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The Difference between Royalty Income and Personal Service Income
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2021-05-28
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The Difference betweenRoyalty Income and Personal Service Income

Date: May 28, 2021

 

I. Introduction

Royalty income and personal service incomemight look the same and they are also quite confusing. However, they aredifferent in many ways. Royalty income comes from intangible value such as‘know how’ and personal service income is generated from physical labor ortechnical skills of anyone. The reason to distinguish the two above is thatthey are in the different categories in taxation system and it affects taxpayers’ money. Therefore, this article will look into the differences and taxliabilities of the two types of income.

 

II. Royalty income and Personal Service Income

1. RoyaltyIncome

Income generated from transfer of theconsideration, right, etc., where any of the following rights, assets, orinformation are used in the Republic of Korea, or the consideration for therights, etc. is paid in the Republic of Korea; Provided, That where a doubletaxation avoidance agreement on income prescribes whether such income is adomestic source income based on the place of its use, no consideration for therights, etc. used overseas shall be deemed a domestic source income, even if itis paid in the Republic of Korea.

  1. Thecopyright of any scientific or artistic work (including films of motionpictures), patent right, trademark right, designs, models, drawings, secretformula or processes, films and tapes for radio or television broadcast, andother assets or rights similar thereto.

  2. Informationor know-how on industrial, commercial, or scientific knowledge and experience.

 

 2. PersonalService Income

Income generated by providing personal servicesspecified by Presidential Decree in the Republic of Korea (including incomegenerated by providing any of the services specified by Presidential Decree,among personal services provided in a foreign country, which is deemedgenerated in the Republic of Korea under a tax treaty). In such cases, when theperson receiving such personal services bears the expenses specified byPresidential Decree, such as an air fare, in connection with personal services,the income means the amount from which such expenses are excluded.

 

  1. Servicesprovided by lawyers, certified public accountants, tax consultants, architects,registered surveyors, patent attorneys, and other similar professionals

  2. Servicesprovided by persons of professional knowledge or special skill in the field ofscientific technology or business management and other similar ones, making useof such knowledge or skill

  3. Servicesprovided by professional athletes

  4. Servicesprovided by actors, musicians, and other entertainers.

 

 3. Incase of Mixed Income of Royalty and Personal Service

  1. Wherepersonal service is auxiliary and does not account for big part of the income,the income is deemed as royalty income

  2. Wherepersonal service is distinguishable rationally and not auxiliary, accountingfor large portion of the income it shall be deemed as personal service income.

     

 4. DeemedIncome Source

  1. Personalservice income

    Internationaltax treaties have different taxation systems on independent personal serviceincome, but it is the subject of domestic taxation if it belongs to any of thefollowing case.

  • Whereany non-resident has a domestic place of business.

  • Ifhis/her stay in the other contracting state is for a period or periodsamounting to or exceeding in the aggregate 183 days in the fiscal yearconcerned

  • Whenthe wage in compensation for independent personal service is paid by a domesticresident or burdened by the domestic place of business and exceeds a certainamount during the fiscal year concerned.

  1. RoyaltyIncome

    Mostinternational tax treaties stipulate that royalty income source belongs to thecountry where the income is payed. However, the tax treaty between ROK and theUS says that royalty income source belongs to the country where the royaltyincome occurred.

     

     

 5. Classificationof Person Service Income and Royalty Income

 

Royalty Income

Personal Service Income

Concept

Intangible value

Labor, function and technique with physical service

Feature

Compensation for created value

Compensation for service offered

Designing service

- any rights to use, offer and copy design drawings designed for unspecified persons

- Information or know-how on industrial knowledge

- specialized service offered by professionals like designers

- drawings designed by professional designers with using one’s expertise

Other technical service

services inevitably accompanied in the process of offering know-how or patent rights 

Human expense and expenses incurred in the process of offering service

Criteria for place of origin

State where the service is offered

State where the payment for the service is paid

 

 

 III. Taxation on domestic-source income

Taxation on royalty income and personal serviceincome of non-residents is decided by the tax treaties. The term “tax treaty”means any type of international agreement governed by international law, suchas a treaty, convention, pact or note, which the Republic of Korea enters intowith another State with respect to taxes on income, capital, and property orcooperation in tax administration. Tax treaties have the same effect with thedomestic taxation system but when the two conflicts tax treaties takeprecedence over the domestic taxation system and the domestic tax system isapplied for the cases unspecified in tax treaties.

 

  1. Withouttax treaties

  • Wherea non-resident has a domestic place of business

Where a foreign corporation owns a domesticplace of business or has income from real-estate or the forest all domesticsource of income shall be aggregated, filed and paid. Provided, income notgenerated from domestic source with being withholding tax imposed should not beaggregated and filed. Branches, offices, or business offices, Workshops,factories, or storages are deemed domestic place of business.

 

  • Wherea non-resident does not have a domestic place of business

Where income from domestic source but notdirectly related to a domestic source or not belonging to the domestic place ispaid to a non-resident, the employer should pay the amount with withholding taxdeducted and the withholding tax amount should be paid to the tax office havingjurisdiction over the place for tax payment until the 10th day ofthe following month to which the date of payment of such amount belongs.

 

Income

Withholding tax rate

remarks

Personal income tax

20% (provided, 3% for scientific technological services)

 

Royalty income

20%

 



  1. Withtax treaties

As international tax treaties override theKorean tax system when withholding tax rates for foreign corporations under thecorporate tax law are higher than those under international tax law tax rateunder international tax law, limited tax rate, shall be applied. However, wherethe income is directly related to a permanent establishment limited tax ratesare not applied but corporation tax rates are applied. In most cases, personalservice income is the subject to taxable income but royalty income is often thesubject to limited tax rates. Therefore, international tax treaties must bechecked. Limited tax rates by countries are as follows;

 

Country

Royalty income

Personal service income

The U.S.

Copy rights, films: 10%

Others: 15%

No limited rate

Japan

10%

No limited rate

China

(Hong Kong, Taiwan, Macao excluded)

10%

No limited rate

U.K

Equipment use: 2%

Others: 10%

No limited rate

Germany

Equipment use: 2%

Others: 10%

No limited rate

 

  1. Incomenot generated from domestic source

Where royalty income and personal serviceincome did not come from domestic source it is not taxable in Korea. Therefore,the income shall be filed in each country where the non-resident came from. Forexample, when a U.S. lawyer works with a Korean corporation over the phone oroffers professional advice through email, not visiting ROK, his or her serviceis not the subject to the withholding tax or subject matter of the exemption.

 

 IV. Applicationfor Non-Taxation or Tax Exemption under Tax Treaty by Nonresident


  1. Submissionof application for Non-Taxation

If a nonresident to whom the domestic sourceincome under Article 119 (excluding the income under subparagraphs 5 and 6 ofthe said Article) is substantially attributed (hereafter referred to as"real income earner" in this Article) intends to be qualified fornon-taxation or tax exemption under a tax treaty, he/she shall submit anapplication for non-taxation or tax exemption to the person who pays thedomestic source income (hereafter referred to as "payer of income" inthis Article), as prescribed by Presidential Decree, and the payer of incomeshall submit the application to the head of the tax office having jurisdictionover his/her place for tax payment.

 

 

  1. The exclusion of Non-Taxation or Tax Exemption forForeign Corporations under Tax Treaties

If an income payer has not receivedan application for non-taxation or tax exemption from a real beneficiary or aforeign investment scheme or a report from a foreign investment scheme, if anincome payer is unable to identify a real beneficiary with the documentsreceived, or if an income payer has any other ground specified by PresidentialDecree, the income payer shall withhold the amount specified in anysubparagraph of Article 98 (1) of Corporate Tax Act and Article 156 (1) ofIncome Tax Act without applying for non-taxation or tax exemption.

 

Ground specified by Presidentialdecree means any of the following cases. In such cases, subparagraph 2 or 3shall apply only to the relevant portion of each case, and subparagraph 3 shallnot apply to a publicly subscribed foreign collective investment vehicle.

  1. Where no application for non-taxation or tax exemption orno report on a foreign investment vehicle has be submitted.

  2. Where the application for non-taxation exemption or thereport on a foreign investment vehicle was submitted, but has not beensupplemented properly according to a request for supplementation andreconciliation.

  3. Where it is impracticable to identify the real incomeearner with the application for on-taxation or tax exemption or the report onan overseas investment vehicle submitted.

 

 

  1. Application for Tax Correction

If a realincome earner to whom non-taxation or tax exemption has not been granted under article98 (4) 3 of Corporate Tax Act and 156 (2) 3 of Income Tax Act intends to beeligible for non-taxation or tax exemption, the real income earner or the payerof income may file an application for correction with the head of the taxoffice having jurisdiction over the place for tax payment of the payer of incomewithin five years from the last day of the month in which the tax was withheldas prescribed by Presidential Decree.

Uponreceipt of an application for correction, the head of a tax office shallcorrect the tax base and the tax amount or shall notify the applicant that noground exists for such correction, within six months from the filing date ofthe application.

 

 

  1. Application for Tax Correction

Where anon-resident to which the domestic source income referred to in Article 119 ofIncome Tax actually reverts intends to apply for the restrictive tax rates(limited tax rates) stipulated under the tax treaties it shall submit anapplication of restrictive tax rates to a person liable for withholding andevery person liable for withholding shall keep the relevant data for five yearsfrom the day following the payment deadline of withholding tax and where thehead of the tax office having jurisdiction over the place of the tax payment ofthe relevant person liable for withholding requests the submission thereof, theyshall submit them.

 

 

 

 

 

 

 

 

 Taxation Process of foreignCorporations in Korea.


Process 1

 

Where income of a foreign corporate occurs it should be decided whether the income is taxable under the Korean tax law. If it is international tax treaties also should be considered as the next step. However the income is not the subject to income tax if it is not taxable under the Koran tax law nor international tax treaties.

 

Decide whether  the income is taxable

Process 2

 

In case of taxable income the source of income should be considered. Where the income was generated from domestic place of business the income is the subject to composite income tax. Provided that the income did not come from domestic place of business the income is the subject to withholding tax under separate taxation. However, capital gains are not the case for this.

 

 

Decide how to levy taxes

 

 

Process 3

 

Where domestic tax rates are lower than those of international tax treaties tax should be levied based on domestic tax rates. In the case of the opposite, tax rates of international tax treaty should be applied.

Decide applicable rates under separate taxation system



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