Court Upholds Tax on Ericsson Network Software Sales as Royalty Income

A Seoul court has ruled that software for telecommunications network equipment bought from a foreign corporation and sold in South Korea is not a “product” but technical know-how, making it lawful to tax the payments as royalty income.

According to the legal community on the 26th, the Seoul Administrative Court’s Administrative Division 6, led by Presiding Judge Na Jin-i, ruled against Ericsson Korea Partners in its lawsuit seeking to overturn a corporate tax assessment imposed by the head of the Yeoksam Tax Office.

Ericsson Korea Partners, whose shareholders include Sweden-based telecom equipment maker Ericsson and LG Electronics, has purchased wireless network equipment and related software for 3G, LTE and 5G from Ericsson AB (EAB), an Ericsson Group entity, and sold them to South Korean telecom operators.

Based on an audit completed in August 2021, the Seoul Regional Tax Office treated the software sales and distribution payments Ericsson Korea Partners made to EAB from 2016 through that year as “royalty income” and notified the company of tax using the 10% withholding cap.

Ericsson Korea Partners sued, arguing the software should be classified as a “product” and the payments to EAB as “business income” for goods purchases. Business income paid to a foreign corporation without a permanent establishment in South Korea is not subject to domestic taxation.

The court disagreed, finding the transactions amounted to introducing “know-how or technology,” not importing a general product, and said taxing the payments as royalty income was appropriate.

“The software at issue is the result of accumulated technology, experience and information,” the panel said, citing the time and technical capability required to develop and supply telecom equipment, the dominance of the global market by a small number of firms, and the fact that the equipment cannot operate without the software.

The court also said the software requires substantial technical expertise and training to use, and that Ericsson Korea Partners is responsible for maintenance, management and error correction, making it difficult to view the software as a widely usable, off-the-shelf product.