Supreme Court: "The fees paid by domestic card companies to Mastercard for overseas transactions are business income"... Cannot impose corporate tax

Conclusion After Over 8 Years of Legal Dispute with Tax Authorities

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] The Supreme Court has ruled that the fees paid by domestic credit card companies to the U.S. corporation Mastercard as compensation for overseas transactions are business income, so value-added tax (VAT) can be imposed, but corporate tax cannot be levied.

This is the final conclusion on the eight-year-long legal dispute between Mastercard and the tax authorities over the nature and taxation of the fees Mastercard receives from domestic credit card companies.

The Supreme Court's First Division (Presiding Justice Park Jeong-hwa) announced on the 23rd that it overturned the appellate court's ruling, which partially ruled in favor of the plaintiffs in the corporate tax imposition cancellation lawsuit filed by eight domestic credit card companies against the tax authorities, and remanded the case to the Seoul High Court.

The court stated, "The appellate court's judgment contained errors that affected the ruling by misunderstanding the legal nature of the fees in question and the scope of royalty income."

The plaintiff card companies had entered into license agreements and membership agreements with the U.S. corporation Mastercard, allowing them to use Mastercard's trademarks domestically and issue credit cards bearing Mastercard's trademarks in Korea.

As compensation, the card companies paid fees to Mastercard. For domestic transaction amounts, they calculated 0.03% of credit payment amounts and 0.01% of cash service amounts under the name of 'issuer fees,' and for overseas transaction amounts, they calculated 0.184% of credit payment and cash service amounts as 'issuer daily fees.'

The legal dispute centered on whether the fees paid by domestic card companies to Mastercard were 'royalties for trademark use' (royalty income) or 'compensation for comprehensive service provision' (business income).

If the fees are considered 'royalty income' received by the U.S. corporation as compensation for trademark use, they are domestic-source income of the U.S. corporation and subject to a 15% withholding tax under the Korea-U.S. tax treaty. In this case, the domestic corporation would bear the obligation to withhold and pay corporate tax on behalf of the U.S. corporation, which is the income recipient.

On the other hand, if the fees are regarded as 'business income' for comprehensive service provision, the U.S. corporation is not subject to corporate tax under the Korea-U.S. tax treaty unless it has a permanent establishment in Korea.

The heads of the tax offices overseeing each domestic card company, including Namdaemun Tax Office, Jungbu Tax Office, Yeongdeungpo Tax Office, and Jongno Tax Office, judged the fees as 'compensation for trademark use,' which was defined as 'domestic-source income' under Article 93, Paragraph 9, Subparagraph (a) of the Corporate Tax Act at the time.

Accordingly, from January 2009 to March 2012, the tax office heads imposed corporate tax amounting to approximately 852 million KRW with penalties on the card companies for failing to submit payment statements as required under Article 120-2 of the Corporate Tax Act (special provisions on submission of payment statements for domestic-source income of foreign corporations). They also imposed VAT amounting to approximately 4.437 billion KRW with penalties for failing to fulfill the obligation to pay VAT on behalf of Mastercard under Article 34, Paragraph 1 of the same law.

Since Mastercard has no domestic establishment and domestic card companies had to pay the taxes on its behalf, the card companies filed a lawsuit in July 2014 at the Seoul Administrative Court seeking cancellation of the tax authorities' corporate tax and VAT imposition decisions.

Mastercard requested a correction, arguing that the fees were business income and not subject to corporate tax, but the tax authorities rejected this, and the administrative appeal was also dismissed, leading Mastercard to file a lawsuit seeking cancellation of the rejection of the correction request.

The Supreme Court ruled that the issuer fees calculated based on domestic transaction amounts are 'royalty income for trademark use' and thus subject to corporate tax.

However, the issuer daily fees calculated based on overseas transaction amounts were concluded to be entirely business income related to Mastercard's international payment network system usage and therefore not subject to corporate tax under the Korea-U.S. tax treaty.

The court also ruled that VAT can be imposed on the issuer daily fees related to overseas transactions because the place of supply of the services provided by Mastercard is Korea.

Regarding corporate tax, the court stated, "The issuer fees calculated based on domestic transaction amounts related to credit cards issued bearing Mastercard's trademark are compensation for trademark use and unrelated to Mastercard's payment system, so they are domestic-source income as trademark royalty income and subject to corporate tax. However, the issuer daily fees calculated based on overseas transaction amounts are business income arising from the use of Mastercard's payment system and thus not subject to corporate tax under the Korea-U.S. tax treaty."

Regarding VAT, the court said, "Mastercard's trademark was used domestically, and the essential and important part of the services provided by Mastercard to domestic credit card companies was performed in Korea, so the place of supply of the services can be considered Korea. Therefore, VAT can be imposed on all the fees in question (both issuer fees based on domestic transactions and issuer daily fees based on overseas transactions)," partially overturning and remanding the appellate court's ruling that differed on corporate tax imposition.

The appellate court had previously ruled that Mastercard's obligations related to domestic credit card transactions were limited to granting trademark use rights, and domestic credit card transactions were unrelated to Mastercard's international payment network system. Therefore, the issuer fees calculated based on domestic transaction amounts were considered trademark royalty income.

The appellate court also held that part of the issuer daily fees calculated based on overseas transaction amounts, corresponding to the issuer fee calculation rates (0.03% of credit payment amounts and 0.01% of cash service amounts), could be regarded as ordinary royalties and thus trademark royalty income, while the remaining amount was business income as compensation for comprehensive service provision.

A Supreme Court official said, "Whether corporate tax and VAT can be imposed on the fees foreign credit card network operators like Mastercard receive from domestic credit card companies has been an issue. Through this ruling, the Supreme Court has provided specific criteria for distinguishing the income related to fees paid to Mastercard, which has been a long-standing issue, and has determined the applicability of corporate tax and VAT," highlighting the significance of the Supreme Court's decision.

This content was produced with the assistance of AI translation services.