Whether the income received by a U.S. corporation in return for use shall be deemed domestic source income in cases where a patent right, etc. of a U.S. corporation registered in a foreign country but not registered in the Republic of Korea is used for domestic manufacture

The latter part of Article 93 subparag. 9 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) stipulates that a foreign corporation registered a right necessary for registration outside of the Republic of Korea to exercise a patent right, utility model right, trademark right, design right, etc. (hereinafter “patent right, etc.”), and that income received as consideration for use when the patent right, etc. is used to be manufactured, sold, etc. in the Republic of Korea, shall be considered as domestic source income. However, Article 28 of the Adjustment of International Taxes Act provides that “Where a nonresident or a foreign corporation’s domestic source income is classified into income of a nonresident or foreign corporation, tax treaties shall prevail notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act, if the patent right, etc. of the U.S. corporation, which was not registered in the Republic of Korea, was used in the Republic of Korea for manufacture, sale, etc., and thus, it cannot be seen that the patent right is not registered in the Republic of Korea.

Article 93 Subparag. 9 (see current Article 93 Subparag. 8) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 28 of the Adjustment of International Taxes Act; Articles 6(3) and 14(4) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Encouragement of International Trade and Investment

Supreme Court Decision 2005Du8641 Decided September 7, 2007

Semiconus Comstrins LC (Semiconuss Instrins, LLC) (Attorney Jeong Byung-su et al., Counsel for the defendant-appellant)

Head of the East Institute Tax Office (Law Firm, Kim & Lee LLC et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2012Nu8382 decided July 11, 2012

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 2(1)2, etc. of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) provides that a foreign corporation is liable to pay corporate tax only if it has income generated from domestic sources, and Articles 2(5) and 98(1) of the same Act provide that a person who pays a foreign corporation a certain amount of income generated from domestic sources, such as Article 93 subparag. 9, is liable to withhold the relevant corporate tax.

However, Article 93 of the Corporate Tax Act provides that "domestic source income of a foreign corporation shall be classified as follows." Article 93 of the same Act provides that "if the relevant patent right, etc. is registered overseas and is used domestically for any of the following rights, assets, or information (hereafter referred to as "rights, etc." in this subparagraph) or the consideration therefor is paid in Korea, the relevant consideration and income accruing from the transfer of such rights, etc.: Provided, That where a double taxation agreement on income provides for whether the relevant income falls under domestic source income based on the place of use, the consideration for the rights, etc. used overseas shall not be deemed domestic source income, regardless of whether the relevant income is paid in Korea. In such cases, where the relevant patent right, etc. is registered overseas and it is used for manufacture, sale, etc. in Korea, it shall be deemed domestic use regardless of whether it is registered in Korea."

Meanwhile, Article 14(4) of the Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Convention”) provides that “The term “user fee used in this Article” shall mean the following: (a) provides that “the copyright of literary, artistic, and scientific works or the copyright, patent, design, new design, drawings, secret or confidential formula, trademark or other similar property or rights, knowledge, experience, skills, vessel or aircraft in consideration of the right to use or use such property in any Contracting State” and Article 6(3) provides that “the source of income shall be treated as the following:

2. A. The lower court determined that: (a) the Plaintiff and its parent company in the U.S. (hereinafter “Plaintiff, etc.”) filed a patent infringement lawsuit with the U.S. court on the ground that the Plaintiff, Samsung Electronic Co., Ltd. (hereinafter “Tsung”) and four subsidiary subsidiaries in the U.S. (hereinafter “Tsung Electronic, etc.”) infringed the Plaintiff’s patent right; (b) Samsung Electronic, etc. filed a patent infringement lawsuit with the U.S. court on the ground that the Plaintiff, etc. infringed the Plaintiff, etc.; and (c) entered into a compromise contract with the Plaintiff, etc. on the grounds that they agreed to grant a patent license to each other on the termination of the patent infringement lawsuit and grant a patent license to each other; and (b) on March 6, 2009, Samsung Electronic, etc. did not constitute KRW 14 million (21,634,200,000,0000,0000 for the Plaintiff’s patent right at home and abroad, 15% U.S. dollars 2,3005,001,09.

Furthermore, the lower court determined that, inasmuch as the meaning of “use of property or right” under Article 6(3) of the Korea-U.S. Tax Convention is interpreted in accordance with the law of the Contracting State in which the relevant tax is determined pursuant to the main sentence of Article 2(2) of the Korea-U.S. Tax Convention, and the latter part of Article 93 subparag. 9 of the Corporate Tax Act, newly incorporated by Act No. 9267 of Dec. 26, 2008, stipulated that “where a patent right, etc. registered in a foreign country, but not registered in a foreign country, has been used for manufacturing, selling, etc. in the Republic of Korea, the income paid in return for such use shall be deemed domestic source income if the patent right was actually used for manufacturing, selling, etc. in the Republic of Korea even if it was registered in a foreign country, the income paid in return for such use shall be deemed domestic source income if the patent right was not registered in the Republic of Korea.

B. The latter part of the proviso of Article 93 subparag. 9 of the Corporate Tax Act stipulates that even if a foreign corporation registered a patent right outside of Korea and did not register the patent right in Korea, income received in return for the use thereof shall be deemed domestic source income. However, Article 28 of the Adjustment of International Taxes Act provides that "in regard to the classification of domestic source income of a nonresident or foreign corporation, tax treaties shall prevail notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act, with regard to the classification of domestic source income of the nonresident or foreign corporation, notwithstanding the foregoing, if the patent right, etc. of the U.S. corporation is registered outside of Korea and has been used for the manufacture, sale, etc. in Korea, it cannot be determined in accordance with the Korea-U.S. Tax Convention as to whether the income received in return for the use thereof is domestic source income. However, Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention merely provides that patent right is effective within the territory of the country where the patent right was registered, and thus, the patent right can not be paid in Korea.

Examining the factual relations acknowledged by the court below in light of the above legal principles, even if the pertinent income was paid for the use of a patent registered in the United States but not registered in the Republic of Korea, it does not constitute domestic source income without examining whether the patent was actually used for the manufacture, sale, etc. in the Republic of Korea. Therefore, even if a U.S. corporation registered a patent abroad and did not register it in the Republic of Korea, the court below determined that the income of the U.S. corporation paid for the use of the patent can be deemed domestic source income if the patent was used for the manufacture, sale, etc. in the Republic of Korea. In so determining, the court below erred by misapprehending the legal principles as to whether the Plaintiff’s disposition rejecting the Plaintiff’s request for correction was illegal, and thus, the court below’s error did not affect the conclusion of the judgment. The ground of appeal disputing

The remaining grounds of appeal are that the lower court erred by misapprehending the legal doctrine on the interpretation of a disposal document and the burden of proof, on the premise that the lower court’s determination that the remuneration for using a patent right registered in the United States but not registered in the Republic of Korea may constitute domestic source income, which is not considered as remuneration for manufacturing, selling, etc. in the Republic of Korea. However, as seen earlier, insofar as such premise is not reasonable, it cannot be accepted without need to further examine it.

3. Therefore, the appeal is 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 Jo Hee-de (Presiding Justice)