1. Article 9 of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”) provides that “Where an enterprise of a Contracting State directly or indirectly participates in the management, control or capital of an enterprise of the other Contracting State, conditions which are different from those established between the independent enterprise in the commercial or monetary relationship between the two enterprises, may be imposed on the enterprise’s profit if, without such conditions, the said conditions have not been established or imposed on the enterprise’s profit.”

In the same purport, Article 4 of the former Adjustment of International Taxes Act (amended by Presidential Decree No. 6779 of Dec. 18, 2002, hereinafter “State Adjustment Act”) provides that “The tax authorities may determine or rectify the tax base and tax amount of the resident on the basis of the arm’s length price if the transaction price falls short of or exceeds the arm’s length price when one of the parties to an international transaction is an overseas person with a special relationship.” Article 5(1) provides that “The arm’s length price shall be the price calculated by the most reasonable method from among the following methods.” Article 5(4) provides that “other reasonable method as prescribed by Presidential Decree.” Article 4 subparag. 2 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 18628 of Dec. 31, 2004, hereinafter “Enforcement Decree of the State Adjustment Act”) provides that “The arm’s length price shall be determined by the method similar to the transaction in question between a resident and a related party without special relationship.”

2. Comprehensively taking account of the adopted evidence, the lower court found that (i) the Plaintiff was a company established with 100% investment by SAP AG located in Germany (hereinafter “the parent company of this case”) and obtained the sales right from the parent company of this case to the system software (hereinafter “the instant software”) and sold it in Korea (hereinafter “the instant transaction”), and paid 40% of the annual sales revenue to the parent company of this case until 200, and 50% of the annual sales revenue from 2001 to 400, and as a result, 2000, 2000, 10% of the sales revenue rate of 7.6% for the pertinent business year, 200, 1.6% of the sales revenue rate of 200, 201, 201, 201, 30% of the sales revenue rate of the instant software company, and 201, 30% of the sales revenue rate of the Plaintiff’s domestic company’s sales revenue revenue for the instant business year of this case.

Based on these factual basis, the lower court determined that the method of calculating the arm’s length price of the instant royalty is unlawful as it goes against the purport of Article 4 subparag. 2 of the Enforcement Decree of the State Assistance Act, and it is against the purpose of Article 4 subparag. 2 of the Enforcement Decree of the State Assistance Act, and thus, it cannot be deemed that the method of calculating the arm’s length price of the instant royalty is consistent with Article 9 of the Korea- Germany Tax Treaty, which takes precedence over Article 4 subparag. 2 of the Enforcement Decree of the State Assistance Act, even if it is contrary to Article 4 subparag. 3 of the Enforcement Decree of the State Assistance Act, and even if it is contrary to Article 4 subparag. 2 of the State Assistance Act, the Defendants’ assertion that the method conforms to the Defendants’ practice, and thus, it cannot be deemed reasonable in light of the terms and conditions of Article 9 of the State Assistance Act, and thus, it cannot be deemed that the pertinent method of calculating the arm’s length price of the instant royalty is similar to the instant transaction.

3. Examining the purport of the above provisions and the relevant legal principles and records, so long as the instant transaction and the instant comparable business entities are not deemed similar, as the court below properly decided, the instant disposition cannot be deemed to conform to Articles 4 subparag. 2 and 4 subparag. 3 of the Enforcement Decree of the National Assistance Act, and it cannot be deemed to conform with Article 9 of the Korea- Germany Tax Treaty that provides for the calculation method of the arm’s length price. Thus, the court below’s length price cannot be deemed to have been stipulated under Article 9 of the Korea- Germany Tax Treaty is inappropriate, but the conclusion that the instant disposition is unlawful is just. In so determining, the court below did not err by misapprehending the legal principles as to the calculation of the arm’s length price under Articles 4 and 5

4. Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Nung-hwan (Presiding Justice)