[1] Where the nominal owner of the property lacks the ability to control and manage the property, there is another person who substantially controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the substance arises from the purpose of tax avoidance, the person liable to pay the income from the property (i.e., the person who actually controls and manages the property), and whether this principle applies to the interpretation

[2] Whether a U.S. corporation’s income received in relation to the registration of a patent in a foreign country can be deemed as domestic source income if it did not register the patent in Korea (negative)

[1] The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes, in cases where there is a separate person to whom such income, profit, property, transaction, etc. belongs differently from the person to whom such income, profit, etc., belongs, the nominal owner on the ground of form or appearance is not the person to whom such income, but the person to whom such income, etc. belongs is to be the person to whom such income, etc., belongs. Thus, in cases where the nominal owner does not have the ability to control and manage the property, and there is another person who substantially controls and manages it through the control, etc. over the nominal owner, and such disparity between name and substance arises from the purpose of tax evasion, the income on the property shall be deemed to be attributed to the person to whom the property is substantially controlled

[2] The latter part of Article 93 subparag. 9 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) stipulates that income received in return for use shall be deemed domestic source income when a patent right, etc. is used to be manufactured, sold, etc. in the Republic of Korea even if a patent right, etc. is not registered in the Republic of Korea. However, Article 28 of the former Adjustment of International Taxes Act (amended by Act No. 1609, Dec. 31, 2018) provides that "in relation to the classification of domestic source income of a nonresident or foreign corporation, a tax treaty 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 registered outside the Republic of Korea is used to manufacture, sell, etc. in the Republic of Korea, income received in return for use shall not be considered as domestic source income by a corporation of the Republic of Korea and the United States of America, and thus, it shall not be considered in accordance with the concept of patent treaty or treaty.

[1] Article 14(1) of the Framework Act on National Taxes / [2] Articles 2(1)2 (see current Article 3(1)2), 2(5) (see current Article 3(4)), 93 subparag. 9 (see current Article 93 subparag. 8), and 98(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); 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 Income and the Encouragement of International Trade and Investment

[1] Supreme Court Decision 2010Du25466 Decided October 25, 2012 (Gong2012Ha, 1963), Supreme Court Decision 2015Du2611 Decided December 15, 2016 (Gong2017Sang, 164), Supreme Court Decision 2015Du55134 Decided July 11, 2017 (Gong2017Ha, 163), Supreme Court Decision 2017Du59253 Decided December 28, 2017 / [2] Supreme Court Decision 91Nu687 Decided May 12, 192 (Gong192, 1905), Supreme Court Decision 201Du81645 Decided September 26, 2015 (Gong206365 Decided September 27, 2007)

Samsung Electronic Co., Ltd. (Law Firm LLC, Attorneys Kim Tae-tae et al., Counsel for the defendant-appellant)

The head of the East Institute Tax Office (Law Firm LLC et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2015Nu47043 decided May 24, 2016

All appeals are dismissed. The costs of appeal are assessed against each party.

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

1. Plaintiff’s ground of appeal

A. The principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes, in cases where there is a separate person to whom the income, profit, property, transaction, etc. is to be attributed differently from the name of the person to whom such income, profit, property, or transaction, etc., belongs, the nominal owner of the property is not the person to whom such income, but the person to whom such income, etc. belongs is to be the person to whom such income, etc., belongs. Thus, in cases where the nominal owner is not capable of controlling and managing the property, and there is a separate person who substantially controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner is attributable to the purpose of tax evasion, the income on the property shall be deemed to be reverted to the person to whom the property is substantially controlled and managed, and such principle shall be applied as it is, unless there is any special provision excluding it in the interpretation and application of a tax treaty having

B. After finding the facts as stated in its holding, the lower court determined that the instant tax Convention cannot be applied to the royalty income on the ground that, in light of the circumstances as indicated in its holding, such as the purpose of establishment and current status of operation, human and physical facilities, decision-making process on transactions, and control and management of royalty income, IVIL merely performed the role of a transaction partner in form. The beneficial owner of the instant royalty income that the Plaintiff paid to IVIL in 2010 is the parent company of IVL, which is a U.S. corporation, and the disparity between this form and substance was solely derived from the purpose of tax avoidance by being subject to the Convention between the Republic of Korea and Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Transfer Income between the Republic of Korea and Ireland.

C. Examining the reasoning of the judgment below in light of the aforementioned legal principles and records, although there is an inappropriate part in the reasoning of the judgment below, the conclusion that the above tax agreement cannot be applied to the royalty income of this case is justifiable. In so doing, contrary to the allegations in the grounds of appeal, there are no errors in the misapprehension of legal principles as to the standard of determining the beneficial owner and the

2. As to the Defendant’s ground of appeal

A. Article 2(1)2, etc. of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “former 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 former Corporate Tax Act provides, “Domestic source income of a foreign corporation shall be classified as follows.” Article 93 of the same Act provides, “If any of the following rights, assets, or information (hereafter referred to as “rights, etc.” in this subparagraph) is used in Korea or the price 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 prescribes whether the relevant income falls under domestic source income based on the place of use, the price for the rights, etc. used overseas shall not be deemed domestic source income, regardless of whether it is paid in Korea. In such cases, where the relevant patent right, etc. is registered overseas and it is used in manufacturing, selling, etc. in Korea, the right required to be registered in the exercise of the rights, such as patent right, utility model right, trademark right, design right, etc. (hereafter referred to

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: “The fee provided for in Article 14(4) of the Convention between the Republic of Korea and the United States of America shall be 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, experience, skills, vessel or aircraft:

B. The latter part of the proviso of Article 93 subparag. 9 of the former Corporate Tax Act stipulates that income received as consideration for use shall be deemed domestic source income when the patent right, etc. is used to be manufactured, sold, etc. in Korea even though a foreign corporation registered its patent right outside the Republic of Korea. 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," and it cannot be determined pursuant to the Korea-U.S. Tax Convention as to whether income received as consideration for use can be deemed domestic source income if the patent right, etc. of the U.S. corporation registered outside the Republic of Korea is used to be manufactured, sold, etc. in the Republic of Korea (see Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention and its language and text).

C. In the same purport, the lower court is justifiable to have determined that the portion corresponding to the royalty for patent rights domestically registered among the royalty for patent rights actually reverted to IV US, falls under the domestic source income of a foreign corporation under Article 93 subparag. 9 of the former Corporate Tax Act, and the remainder of the royalty is not a domestic source income, and thus, the part corresponding to the remaining royalty in the instant disposition is unlawful. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending

3. Conclusion

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

Justices Kim Jae-hyung (Presiding Justice)