[1] The standard for determining whether a U.S. corporation has a permanent establishment in Korea

[2] In a case where Party A’s subsidiaries located in the U.S. and provided the service of delivering information through the street equipment and budsberg receiver after concluding a service contract with Party A with Party A located in the U.S., and employees of Party A’s overseas branches provide promotion and educational activities at Party B’s office, the tax authority deemed Party A’s permanent establishment in the Republic of Korea and imposed a value-added tax on Party A, the case affirming the judgment below holding that the above business activities cannot be deemed as the essential and important part of Party A’s business, and thus Party A’s permanent establishment in the Republic of Korea cannot be deemed as

[1] In light of the language and purport of the provisions of Articles 8(1), 9(1) and (3) (a), and (e) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment, etc., to ensure that a permanent establishment of a U.S. corporation exists in the Republic of Korea, an employee of the U.S. corporation or a person under instructions thereof, through a “fixed place of business” such as a building, facility, equipment, etc. in the Republic of Korea where the U.S. corporation has the right to dispose of or use the “permanent establishment” shall perform an “essential and important business activity” rather than a preparatory or auxiliary business activity, and the determination of whether the business

[2] The case affirming the judgment below holding that, in case where Gap corporation's domestic subsidiaries located in the United States and Eul provided services to deliver information through a service contract with Gap corporation, and Gap corporation's overseas branch employees provided promotion and educational activities at Eul's office, etc., and the tax authorities imposed value-added tax on the premise that Gap corporation's domestic permanent establishment exists, the case affirming the judgment below that Gap's activities conducted in the Republic of Korea through the above equipment cannot be deemed to constitute an essential and important part of Gap's entire business activities, on the ground that Gap's main function is a device for receiving information processed and analyzed from Eul's main computers, and it cannot be deemed that Gap's activities conducted in the Republic of Korea through the above equipment are merely an essential and important part of Gap's entire business activities, and further, Gap's overseas branch employees visited Korea to provide information service such as advertising and promotion activities such as information use fees, and notified Gap's terms and conditions for domestic business activities with Gap's office's domestic establishment usage fees, etc., and it cannot be deemed that Gap's domestic business activities conducted within Gap's office.

[1] Articles 8(1) and 9(1) and (3) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment / [2] Articles 8(1) and 9(1) and (3) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment

Bludiobbb Co., Ltd. (Attorneys Lee Im-soo et al., Counsel for the plaintiff-appellant)

Head of the tax office;

Seoul High Court Decision 2007Nu27747, 27754 decided October 9, 2009

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

Article 8(1) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Convention”) provides that “The industrial or commercial profits of a resident of a Contracting State shall be exempted from taxes by that other Contracting State unless the resident is engaged in industrial or commercial activities within that other Contracting State through a permanent establishment located in the other Contracting State.” Article 9(1) of the Korea-U.S. Tax Convention provides that “The term “permanent establishment for the purpose of this Convention” means a fixed place of business in which a resident of any Contracting State is engaged in industrial or commercial activities.” Meanwhile, Article 9(3) of the Korea-U.S. Tax Convention provides that “The permanent establishment does not include a fixed place of business used only for any of the following or more purposes:

In light of the language, purport, etc. of the above provisions, in order for a permanent establishment of a U.S. corporation to exist in the Republic of Korea, an employee of the U.S. corporation or a person who is instructed by an employee of the U.S. corporation or a person who is instructed by the employee of the U.S. corporation to carry out an “essential and important business activities,” rather than preliminary or auxiliary business activities, shall be determined by comprehensively considering the nature and scale of the business activities, the importance and role of the entire business activities, etc.

According to the reasoning of the judgment below, the court below accepted the judgment of the court of first instance and acknowledged facts as stated in its holding, and found that the information collection personnel of the countries around the world generated financial information, etc. to the U.S. head office of non-ELP, and processed and analyzed the information, and concluded a sales contract for the information to enter the U.S. head office of non-ELP into the main computer located in the U.S. and deliver the information to the customers through the NAV’s office using the PE. Thus, the court below held that the most essential part of the information collected and processed and analyzed the information to maximize added value and sold it to the employees of the non-permanent branch office of this case on the premise that the information cannot be seen as being used by the non-permanent branch office of this case, because the information collection personnel of this case conducted within the Republic of Korea cannot be seen as being used by the non-permanent branch office of this case to constitute an essential part of the information collection equipment of the non-permanent branch office of this case.

In light of the above legal principles and records, the above judgment of the court below is just, and there is no error of law by misapprehending the legal principles on permanent establishment under the Korea-U.S. Tax Convention, as otherwise alleged in the ground of appeal.

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Min Il-young (Presiding Justice)