Philips Korea 9 Billion KRW Corporate Tax Lawsuit Remanded for Retrial

The corporate tax lawsuit worth over 9 billion KRW between Philips Korea and the Namdaemun Tax Office has been remanded for retrial. On October 16, the Supreme Court’s Administrative Division 2 (Presiding Justice Eom Sangpil) overturned the appellate court’s ruling that favored Philips Korea in the case to cancel the corporate tax imposition, and sent the case back to the Seoul High Court (2024Du54065).

Philips Korea logo. The Law Times.

[Facts]

In August 2017, the tax authorities issued a revised notice to Philips Korea for 9,046,619,100 KRW in corporate tax for the business years 2012 to 2015. The authorities determined that Philips Korea had underreported its operating margin because it purchased medical equipment, small appliances, and automotive lighting products from its overseas related party (Philips Netherlands headquarters) at prices higher than the arm’s length price. Philips Korea objected to the tax assessment and filed an administrative lawsuit in October 2019.

[Key Issue]

Under the Act on the Coordination of International Tax Affairs, determining the arm’s length price requires comparing Philips Korea to companies with similar functions performed, risks assumed, and assets used. The central issue was whether Philips Korea should be classified as a “limited risk distributor” that follows the strategy of Philips Netherlands headquarters and bears only limited functions and risks, or as a “full-fledged distributor” that independently undertakes all functions and risks.

[Lower Court Rulings]

The court of first instance ruled against the plaintiff. The court stated, “Philips Korea possesses independent intangible assets, including engineering expertise, service key security policies, and exclusive rights to supply parts, and also bears inventory risk, making it a full-fledged distributor.” The court further found that “the tax authorities lawfully selected comparable companies with similar functions and assets to determine the arm’s length price.”

The appellate court, however, ruled in favor of the plaintiff, contrary to the first instance. The court held, “The tax authorities erred in selecting comparable companies for the medical equipment segment by using domestic transactions (maintenance service business) as the standard, rather than international transactions (equipment supply and headquarters maintenance support).” The court also found that “in the small appliances segment, Philips Korea’s role was limited, yet the authorities incorrectly classified it as a full-fledged distributor.”

[Supreme Court Decision]

The Supreme Court accepted the appellate court’s reasoning regarding the small appliances segment but found that, for the medical equipment segment, the lower court misunderstood the relevant legal principles and failed to conduct a necessary review. The justices stated, “It is difficult to conclude that there was an independent maintenance service support transaction between Philips Korea and its overseas related party,” and “there is sufficient reason to believe that the tax authorities reasonably determined the arm’s length price by selecting comparable companies engaged in similar transactions with Philips Korea.” The Court clarified that maintenance support from Philips Netherlands headquarters is not a separate, independent international transaction but rather an ancillary condition attached to equipment supply. Therefore, the authorities did not violate the law by determining the arm’s length price by comparison with domestic companies engaged in similar business to Philips Korea.

Lee Sangwoo, The Law Times reporter

※This article is based on content supplied by Law Times.

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