Cho Jae-2017-China-2917 ( November 10, 2017)

Whether domestic unregistered patent royalty income is domestic source income

As the patent right under the Korea-U.S. Tax Treaty is not interpreted to be used or paid for the use of the patent in a country other than the country where the patent right is registered, the domestic unregistered patent right is not subject to domestic withholding.

Article 93 of the Corporate Tax Act

2018Guhap60176 Revocation of Disposition of Rejecting Corporate Tax

AAccoa et al.

a) the Director of the Tax Office

May 30, 2018

February 13, 2019

1. On April 7, 2017, the Defendant revoked both the disposition of refusal to rectify corporate tax of KRW 1,247,179,280 for the year 2012, and the Defendant’s disposition of refusal to rectify corporate tax of KRW 221,871,00 for the corporate tax of KRW 221,871,00 for the year 2012, which belongs to Plaintiff BB, on April 5, 2017.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. On March 2012, the Plaintiff AACos Ltd. (hereinafter referred to as “Plaintiff ACos Ltd”) entered into a contract (hereinafter referred to as “instant contract”) with the Plaintiff ACos Ltd. (hereinafter referred to as “CC”). Around March 2012, the Plaintiff ACos Ltd. (hereinafter referred to as “Plaintiff ACos”) granted the right to use the patent of 3277 (hereinafter referred to as “instant patent”). ACos Ltd. (hereinafter referred to as “instant patent”) to receive US$70,000 (hereinafter referred to as “the instant royalty”) from the Plaintiff ACos Ltd. (hereinafter referred to as “CC”). The patent registered in each of the world countries, such as the United States of America (hereinafter referred to as “U.S.”) is 3,110, and the patent registered in the Republic of Korea (referring to the patent registration number) is 167.

B. On March 2012, Plaintiff BBE ELC (hereinafter referred to as “Plaintiff B”) entered into a contract (hereinafter referred to as “instant contract”) under which Plaintiff BBE granted the right to use four patents (hereinafter referred to as “instant patent”) toCC and, in return, the right to use 1.3 million U.S. dollars (hereinafter referred to as “instant royalty”) was to be paid. The instant patent is not registered in the Republic of Korea among the patents.

C.CC: (a) applied the limited tax rate of 15% pursuant to Article 14(1) 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”); and (b) paid corporate tax of KRW 1,314,150,000 on Plaintiff A and corporate tax of KRW 21,871,00 on Plaintiff B, respectively, to the Defendant.

D. The plaintiffs (1), 2, 392,402 US dollars 392,40,402 in proportion to the number of patents in the case of plaintiff (i.e., US$ 770,000 x US$ 167/3,277, and less than US$ 1) are domestic source income, and when converting it into Korean currency, 446,471,468 won. The legitimate tax amount applying 15% of the limited tax rate is 66,970,720 (=46,471,468 x 15%) x 15%, and 10 won is less than domestic source income.

E. The Plaintiffs filed a request with the Tax Tribunal on October 11, 2017, which was dissatisfied with the instant disposition, but the Tax Tribunal dismissed all the said request by the Plaintiffs.

[Reasons for Recognition] Unsatisfy, Gap evidence 1 to 7 (including the number of branch), the purport of the whole pleadings

2. Relevant statutes;

The entries in the attached statutes are as follows.

3. Summary of the parties' arguments;

A. The plaintiffs

According to Article 6 (3) of the Korea-U.S. Tax Convention, payments received by a U.S. resident as consideration for the use of a patent right which has not been registered in the Republic of Korea from a domestic resident does not constitute income subject to withholding. Therefore, the instant case where the Plaintiffs’ request for correction was rejected on the ground that the consideration for the use of a patent right which has not been registered in the Republic of Korea constitutes income subject to withholding tax,

B. Defendant

Since the plaintiffs did not prove that they correspond to the "resident of the United States" under Article 3 of the Korea-U.S. Tax Convention, the term of "use" under Article 2 (2) of the Korea-U.S. Tax Convention shall be determined in accordance with the domestic law, since the following proviso of Article 93 (8) of the former Corporate Tax Act (amended by Act No. 1608, Dec. 24, 2018; hereinafter the same) provides that "income from the use of a patent right that has not been registered in the Republic of Korea shall not be subject to the Korea-U.S. Tax Convention." In addition, since the Korea-U.S. Tax Convention provides that "use income shall be deemed as a domestic source income if the pertinent patent right falls under the price for the use of the patent right in the Republic of Korea-U.S., which is determined as the source of income from the use of the patent right in the Republic of Korea-U.S. Tax Convention, the term "use" shall be deemed as "use income from the domestic source income in this case."

4. Whether the disposition is lawful.

A. Whether the plaintiffs are residents of the United States

Article 3 (1) (b) of the Korea-U.S. Tax Convention provides that "the term "resident of the United States" means the following: (i) the term "U.S. corporation" is referred to in subparagraph (ii) the term "other persons (excluding corporations or organizations treated as corporations under the laws of the United States) residing in the United States for the tax purposes of the United States, but in the case of persons acting as members or trustees, the income generated by such persons is limited to the extent that they must comply with the tax of the United States as income of the resident."

Therefore, in full view of the overall purport of the arguments in evidence Nos. 9 and 10, the plaintiffs can recognize the facts that are residents of the United States for the purposes of tax purposes of the United States. As such, ①, ②, and ②, the Korea-U.S. Tax Convention applies to the income.

B. Whether the royalty income constitutes domestic source income

1) Article 2(1)2 of the former Corporate Tax Act provides that a foreign corporation is liable to pay corporate tax only when there is any domestic source income. Articles 2(5) and 98(1) provide that a person who pays a foreign corporation the amount of certain domestic source income, such as Article 93 subparag. 8, shall withhold the relevant corporate tax.

However, Article 93 of the former Corporate Tax Act provides that "domestic source income of a foreign corporation shall be classified as follows." Article 93 of the former Corporate Tax Act provides that "if a patent, 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 price therefor is paid in Korea, the price therefor and the 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 the relevant patent, etc. is paid in Korea. In such cases, a patent right, etc. (hereafter referred to as "patent right, etc." in this subparagraph) requiring registration in the exercise of rights, such as patent right, utility model right, trademark right, and design right

On the other hand, Article 14 (4) of the Korea-U.S. Tax Convention provides that "user fees used in this Article" shall be "the following means the copyright of literary, artistic or scientific works or the copyright, patent, design, drawings, drawings, secret or secret public formula, trademark or other similar property or rights, knowledge, experience, skills, vessel or aircraft in return for the use or right of use of the vessel or aircraft" in paragraph (3) of the same Article provides that "the source of income shall be treated as the following for the purposes of this Convention" and that "the user fees provided in paragraph (4) of the same Article shall be treated as income which has source only if the right to use or use the property is paid for the use of that property in a Contracting State:

The Act stipulates.

2) The latter part of the proviso of Article 93 subparag. 8 of the former Corporate Tax Act stipulates that income received as consideration for use by a foreign corporation shall be deemed domestic source income when it was used in manufacturing, selling, etc. in Korea even if the patent right was not registered in 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 non-resident or foreign corporation,” and it shall be determined pursuant to the Korea-U.S. Tax Convention as to whether income received as consideration for use by a U.S. corporation should be deemed domestic source income if the patent right, etc. of the non-resident or foreign corporation was used in manufacturing, selling, etc. in Korea and abroad, and thus, Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention shall not be deemed as having been registered in Korea (see, e.g., Supreme Court Decision 2007Du48)., where the patent right of domestic source income is registered.

3) Therefore, only the portion corresponding to the royalty for the patent registered in the Republic of Korea, falls under the domestic source income of foreign corporations under Article 93 subparag. 8 of the former Corporate Tax Act, and the portion corresponding to the royalty for the use of a patent registered in a foreign country but not registered in the Republic of Korea shall be deemed not to fall under the domestic source income regardless of whether the patent right was actually used for manufacturing, selling,

On the other hand, the "amount equivalent to legitimate tax base" among the user fees of this case ① is not specified in the contract of this case, and no other data are confirmed. However, with respect to the method of calculating the above legitimate tax base, the plaintiff ① claims a method of calculating the tax base based on the ratio of 167 patents registered in Korea among the patents of this case ① 1,314,159,720 won, which is the corporate tax amount of the plaintiff ① paid through withholding tax, as seen above, 66,970,720 won, which is the tax amount equivalent to the ratio of the calculation method alleged by the plaintiff ①, as seen in the above. Accordingly, the plaintiff’s own legality is deemed to be the plaintiff’s 1,247,179,280 won (=1,314,150,000 - 6,970,720 won).

5. Conclusion

Therefore, each of the claims of the plaintiffs in this case is with merit, and it is decided as per Disposition.