Cho Jae-2017-west-2678 (2017.05)

The instant royalty does not constitute Plaintiff’s domestic source income as consideration for patent rights not registered in Korea.

The user fee of this case does not constitute the plaintiff's domestic source income as the consideration for patent rights not registered in Korea, and it is not reasonable to acknowledge that the defendant's assertion of other income satisfies the requirements of the law.

Adjustment of International Taxes Act Article 28 (Preferential Application of Income Classification under Tax Treaty)

Seoul Administrative Court-2017-Gu Partnership-86798 (originalcheon) Claim for the revocation of a revocation of a disposition rejecting the rectification of tax;

aa Corera

s. Head of the tax office

on 06 07 October 2019

1. On January 12, 2017, the Defendant’s disposition rejecting correction of KRW 294,769,800 as corporate tax for the year 2016 against the Plaintiff was revoked.

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

The same shall apply to the order.

1. Details of the disposition;

가. 원고는 뵘석(Boehmite)으로 이루어진 배터리, 셀, 세퍼레이터, 전해액에 관한 기술에 대한 특허권 등 지적재산권을 소유한 미국법인이다.

B. On March 21, 2016, the Plaintiff entered into a contract for granting a total of 20 patent rights (hereinafter “instant patent right”) owned by the Plaintiff to Bmchemical (hereinafter “instant contract”) with Bmchemical Co., Ltd. (hereinafter “bb chemical”) (hereinafter “instant contract”). The Plaintiff set the royalty per patent at KRW 103,428,000 ($ 90,000).

C. On April 15, 2016, Bchemical paid 2,068,560,000 [2,80,000 US$1,80,000 per case x 90,000 US dollars per case] to the Plaintiff on April 15, 2016, B withheld and paid corporate tax 310,284,000 ($270,000 per case) and Article 93 subparag. 8 of the former Corporate Tax Act (amended by Act No. 14386, Dec. 20, 2016; hereinafter the same shall apply) and Article 14 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”).

D. However, among the patent rights in this case, only one patent registered in Korea was registered in foreign countries, such as the United States of America, Europe, Japan, and China. Accordingly, the Plaintiff sought a request for correction of the royalty of KRW 1,965,132,000 ($ 1,710,000 ($ 1,710,000 ($ 90,000)); hereinafter “the instant royalty”) from among the royalty withheld at source, on May 25, 2016, on the ground that it does not constitute a domestic source income subject to withholding pursuant to the Korea-U.S. Tax Convention, the Defendant made a request for correction of the royalty of KRW 294,769,80 (=1,965,132,000 x 15%, 15%, and hereinafter “the instant royalty”). However, the Defendant made a disposition rejecting this (hereinafter “instant royalty”).

[Ground of recognition] Facts without dispute, entry of Gap 1 to 3 evidence, purport of whole pleadings

2. The parties' assertion

A. The plaintiff

According to the Korea-U.S. Tax Convention, the amount received as compensation for the use of patent rights not registered in the Republic of Korea does not constitute domestic source income subject to withholding. Therefore, the instant disposition rejecting the Plaintiff’s request for correction on the ground that the instant royalty constitutes domestic source income is illegal.

B. Defendant

1) Article 6(3) of the Korea-U.S. Tax Convention provides that the determination of the source income of royalties, such as patent rights, as provided for in Article 14(4) shall be made on the basis of ‘use-based principle', but does not specifically stipulate the meaning of ‘use'. Therefore, the meaning of ‘use' under Article 2(2) of the Korea-U.S. Tax Convention should be interpreted in accordance with the domestic law in which taxes on royalty income are determined

However, the latter part of the proviso of Article 93 subparag. 8 of the former Corporate Tax Act provides that where patent rights are used to manufacture, sell, etc. in Korea, it shall be deemed used in Korea regardless of whether a patent is registered in Korea and the amount equivalent to the royalty shall be deemed domestic source income of a foreign corporation.

2) The instant usage fee falls under other income as stipulated in Article 93 subparag. 10 of the former Corporate Tax Act, which is a reward for compensating for damages or preventing the conclusion of disputes or the recurrence of disputes, and constitutes subject to taxation as Plaintiff’s domestic source income.

3. Relevant statutes;

It is as shown in the attached Form.

4. Determination

A. The latter part of Article 93 subparag. 8 of the former Corporate Tax Act, which constitutes domestic source income under Article 93 subparag. 8 of the former Corporate Tax Act, stipulates that even if a foreign corporation registered a patent right outside of Korea and does not register the patent right in Korea, income paid in return for the use of the patent right shall be deemed domestic source income. However, Article 28 of the former Adjustment of International Taxes Act (amended by Act No. 16099, Dec. 31, 2018) provides that "the classification of domestic source income of a nonresident or foreign corporation shall be preferentially applied to a tax agreement, notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act, if the patent right of the U.S. corporation, etc., which was registered outside of Korea, was used for manufacturing, selling, etc. in Korea, the patent right of the U.S. corporation cannot be deemed domestic source income under the Korea-U.S. Tax Convention, and thus, the patent right or license of the patent corporation cannot be deemed domestic source income.

According to the above legal principles, the user fee of this case does not constitute the Plaintiff’s domestic source income as consideration for patent rights not registered in Korea.

B. The instant royalty, which corresponds to other income under Article 93 subparag. 10 of the former Corporate Tax Act, is the amount paid for Bbchemical from the Plaintiff for the grant of the right to use a patent registered overseas from the Plaintiff, and its legal nature itself shall be deemed to fall under the royalty income under Article 93 subparag. 8 of the former Corporate Tax Act. However, as seen earlier, as the Korea-U.S. Tax Convention prior to the application of Article 28 of the former Adjustment of International Taxes Act in preference to Article 93 of the former Corporate Tax Act, it cannot be imposed as domestic source

In addition, in order to fall under the other income under Article 93 subparagraph 10 of the former Corporate Tax Act, it should fall under the "compensation (a) for damages received in connection with the real estate in Korea and other assets in Korea or the business operated in Korea, or the "personal services provided in Korea or the economic benefits provided in relation to assets in Korea". There is no evidence that the royalty in this case satisfies the requirements under each of the above items. The defendant's assertion is without merit.

C. Sub-committee

Since the user fee of this case does not constitute the Plaintiff’s domestic source income that the Defendant is able to impose corporate tax, the tax withheld from the Plaintiff should be refunded. Therefore, the disposition of this case must be revoked as unlawful.

5. Conclusion

The claim of this case is justified, and it is so decided as per Disposition.