Seoul court wipes out 90% of Netflix Korea's W76.2b tax bill

The Seoul Administrative Court on Tuesday ordered the cancellation of 68.7 billion won ($46.7 million) in taxes imposed on Netflix Services Korea, ruling mostly in favor of the global streaming giant’s local unit in a lawsuit against tax authorities.

Netflix Services Korea filed the lawsuit in 2023 against the head of the Jongno Tax Office and other authorities, seeking to cancel about 76.2 billion won in taxes. The court accepted 68.7 billion won of that claim Tuesday.

The court found that Netflix Services Korea’s role was not that of a “copyright user,” but a “service intermediary.”

“The core functions of storing and transmitting Netflix content provided to Korean consumers are carried out by overseas entities,” the court said. “Netflix Services Korea appears to operate a platform that enables access to Netflix services in Korea and conduct auxiliary and incidental activities, such as advertising.”

The court also said payments made by Netflix Services Korea to overseas entities could not be viewed as compensation for the use of copyrights in video content.

“Rather, they appear to be compensation for the overseas entities’ provision of streaming services to Korean consumers,” the court said.

Regarding tax authorities’ allegations of tax avoidance, the court said, “The fact that overseas entities sell services through the plaintiff cannot in itself be viewed as an act of tax avoidance in Korea.”

However, the court upheld a smaller portion of the tax assessment related to server assets Netflix had installed at domestic internet service providers, saying they could be seen as assets “substantially used for advertising and other business activities” and under the “actual control” of Netflix Services Korea.

Netflix Services Korea posted about 415 billion won in sales in 2020, but paid only about 2.1 billion won in corporate tax.

Finding the discrepancy suspicious, tax authorities conducted an audit in 2021 and imposed 80 billion won in additional taxes.

The Tax Tribunal later granted only a partial reduction, prompting Netflix to file an administrative suit against the remaining 76.2 billion won.

During the trial, Netflix argued that the content was provided by overseas entities and that the Korean unit merely mediated and sold the service to local users. The company said the related income was generated overseas, meaning the Korean unit had no withholding obligation and was not subject to the disputed taxes.

Tax authorities countered that copyrights were effectively used in the process of providing the service through domestic telecommunications networks, making the resulting profits Korea-sourced income subject to taxation.

A Netflix official said after the ruling that the company complies with tax laws and regulations in every country it operates.

“We continue to make long-term investments in Korea’s content ecosystem and cooperate with the authorities,” the official said.