Disposition Rejecting Corporate Tax Correction

Income received by the Plaintiff, a U.S. corporation, in relation to a patent right registered only in a foreign country and not registered in the Republic of Korea, shall not

Article 93 subparagraph 9 of the former Corporate Tax Act (amended by Act No. 9272 of Dec. 26, 2008) (amended by Act No. 9272 of Jan. 1, 2009)

2016Guhap57601 Disposition of revocation of refusal to correct corporate tax

UN************

The head of the AAA Tax Office and 1

1. As to the Plaintiff, the rejection disposition against the Plaintiff by Defendant AA Head of the tax office on May 21, 2015 and by Defendant BB Head of the tax office on May 20, 2015 shall be revoked.

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

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a corporation of the United States of America (hereinafter referred to as the “U.S.”) and has a number of patent rights related to radio Internet technology registered in the United States.

B. Around July 2010, the Plaintiff filed a lawsuit against the Plaintiff for the prohibition of patent infringement and damages against the instant companies in the Eastern court of the United States on the ground that the Plaintiff violated the patent right (hereinafter referred to as the “patent infringement lawsuit of this case”) related to the Plaintiff’s smartphone radio e-mail transmission technology (Korean Patent No. 54***, 56***, 56******6****, 63******, 60************************************************************* 54*******; hereinafter referred to as the “patent of this case”).

(C) On May 2012, the Plaintiff and the instant enterprise entered into a patent license agreement and a compromise agreement (hereinafter “conciliation agreement”) with the main contents of the completion of the instant patent infringement lawsuit and the grant of a patent license to the instant enterprise. According to the said reconciliation agreement, the Plaintiff granted the instant enterprise a license for the use of the instant patent, and in return, △ electronic shall pay to the Plaintiff 7.5 million U.S. dollars (amounting to KRW 8,593,500,000), △ electronic shall pay 4.8 million U.S. dollars (amounting to KRW 5,392,080,000) to the Plaintiff, respectively.

E. On January 23, 2015, the Plaintiff asserted that the instant royalty is income from a patent that was not registered in the Republic of Korea, and thus, did not constitute the Plaintiff’s domestic source income, and filed a request for correction to request the Defendants to correct and refund the total amount of corporate tax withheld on the instant royalty. Accordingly, the head of the Defendant BB Tax Office notified the Plaintiff of his/her refusal to file a request for correction on May 20, 2015, the head of the Defendant AAAA Tax Office, on May 21, 2015, on the ground that the instant royalty falls under the domestic source income (hereinafter “instant disposition”).

F. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on August 11, 2015, but the Tax Tribunal dismissed the appeal on December 23, 2015.

[Grounds for Recognition] Facts without dispute, entry in Gap evidence 1 through 7 (including the relevant branch numbers), the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The defendants' assertion

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 (hereinafter referred to as the “Korea-U.S. Tax Convention”) adopt the principle of place of use concerning the criteria for determining the source of royalty income, but they do not explicitly define the use of a patent right that is not registered in the Republic of Korea, so the meaning of "use" under the Corporate Tax Act of the Republic of Korea in accordance with Article 2(2) of the Korea-U.S. Tax Convention should be interpreted. Meanwhile, upon the amendment of the Corporate Tax Act on December 26, 2008, the latter part of the proviso of Article 93 subparagraph 91 of the same Act (hereinafter referred to as the “instant provision”) newly established that "where a right necessary for the exercise of a patent right is registered outside of Korea, and a patent right that is not registered in the Republic of Korea is used in the Republic of Korea regardless of whether it is registered in the Republic of Korea.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Article 2(1)2 of the former Corporate Tax Act (amended by Act No. 12555, Dec. 15, 2015; hereinafter “former Corporate Tax Act”) provides that a foreign corporation shall be liable to pay corporate tax only if it has income generated from domestic sources. Articles 2(5) and 98(1) provide that a person who pays a foreign corporation a certain amount of income generated from domestic sources, such as Article 93 subparag. 9, 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 the relevant patent right, etc. is registered overseas and is used for manufacturing, selling, etc. domestically, the relevant consideration and income accruing from the transfer of any of the following rights, etc. (hereafter referred to as "rights, etc." in this subparagraph) shall be paid in Korea: 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 consideration for the rights, etc. used overseas shall not be deemed domestic source income, regardless of whether the relevant patent is paid in Korea. In such cases, where a patent right, etc. is registered overseas and the relevant patent right, etc. is used for manufacturing, selling, etc. in Korea, it shall be deemed domestic use regardless of whether it is registered in Korea."

On the other hand, Article 14 (4) of the Korea-U.S. Tax Convention provides that "the term "user fee used in this Article" shall mean the following: (a) the copyright of literary, artistic and scientific works or the copyright, patent, design, design, drawings, drawings, secret or secret public formula, trademark or other similar property or rights, knowledge, experience, skills, vessel or aircraft, and all kinds of payments received in consideration of the right to use or use the vessel or aircraft" in paragraph (3) of the same Article provides that "the source of income shall be treated as follows for the purposes of this Convention", while Article 6 provides that "the user fee provided in paragraph (4) of the same Article shall be treated as income in the territory of a Contracting State only if it is paid for the right to use or use the property under paragraph (4) of the same Article within a Contracting State:

2) As alleged by the Defendants, it is true that the key provision, as a matter of course, stipulates that a foreign corporation registers a patent right outside of Korea, but does not register the patent right outside of Korea, the income received in return for use shall be deemed domestic source income when the patent right, etc. is used to be manufactured

However, since Article 93 subparagraph 9 (a) and (b) of the former Corporate Tax Act provides for the scope of intangible assets subject to domestic source use fees income, the main issue clause is difficult to interpret that the scope of intangible assets subject to user fees income is expanded or that the scope of intangible assets subject to patent in Korea is added to unregistered assets subject to patent in Korea. Even if the main issue clause expandss the scope of intangible assets subject to user fees income into the manufacturing method, technology, information, etc. included in foreign registered patent rights actually used for domestic manufacture and sale, the "other similar property or rights" under Article 14 (4) Item (a) of the Korea-U.S. Tax Convention shall be limited to intangible assets subject to exclusive and exclusive use and disposal by the right holder in light of the nature of copyright, patents, designs, new designs, trademarks, etc. listed earlier, so it is difficult to regard that the non-registered domestic non-registered assets are "property or rights similar to the patent under the Korea-U.S. Tax Convention."

As such, the establishment of the main provision can not affect the scope of intangible assets subject to royalty income under the Korea-U.S. Tax Convention, and Article 28 of the Adjustment of International Taxes Act provides that "in relation to the classification of domestic source income of non-resident or foreign corporation, the tax treaty shall prevail, notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act, with respect to the classification of domestic source income of non-resident or foreign corporation," so it cannot be determined in accordance with the Korea-U.S. Tax Convention as to whether the income received in return for use by the U.S. corporation is deemed domestic source income if the patent

However, Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention provides that the right of patent licensing, such as the exclusive production, use, transfer, lease, import, or display of patent products, shall take effect only within the territory of the country where the patent right is registered, and only the income paid as the consideration for the use of the patent license, if the U.S. corporation has a patent license in the Republic of Korea after registering the patent right in the Republic of Korea. Under the interpretation of the Korea-U.S. Tax Convention, the interpretation of the Korea-U.S. Tax Convention cannot be construed as the concept that the use of the patent right should be used or paid as the consideration for the use of the patent, as it does not occur outside the country where the patent right is registered. Therefore, if the U.S. corporation registers the patent right outside the country and fails to register it in the Republic of Korea, the income received by the U.S. corporation in relation thereto cannot be considered as domestic source income (see, e.g., Supreme Court Decision 20

3) In light of the above legal principles, since the patent right of this case appears not to have been registered in the Republic of Korea, the income of this case cannot be deemed to be income from domestic source income, and the prior disposition of this case on a different premise should be revoked as it is unlawful.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is so decided as per Disposition.