Scambling Commerz Duz LC (Attorney Jeong Byung-chul et al., Counsel for the defendant-appellant)

The superintendent of the tax office

November 10, 201

1. The defendant's rejection disposition regarding the amount of tax withheld for March 2009 against the plaintiff on January 28, 2010 is revoked.

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

The same shall apply to the order.

1. Basic facts

A. The filing of a patent infringement lawsuit

1) On November 30, 2006, Samsung Electronic Co., Ltd. (hereinafter referred to as "Tsung") and its subsidiaries located in the U.S. (hereinafter referred to as "Tsung, etc.") filed a patent infringement lawsuit against the Plaintiff and its parent company located in the U.S. on the part of Samsung Electronic Co., Ltd. (hereinafter referred to as "Tsung Electronic Co., Ltd.") to the Federal District Court of the United States Detewaita on November 30, 2006 that "Tsung Electronic, etc. did not infringe the patent (registration No. 1 omitted), (registration No. 2 omitted), (registration No. 3 omitted), and (Registration No. 3 omitted), and the Plaintiff et al. filed a patent infringement lawsuit to the effect that "the damages suffered by Samsung Electronic Co., Ltd. by infringing the patent (registration No. 4 omitted) registered in the U.S.

2) On December 4, 2006, the Plaintiff et al. filed a patent infringement lawsuit against Samsung Electronic et al. against the U.S. District Court of Tex to the effect that “Tsung Electronic et al., infringes on the above patent registered in the U.S. and compensate for all damages suffered by the Plaintiff et al.,” and the instant case was consolidated into the instant case filed with the Deelwa District Court (hereinafter “instant two cases”).

(b) Conclusion of a compromise contract;

1) On February 5, 2009, the Plaintiff et al. concluded a compromise contract with the main contents of the termination of the instant patent infringement lawsuit and the grant of a patent license to each other (hereinafter “instant compromise contract”). Accordingly, the instant patent infringement lawsuit was concluded.

2) The main contents of the instant reconciliation agreement are as follows.

2.3. The Plaintiff, etc., may manufacture, use, sell, provide, or import the product of Samsung Electronic, etc. to Samsung Electronic, etc., and grant the right to practice the method of patent right in full and in full to the Plaintiff, etc., within five days after the receipt of the payment indicated in paragraph 4.1, and mutually cooperate to the court for the effective conclusion of the agreement. The Plaintiff, etc., as well as the Plaintiff, etc., may manufacture, use, sell, provide, or import the product of Samsung Electronic, etc. with respect to the patent right of the Plaintiff, etc., and grant the right to practice the method of patent to the Plaintiff, etc., with a global, non-exclusive, permanent, and non-exclusive, and full payment of the cost. 3.2. The Plaintiff, etc., upon the request of the Plaintiff, etc., shall immediately divide the license to practice the patent right of Samsung Electronic, etc. into the world, non-exclusive, permanent, and non-exclusive, usable, and, in accordance with paragraph 13, grant the right to practice Samsung Electronic, etc., within 401.

(c) Payment of the price for compromise and circumstances of the disposition of this case;

1) On March 6, 2009, Samsung Industries paid USD 14 million (21,643,200,000,000, hereinafter “the settlement price of this case”) to the Plaintiff on March 6, 2009 under the instant settlement agreement, and paid USD 2.1 million (3,245,130,000) out of which 15% is 15% as the Plaintiff’s corporate tax, and reported and paid the withheld tax to the Defendant on April 10, 2009, when it withheld USD 210,000 (324,513,000) which is 10% of the corporate tax.

2) Meanwhile, at the time of the payment of the settlement of this case, the Plaintiff had a total of 894 registered patent rights all over the world. The number of patent rights by country registered and the amount allocated to each country for the settlement of this case pursuant to Article 4.3 of the Settlement Agreement is as follows.

1.2% of 1.2% of the Republic of Korea of 11.2% of the total of 16.1% of the Republic of Korea of 259,610,400 Won 11,259,610,400, US 710, 79.4% of the total of 143 Won 21,634,634,200,000 won of 19,259,610,400,000 won for the registration of the tickets-registered countries included in the main sentence of this paragraph, Japan, Germany, and China, including 143,16.1% of the total of 3,504,740,400 won for the registration of the tickets-registered countries in the United States of America.

3) On November 16, 2009, the Plaintiff filed a claim with the Defendant for correction and refund under Article 45-2(3) of the Framework Act on National Taxes amounting to 21,374,589,600 won (=21,643,200,000 won - 259,610,400 won - 259,610,400 won for the use of patent rights registered in the Republic of Korea among the amounts of 21,643,20,000 won for the settlement in the instant case (=21,643,200,000 won - 259,610,400 won - 3,206,18,440 won for the foreign source income.

4) On January 28, 2010, the Defendant notified the Plaintiff on January 28, 2010 that “$ 14 million paid by Sungsung Electronic to the Plaintiff constitutes a domestic source income and cannot be refunded since it constitutes withholding tax,” thereby refusing the Plaintiff’s request for correction (hereinafter “instant disposition”).

(d) Implementation of the preceding trial procedures;

The Plaintiff was dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on February 9, 2010, but the claim was dismissed on December 28, 2010.

[Ground of recognition] Facts without dispute, entry of Gap evidence 1 to 7, purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiff's assertion

1) According to Article 6(3) 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 Article 93 Subparag. 9 of the former Corporate Tax Act (wholly amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”), corporate tax on the royalty income of a U.S. corporation is imposed only on income generated from sources in Korea based on the so-called “use doctrine.” The source of patent royalty income based on the use doctrine is the country in which the relevant patent right

2) Therefore, the instant income, which is the cost of patent use not registered in the Republic of Korea, does not constitute domestic source income, and thus, the instant disposition that is deemed the corporate tax base against the Plaintiff, a U.S. corporation, is unlawful.

(b) Related statutes;

It is as shown in the attached Form.

(c) Markets:

1) The key issue of the instant case is whether the instant income received by the Plaintiff, a U.S. corporation, as a royalty for patent right that was not registered in Korea, constitutes a domestic source income subject to corporate tax against the Plaintiff, and first, we examine the relevant applicable statutes

According to Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention, where a corporate tax of the Republic of Korea is applicable, user fees paid as consideration for the use or use of a patent shall be treated as income derived from the source in a Contracting State only if the patent is paid for the use or use of the patent in a Contracting State. Under the principle of patent territorialism, the right of patent licensing, such as the exclusive production, use, transfer, lease, import, or display of patent articles, shall only be effective within the territory of the country where the patent right is registered. Thus, in order to treat patent royalty income of a U.S. corporation as income derived from the source in the Republic of Korea, if the U.S. corporation has a patent license within the Republic of Korea after registering the patent in the Republic of Korea (see Supreme Court Decision 2005Du8641, Sept. 7, 207, etc.).

Meanwhile, Article 93 of the Corporate Tax Act, which lists the domestic source income of a foreign corporation, provides that “if the patent right is used in Korea or is paid in Korea, the patent right is registered abroad and it is used in Korea, regardless of whether it is registered in Korea.” In full view of the language and purpose of legislation, domestic source income of the foreign corporation under the above provision shall be construed as including income paid as compensation for the use of the patent license in cases where the foreign corporation has a patent license in Korea by registering the patent in the Republic of Korea, and the patent right registered outside the Republic of Korea is actually used in the Republic of Korea.”

As such, Article 6 of the Korea-U.S. Tax Convention and Article 93 of the Corporate Tax Act provide for the interpretation of the scope of patent royalty income of a U.S. corporation as income generated from sources in Korea. According to Article 28 of the Adjustment of International Taxes Act, the Korea-U.S. Tax Convention prior to the application of the tax treaty notwithstanding Article 93 of the Corporate Tax Act with respect to the classification of income generated from sources in Korea by foreign corporations. Thus, the Korea-U.

2) However, according to Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention, where a U.S. corporation registered a patent in Korea and has a patent license in Korea, only income paid for the use of the patent license shall be treated as domestic source income of the U.S. corporation. Income paid for the use of the patent right that the U.S. corporation did not register in Korea cannot be considered as domestic source income. Thus, the income of the latter is treated as domestic source income, notwithstanding the provisions of Article 93 of the Corporate Tax Act, and thus, it cannot be treated as income

3) Meanwhile, in light of the process of concluding a compromise agreement of this case as seen earlier and the details and progress of the settlement agreement, the substance of the settlement agreement of this case is the royalty for the patent owned by the Plaintiff, which is the consideration for granting the patent license. Under the principle of patent jurisdiction, the patent license only takes effect in the territory of the country where the patent right is registered. ② Article 4.3 of the reconciliation agreement of this case provides that the settlement agreement of this case, which is the consideration for granting the patent license, shall be apportioned in proportion to the number of patent registered in each country, and the scope of manufacturing and selling the product is limited to individual countries where the patent right is registered. ③ As such, the principle of freedom of contract applies to the agreement on the use of the patent right concluded between private persons, barring any special circumstance that the parties to the agreement of this case, such as the scope of the use of the patent right, which is the subject matter of the patent license, should be freely interpreted to include the payment of the royalties in the pertinent agreement of this case, and thus, the parties to the agreement of this case should be freely interpreted to the agreement.

Therefore, the income of this case, which is the cost of using a foreign-registered patent, is limited to the country of registration of the relevant patent right, so there is no room to include the cost for domestic use in the income of this case.

From this point of view, even if Article 93 of the Corporate Tax Act preferentially applies to the Korea-U.S. Tax Convention in distinguishing the source of the instant income, or Article 6(3) of the Korea-U.S. Tax Convention is interpreted as the same as the provision of Article 93 of the Corporate Tax Act, the instant income cannot be deemed as the U.S. corporation’s domestic source income unless the cost for domestic use of the registered patent right is included in the instant income, and thus, it cannot be viewed as the Plaintiff’s domestic source income.

As to this, the Defendant asserted that the instant amount of income is a domestic source income in light of the fact that Samsung Electronic bears the entire amount of the settlement price in this case and processes it as deductible expenses, and that Samsung Electronic, which is the party to the instant settlement contract, is the party to the instant settlement contract, regardless of whether it is registered in the Republic of Korea in the patent right, it is difficult to determine differently from the circumstances of the said assertion.

4) As seen above, the instant income does not fall under any of the domestic source income of the U.S. corporations, and as such, the withholding tax reported and paid by Samsung Electronic shall be refunded to the Plaintiff. Nevertheless, the Defendant rejected the Plaintiff’s claim for correction regarding the instant income by deeming it as domestic source income, and thus, the instant disposition is unlawful.

3. Conclusion

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

[Attachment Omission of Related Acts]

Judge Cho Man-tae (Presiding Judge)

(1) These U.S. subsidiaries are Samsung Tsch Rexroth, Amera Macoopa (Samic Emeric Americ America, Inc.), Samsung Crocona (Samsimic Americ America, Inc.), Samsung Crocona (Samsemic Americ Americ America, LLC), Samsung Trocona elel (LC) where Samsung Tmeric America, Samsung Tmeric Americ America, LLC (LC) where Tmeric Americ America is located.

2) The fact that the full amount of the settlement payment in this case was paid to the Plaintiff is due to the absence of a patent right owned by the Plaintiff’s parent company in the case of the C&C, which is the Plaintiff’s parent company, and the Defendant, as well as Samsung Electronic and the Defendant does not particularly raise issues. On the other hand, other than Samsung Electronic and the U.S. subsidiaries under the settlement contract in this case, were granted a patent license from the Plaintiff and the fees were included in the settlement payment in this case, Samsung Electronic and the settlement payment in this case was fully paid to the Plaintiff by Samsung Electronic and the Plaintiff. If Samsung Electronic and the full amount was paid, what is the reason or basis for the allocation of the settlement payment in this case, and it is not clear whether Samsung Electronic and the U.S. subsidiary will share the settlement payment in this case with the payment in this case, and if