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A court has ruled that tax authorities must cancel 68.7 billion KRW out of 76.2 billion KRW in taxes imposed on Netflix Korea, the Korean subsidiary of the global video streaming (OTT) service.

This effectively means Netflix has won the tax dispute lawsuit that has been ongoing for five years since the tax assessment in 2021.

The Seoul Administrative Court's Administrative Division 6 (Presiding Judge Na Jin-yi) ruled in favor of the plaintiff in part on the 28th in a lawsuit filed by Netflix Services Korea (Netflix Korea) against the head of the Jongno Tax Office and others, seeking the cancellation of corporate tax and other assessments.

The lawsuit originated from the National Tax Service's tax investigation of Netflix Korea in 2021, which resulted in a tax imposition of approximately 80 billion KRW.

Although the tax amount was partially reduced after a review by the National Tax Tribunal, Netflix appealed this decision and filed a lawsuit in November 2023 seeking the cancellation of 76.2 billion KRW in taxes.

The core issue of the lawsuit was whether the payments made by Netflix Korea to its Dutch subsidiary could be considered royalty fees for copyright usage.

The tax authorities argued that Netflix Korea holds the domestic transmission rights for Netflix video content, and therefore, these payments should be treated as copyright royalties.

If considered copyright royalties, they would fall under "royalty income," allowing tax authorities to withhold taxes from Netflix Korea.

Conversely, Netflix Korea contended that these payments constitute "business income." According to the tax treaty between South Korea and the Netherlands, there is no domestic taxation right for business income.

The court sided with Netflix Korea's position.

The court stated, "It is difficult to consider the money paid by the plaintiff as consideration for the copyright of video content; rather, it appears to be consideration for providing content streaming services to domestic consumers."

The ruling indicated that while overseas entities perform core functions such as storing and transmitting Netflix content, the Korean subsidiary's activities are limited to platform operations, advertising, and other ancillary activities that facilitate domestic service access.

The method of calculating the payment was also cited as a basis for the decision.

Netflix Korea had a practice of deducting costs from domestic subscription revenue, guaranteeing a certain operating profit, and paying the remaining amount to the Dutch entity.

The court determined that this calculation method reflects a structure that guarantees a certain level of operating profit for platform operations, marketing, and user management, rather than a structure where the plaintiff independently exercises copyrights to generate revenue.

Furthermore, the court concluded, "It is difficult to legally view Netflix's sale of services through the plaintiff as an intermediary as tax evasion," and added, "Even if an unreasonable result is derived due to low realized taxable income, it is difficult to consider this assessment as lawful."

Following the ruling, Netflix Korea stated, "Netflix complies with Korea's tax laws and relevant regulations, continues to invest long-term in Korean content and its ecosystem, and cooperates with authorities. Regardless of today's decision, Netflix will continue to contribute to Korea and Korean content going forward."