Land Acquisition Tax, Software Royalties and a Ten-Day Installation
Daehan Precision Co., Ltd. is a Korean manufacturer. In March 2025 it bought 5,000 square metres of land in a general area outside Seoul, not in an industrial complex and not in an over-concentration control area, for 5,000,000,000 KRW. In the same month it signed a contract with a German engineering company that has no office, employees or dependent agent in Korea. The contract price is 20,000,000,000 KRW: 17,000,000,000 KRW for the production line, 2,000,000,000 KRW for a perpetual licence to use the supplier's software, and 1,000,000,000 KRW for ten days of on-site installation supervision by four German engineers. The supplier has no other construction or installation project in Korea. Assume the treaty, if its conditions are met, limits source-country tax on royalties to 10%, and that a valid certificate of residence is submitted. Daehan paid the software fee in June 2025 without withholding anything.
1. Compute the acquisition tax, local education tax and special rural development tax on the land, and state the filing deadline.
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Land acquired for business use is taxed at the general acquisition tax rate of 4%, with local education tax at 0.4% and special rural development tax at 0.2% of the tax base. Because the site is outside an industrial complex and outside an over-concentration control area, no reduction or heavy rate applies.
- Acquisition tax: 5,000,000,000 x 4% = 200,000,000 KRW
- Local education tax: 5,000,000,000 x 0.4% = 20,000,000 KRW
- Special rural development tax: 5,000,000,000 x 0.2% = 10,000,000 KRW
- Total: 230,000,000 KRW
Acquisition tax is self-assessed and paid within 60 days of the acquisition date, so if title was registered in March 2025 payment is due by the corresponding date in May 2025. Late payment triggers a surcharge computed daily. The purchase price is the tax base unless the transaction is at a price below the officially assessed value, which is not suggested here.
2. Was Daehan required to withhold on the 2,000,000,000 KRW software licence fee? Compute the correct withholding and explain the consequence of its failure.
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A payment to a non-resident for the use of, or the right to use, copyright in software is Korean-source royalty income. A perpetual licence to use the supplier's software is a licence of copyright, not a sale of a shrink-wrap copy, so the royalty character applies.
Domestic withholding would be 20% income tax plus 2% local income tax (10% of the income tax) = 22%, or 440,000,000 KRW. With a valid certificate of residence and the treaty's 10% limit, the income tax is 2,000,000,000 x 10% = 200,000,000 KRW, plus local income tax of 20,000,000 KRW, so 220,000,000 KRW should have been withheld when the fee was paid in June 2025.
Because Daehan paid gross, it is liable for the unwithheld tax as withholding agent, plus a late-payment surcharge running from the 10th day of the month after payment, and it may also face a penalty for failing to file the withholding return. It can recover the amount from the German supplier contractually, but the tax office will pursue Daehan first. A treaty exemption or reduction is not automatic; the residence certificate and the reduced-rate application must be obtained before payment.
3. Does the ten-day installation create a permanent establishment, and what VAT consequences arise on the imported software licence and installation service?
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Permanent establishment. Ten days of supervision by four engineers does not create a PE. There is no fixed place of business, no dependent agent and the installation project is far below the usual 6- or 12-month project threshold in the treaty. The 1,000,000,000 KRW service fee is business income without a PE and is not subject to Korean income tax or withholding. The engineers' own salaries are also outside Korean tax under the 183-day rule, as they are paid by the German employer and not borne by a Korean PE.
VAT. The software licence is a service used in Korea, so the place of supply is Korea and Daehan must self-assess VAT at 10% on 2,000,000,000 KRW = 200,000,000 KRW. The installation service is physically performed in Korea, so it is also taxable to the foreign supplier and Daehan must self-assess 10% on 1,000,000,000 KRW = 100,000,000 KRW. Both amounts are reported on Daehan's VAT return for the relevant period; the VAT is creditable as input tax if the services are used for Daehan's taxable business, so the cash cost may be limited to timing and the non-creditable portion.