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The Difference between Royalty Income and Personal Service Income
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2019-11-22
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The Difference between Royalty Income and Personal Service Income

Date: November 22,2019

 

I. Introduction

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

 

II. Royalty income and Personal Service Income

 

1. Royalty Income

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

- The copyright of any scientific or artistic work (including films of motion pictures), patent right, trademark right, designs, models, drawings, secret formula or processes, films and tapes for radio or television broadcast, and other assets or rights similar thereto.

 

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

 

2. Personal Service Income

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

 

- Services provided by lawyers, certified public accountants, tax consultants, architects, registered surveyors, patent attorneys, and other similar professionals

 

- Services provided by persons of professional knowledge or special skill in the field of scientific technology or business management and other similar ones, making use of such knowledge or skill

 

- Services provided by professional athletes

 

- Services provided by actors, musicians, and other entertainers.

 

 

 

3. Incase of Mixed Income of Royalty and Personal Service

 

- Where personal service is auxiliary and does not account for big part of the income, the income is deemed as royalty income

 

- Where personal service is distinguishable rationally and not auxiliary, accounting for large portion of the income it shall be deemed as personal service income

 


4. DeemedIncome Source

 

* Personal service income

 

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

 

- Where any non-resident has a domestic place of business.

 

- If his/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

 

- When the 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.

 

 

* Royalty Income

 

Most international tax treaties stipulate that royalty income source belongs to the country where the income is payed. However, the tax treaty between ROK and the US says that royalty income source belongs to the country where the royalty income 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 special knowledge

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 into with another State with respect to taxes on income, capital, and property or cooperation in tax administration. Tax treaties have the same effect with the domestic taxation system but when the two conflicts tax treaties take precedence over the domestic taxation system and the domestic tax system is applied for the cases unspecified in tax treaties.

 

 

1. Without tax treaties

 

* Where a 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 domestic source of income shall be aggregated, filed and paid. Provided, income not generated 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.

 

* Where a non-resident does not have a domestic place of business

 

Where income from domestic source but not directly related to a domestic source or not belonging to the domestic place is paid to a non-resident, the employer should pay the amount with withholding tax deducted and the withholding tax amount should be paid to the tax office having jurisdiction 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%

 



2. With tax treaties

 

As international tax treaties override the Korean tax system when withholding tax rates for foreign corporations underthe corporate tax law are higher than those under international tax law taxrate under international tax law, limited tax rate, shall be applied. However,where the income is directly related to a permanent establishment limited taxrates are not applied but corporation tax rates are applied. In most cases,personal service income is the subject to taxable income but royalty income is often the subject to limited tax rates. Therefore, international tax treaties must be checked. 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

 

 

3. Income not generated from domestic source

 

Where royalty income and personal service income 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. For example, when a U.S. lawyer works with a Korean corporation over the phone or offers professional advice through email, not visiting ROK, his or her service is nott he subject to the withholding tax or subject matter of the exemption.

 

 

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


1. Submission of application for Non-Taxation

 

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

 

 

2. The exclusion of Non-Taxation or Tax Exemption for Foreign Corporations under Tax Treaties

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

 

Ground specified by Presidential decree means any of the following cases. In such cases, subparagraph 2 or 3 shall apply only to the relevant portion of each case, and subparagraph 3 shall not apply to a publicly subscribed foreign collective investment vehicle.

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

     

    - Where the application for non-taxation exemption or the report on a foreign investment vehicle was submitted, but has not been supplemented properly according to a request for supplementation and reconciliation.

     

    - Where it is impracticable to identify the real income earner with the application for on-taxation or tax exemption or the report on an     overseas investment vehicle submitted.


     

    3. Application for Tax Correction

    If a real income earner to whom non-taxation or tax exemption has not been granted under article 98 (4) 3 of Corporate Tax Act and 156 (2) 3 of Income Tax Act intends to be eligible for non-taxation or tax exemption, the real income earner or the payer of income may file an application for correction with the head of the tax office having jurisdiction over the place for tax payment of the payer of income within five years from the last day of the month in which the tax was withheld as prescribed by Presidential Decree.

    Upon receipt of an application for correction, the head of a tax office shall correct the tax base and the tax amount or shall notify the applicant that no ground exists for such correction, within six months from the filing date of the application.

     

     

    4. Application for Tax Correction

    Where a non-resident to which the domestic source income referred to in Article 119 of Income Tax actually reverts intends to apply for the restrictive tax rates (limited tax rates) stipulated under the tax treaties it shall submit an application of restrictive tax rates to a person liable for withholding and every person liable for withholding shall keep the relevant data for five years from the day following the payment deadline of withholding tax and where the head of the tax office having jurisdiction over the place of the tax payment of the relevant person liable for withholding requests the submission thereof, they shall submit them.

     

     

     

     

    Taxation Process of foreign Corporations 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.

     

     

     

     

     

     

     

    Learn more about Korean tax system by visiting our website:

     

     

     

     

     

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