In a case where a German corporation: (a) concluded a contract for the purchase of steel facilities with a Korean company; (b) provided services such as facility supply and design for plant construction; and (c) paid the design price to a corporation A; and (b) withheld corporate tax on the ground that it constitutes royalty income under Article 12 subparagraph 2 (b) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital; and (b) paid the corporate tax to the tax authority; and (c) rejected a request for correction of corporate tax on the ground that the design price for the corporation A cannot be withheld as income from the provision of personal services, the case holding that the design price received by the

Subparagraph 1 of Article VII, subparagraphs 1 and 2(b) and 3 of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital

Escuft Doz (Attorneys Jeong Byung-dae et al., Counsel for the plaintiff-appellant)

Incheon director of the tax office (Law Firm LLC, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2014Nu2883 decided January 23, 2015

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1.Article 7 subparagraph 1 of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter referred to as the “Korea- Germany Tax Treaty”) provides that “for a business profit of an enterprise of a Contracting State, only in that other Contracting State shall be taxed unless the enterprise performs its business in the other Contracting State through a permanent establishment located in the other Contracting State. Where the enterprise carries out its business as shown in its former part, only those parts of its profits which may accrue to that permanent establishment may be taxed in that other State.” With respect to the royalty income in subparagraph 1 of Article 12 provides that “However, it may be taxed in that other Contracting State with respect to the royalty paid to a resident of the other Contracting State, if the recipient is the beneficial owner of the royalty, such fee shall not exceed the following taxes imposed in accordance with the laws of that State: (b) providing that “for all other purposes of the royalty or the right to use the scientific or scientific film of any kind or any material used in the industrial or scientific film,”; (c.

2. A. The lower court found the following facts based on the adopted evidence.

(1) The Plaintiff, a German corporation, entered into a consistent steel processing facility purchase contract (hereinafter “instant contract”) with Hyundai Steel Co., Ltd. (hereinafter “Modern steel”), and received each of the services, such as supply of equipment, design, engineering, supervision, etc. for the construction of each of the instant plant, including the instant plant and gas refining plant, as a price for providing services, such as supply of equipment for construction of the instant plant, design, engineering, and supervision, and design and engineering services (hereinafter “instant design price”), 21,000,000 supply price for overseas equipment, and 17,575,000 supply price for supervision services.

(2) In paying the Plaintiff a total of KRW 16,80,000 among the design price of this case, Hyundai Steel withheld corporate tax by applying the withholding tax rate of 10% to the Plaintiff, deeming that the design price of this case falls under the royalty income under Article 12 subparagraph 2 (b) of the Korea- Germany Tax Treaty, and paid KRW 2,528,716,898 to the Defendant during the period from February 11, 2008 to August 17, 2009.

(3) On March 10, 2011, the Plaintiff filed a claim for correction with the Defendant for refund of KRW 2,528,716,898 of the corporate tax amount on the grounds that the instant design cost is not the royalty income but the income derived from the provision of human services and cannot be withheld at home. However, the Defendant rendered the instant disposition rejecting the Plaintiff’s claim for correction on May 6, 201 on the ground that the instant design cost constituted royalty income.

B. Next, the lower court determined that: (a) the principal purpose of the instant contract is to supply modern steel with plant facilities of this case; (b) design and engineering services for each plant of this case (hereinafter “instant services”) are essential design and drawings to supply each plant of this case; (c) even if the instant services require high technical skills, it cannot be readily concluded that the instant services cannot be performed with professional knowledge or special skills ordinarily owned by the same kind of service provider; (c) the confidentiality provisions of the instant contract impose the duty of confidentiality on both parties equally; (d) the instant services were performed over a long period of up to two years and six months; and (e) the design payments of this case, which were paid as compensation for actual expenses, are extremely high; and (v) the Plaintiff’s performance of the instant services in the process of performing the instant contract and the Plaintiff’s performance of the instant technology-related services, which appears to have been unlawful in light of the fact that there was no possibility that the design payments for the instant services were paid to the Plaintiff during the process of providing new technology-related services in Korea.

C. Examining the above provisions and related legal principles and records, the above determination by the court below is just, and contrary to what is alleged in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the burden of proof, or in exceeding the bounds of the principle of

3. 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 on the bench.

Justices Park Sang-ok (Presiding Justice)