National Day 46017-698 ( November 15, 1997)
Where a Japanese corporation without a domestic place of business provides technical support services, such as preparation of design drawings and supervision of construction works, to a domestic corporation with respect to the interior construction of a building for a period not exceeding six months, it shall not be taxed in Korea as business income, but shall not meet the taxation requirements.
Where a Japanese corporation which has no domestic place of business provides technical support services, such as preparation of design drawings and supervision of construction in connection with the interior construction of buildings, and receives the price for such technical support for a period of less than six months, the price shall be business income prescribed in Article 6 of the Korea-Japan Tax Treaty, but it does not meet the requirements for taxation on business income prescribed in Article 4 (4) of the Treaty, and shall not be taxed in
Article 6 of the Korea-Japan Tax Treaty
1. A summary of the contents of inquiry;
1. Factual basis
With respect to the intra-public construction of a building ordered by a domestic corporation, a Japanese constructor with no domestic place of business has entered into a separate contract with a domestic corporation, (i) first, in accordance with the Design Service Contract Act, prepares and provides design drawings necessary for the intra-public construction in a foreign country; and (ii) thereafter, in accordance with the Technology Support Contract Act, a domestic constructor selected by a domestic corporation pursuant to the Domestic Corporation Act intends to dispatch two employees of a Japanese construction company to a domestic construction site for four months at the stage of performing construction works by using the design drawings.
2. Matters to be asked;
Under the above factual relations, we will audit Japan's construction company's taxation in Korea on the "Design Cost" and "technical support service cost, such as construction supervision," which it receives from a domestic corporation according to each contract as follows:
(a) relating to “design cost”;
In the event that the design service is performed only in a foreign country, whether the “design Cost” is exempt in Korea pursuant to Article 12(2)(a) of the Korea-Japan Tax Convention.
(b) “Price for technical support services, such as construction supervision”;
In relation to whether Japan's construction enterprise imposes tax on "cost for technical support services, such as construction supervision," received from a domestic corporation, there may be two conflicting views, one of which is the following.
According to Article 12 of the Korea-Japan Tax Convention, not only individual but also corporation's services should be treated as "independent personal services" and imposed in the country where the service is performed. Thus, regarding the fees that Japan's construction enterprises received for technical support services such as construction supervision in Korea, they are taxed in Korea.
Therefore, pursuant to Article 59 (1) 2 and (7) of the Corporate Tax Act, a domestic corporation should withhold 20% of the service cost paid to a Japanese constructor and pay it as corporate tax. In this case, 10% of the corporate tax amount should be withheld as resident tax.
(ii) A. B.
In light of the provisions of Article 4 (4) (b) and (i) of the Korea-Japan Tax Convention, which provides that if a resident or corporation of a Contracting State does not have permanent facts within the other Contracting State provides human services such as supervision, technology, or other professional services conducted for a period exceeding six months in connection with a contract for construction, construction, installation, or assembly works in the other Contracting State, the income that a Japanese corporation gets to provide the above construction-related services in Korea should be regarded as business income, so long as a Japanese constructor does not have any permanent facilities differently in Korea under the above facts, and technical support services such as construction supervision, etc. related to the interior construction of a building do not exceed six months, the income is also exempted from Korea under Article 6 (1) of the Korea-Japan Tax Convention (see Supreme Court Decision 74Nu7484, May 25, 1995).
(c) In relation to the question of the above "B", if imposed in Korea on "cost for technical support services, such as construction supervision," whether it is likely to be taxed in Korea on "design cost" by deeming "technical support services, such as construction supervision, performed in Korea" and "design services performed only in a foreign country as one comprehensive personal service."
2. Relevant tax-related Acts and subordinate statutes (Acts, Enforcement Decree, Enforcement Rule, and General Provisions);
○ Article 6 of the Korea-Japan Tax Treaty
○ Article 4(4) of the Korea-Japan Tax Treaty