall bededucted as the amount of tax paid.
(3) Where a report is filed and payment is made under paragraph (1),Articles 95 and 97 shall apply mutatis mutandis to the method of calculatingthe amount of tax and tax rates and methods of filing reports, making payment,determinations, corrections, and collection.
Article 93 (Domestic Source Income of ForeignCorporations)
Domestic source income of a foreign corporationshall be classified as follows:
1. Thefollowing income, which includes interest income referred to in Article 16 (1)of the Income Tax Act (excluding the income provided for in subparagraph 7 ofthe same paragraph), other interest on loans and profits from trusts: Provided,That the same shall not apply to interest on any loan directly obtained by anoverseas place of business for the overseas place of business of a resident ordomestic corporation:
(a) Income received as a payment from the State, a local government, adomestic place of business of a resident, domestic corporation or foreigncorporation, or a domestic place of business of a non-resident referred to inArticle 120 of the Income Tax Act;
(b) Income received as a payment from a foreign corporation or non-resident,which is substantially related to the domestic place of business of the foreigncorporation or non-resident and is included in deductible expenses or incurredexpenses for the purpose of calculating the amount of income of such domesticplace of business;
2. Dividend income provided for in Article 17 (1) of the Income Tax Act(excluding the income provided for in subparagraph 6 of the same paragraph)that is paid in the Republic of Korea by any domestic corporation, anyorganization deemed a corporation, or any other domestic source and the amountdisposed of as a dividend under Articles 9 and 14 of the Adjustment ofInternational Taxes Act;
3. Income accrued from real estate in the Republic of Korea or real estaterights and mining rights, mining concessions or rights to quarry earth, sand,and rocks, each of which is acquired in the Republic of Korea, or the transferor lease of rights to use or develop underground water or other management ofunderground water: Provided, That excluded herefrom shall be capital gains referredto in subparagraph 7;
4. Income accrued from the rental of a ship, aircraft, registered motorvehicles, construction machinery, industrial, commercial or scientificmachinery, facilities and equipment, and other tools prescribed by PresidentialDecree to a domestic place of business of a resident, domestic corporation orforeign corporation, or a domestic place of business of a non-resident referredto in Article 120 of the Income Tax Act;
5. Income prescribed by Presidential Decree and accrued from any businessoperated by a foreign corporation (including income taxable as domestic sourcebusiness income under any tax treaty): Provided, That excluded herefrom shallbe income referred to in subparagraph 6;
6. Income accrued by rendering personal services prescribed by PresidentialDecree in the Republic of Korea (including the income deemed to have accrued inthe Republic of Korea according to a tax treaty by rendering personal servicesprescribed by Presidential Decree, among personal services rendered abroad). Insuch cases, where the person provided with the personal services bears expensesprescribed by Presidential Decree, including airfares, in connection with theprovision of such personal services, such income means an amount excluding suchexpenses;
7. Capital gains on a transfer of any of the following assets or rights:Provided, That this shall be limited where the assets or rights which generatesuch gains are in the Republic of Korea:
(a) Assets or rights referred to in Article 94 (1) 1, 2, and 4 (a) and (b)of the Income Tax Act;
(b) Stocks, etc. (hereafter in this Article, referred to as "realestate, stocks, etc.") of a domestic corporation, where the aggregate ofthe following values is at least 50/100 of total assets of that domesticcorporation as at the start date of the business year in which the relevantassets are transferred, among stocks, etc. (including depository receipts orpreemptive rights issued on the basis of stocks, etc.; hereafter in thisChapter, the same shall apply) of such domestic corporation, which have notbeen listed on any securities market under the Financial Investment Servicesand Capital Markets Act;
(i) Thevalue of assets referred to in Article 94 (1) 1 and 2 of the Income Tax Act;
(ii) Thevalue calculated by multiplying the value of stocks of another corporation thatexcessively owns real estate, which is owned by the domestic corporation, bythe ratio of real estate owned by that corporation. In such cases, the methodsfor determining a corporation that excessively owns real estate and fordetermining the ratio of ownership of real estate shall be prescribed byPresidential Decree.
8. Whereany of the following rights, assets, or information (hereafter in thissubparagraph, referred to as "rights, etc.") are used or theremuneration therefor is paid in the Republic of Korea, the relevant price andthe income accrued from the transfer of such rights, etc.: Provided, That wherethe place of use rule applies, under an agreement for preventing doubletaxation on income, to determine whether the relevant income is domestic sourceincome, the remuneration for rights, etc., used overseas shall not be deemeddomestic source income, regardless of whether it was paid in the Republic ofKorea. In such cases, rights requiring registration to exercise thereof, suchas patent rights, utility model rights, trademark rights, and design rights(hereafter in this subparagraph, referred to as "patent rights,etc.") shall be deemed used in the Republic of Korea, irrespective ofwhether they were registered in the Republic of Korea, where the relevant patentrights, etc., were registered overseas and have been used for manufacture,sale, etc., in the Republic of Korea:
(a) Copyrights, patent rights, trademark rights, designs, forms, andsketches of academic or artistic works (including movie films) or secretformulae or processes, film and tapes for radio and television broadcasts, andother similar assets or rights;
(b) Information or know-how related to industrial, commercial, or scientificknowledge and experience;
9. Income prescribed by Presidential Decree and accrued from the transferof any of the following stocks, etc. (including real estate stocks, etc.,listed on any securities market under the Financial Investment Services andCapital Markets Act), or other securities (including securities defined inArticle 4 of the Financial Investment Services and Capital Markets Act;hereinafter the same shall apply):
(a) Stocks, etc., and other securities issued by a domestic corporation;
(b) Stocks, etc., issued by a foreign corporation (limited to stocks, etc.,listed on any securities market under the Financial Investment Services andCapital Markets Act), and other securities issued by a domestic place of businessof a foreign corporation;
10. Other domestic source income: Any of the following, other than thoseprovided for in subparagraphs 1 through 9:
(a) Insurance money, indemnification, or compensation paid in connectionwith any real property or other assets situated in the Republic of Korea, orbusiness run in the Republic of Korea;
(b) Income prescribed by Presidential Decree as penalties for breach of anycontract or compensation for damage paid in the Republic of Korea;
(c) Income accrued from the inheritance of domestic assets;
(d) Prize money, monetary rewards, compensation, and other similar income paidin the Republic of Korea;
(e) Income accrued from buried property discovered in the Republic of Korea;
(f) Income accrued from the transfer of licenses, approval, or rightsestablished by other similar administrative dispositions under laws of theRepublic of Korea, and from the transfer of domestic assets, other than realestate;
(g) Prize received based on lottery, gift tickets, or other drawing tickets,and refunds paid to the purchasers of horse-race tickets, winner-bettingtickets, bullfighting tickets, or sports promotion tickets, all issued in theRepublic of Korea;
(h) Amounts disposed of as other income pursuant to Article 67;
(i) Income accruing from an increase in the value of the stocks, etc., of adomestic corporation that are held by any related party prescribed byPresidential Decree (referred to as "foreign related party" hereafterin Article 98) that arises from capital transactions prescribed by PresidentialDecree;
(j) Income from any business operated in the Republic of Korea, frompersonal services rendered in the Republic of Korea, or from economic benefitsreceived in relation to assets located in the Republic of Korea (excluding thedifference, if any, between the amount received for redemption of foreigncurrency-denominated bonds issued by the State or financial companies, etc.,established under any special Act and the issue prices of such bonds) or othersimilar income prescribed by Presidential Decree, other than those referred toin any of items (a) through (i).
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