Collection and Cancellation of Corporate Tax Disposition

IVIL is a beneficial owner of patent fees and domestic source income of domestic unregistered patent fees

Article 93 of the Corporate Tax Act

2015Guhap53282 Corporate Tax Collection and revocation of disposition

Debtor Rehabilitation AAA

Head of Mapo Tax Office

March 11, 2016

April 1, 2016

1. On August 1, 2013, the Defendant’s imposition disposition of KRW 4,106,40,000 of corporate tax for the business year 201 against the Plaintiff and imposition disposition of KRW 410,640,00 of corporate tax for the business year, and the imposition disposition of KRW 509,850,00 of corporate tax for the business year 201 and the imposition disposition of KRW 50,985,00 of corporate tax for the business year 201 shall be revoked.

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

Cheong-gu Office

The same shall apply to the order.

In each below, the following abbreviations shall be used:

1. Inc. management, L.L.C. ? IV;

2. Integment Investment First, L.P. ? IIF1

3. Innive Investment Management II, L.L.C. ? IIF2

4. Inllied Vures Glbal Licens, L.L.C. ? IV US;

5. Sennaos ? Sennaos;

6. Incenture Virtuals International Licens ? E;

7.IP Licensing L.L.C. ? IPL;

8. US Licensing L.L.C. ? USL;

9. The Republic of Ireland ? Ireland

10. Keyprost Republic ? Key prox;

11. United States of America ? United States of America

12. Double taxation avoidance and avoidance of taxes on income and capital gains between the Republic of Korea and Ireland.

Convention for the Prevention of Fiscal Evasion ? Korea-Uyland Tax Convention

13. Double taxation and the prevention of Fiscal Evasion with respect to income between the Republic of Korea and the United States of America;

Convention for the Promotion of International Trade and Investment ? Korea-U.S. Tax Convention

1. Details of the disposition;

A. The plaintiff's status

On August 19, 2014, the rehabilitation debtor B, a company engaged in the manufacture, processing, and sale of electronic equipment, machinery, and apparatus, and parts thereof, and the representative directorCC, who is deemed the manager of BB on the same day, was decided to commence the rehabilitation procedure under the Seoul Central District Court 2014 Gohap10098, filed the instant lawsuit. BB had changed its trade name to BB on October 16, 2015 during the instant lawsuit, and on the same day, B B was newly established as B B B B from the existing company under the rehabilitation plan. On October 21, 2015, CC and DD were appointed as the joint manager of BB and took over the instant lawsuit procedure. In addition, BB had acquired major business assets, human resources, etc. of the existing company and received the decision to commence the rehabilitation procedure from the court (hereinafter referred to as “Plaintiff”) and had all of the instant lawsuit commenced on November 26, 2015.

(b) IV, IV US, establishment purpose, governance, etc. of EE;

1) IV was established around 200 with a view to dealing with the patent management delegated by five funds, including Section IIF1, IIF2, which are located in the United States.

2) IV U.S. also IIF1 and IIF2 are companies established for the purpose of managing their patent rights by investing their entire shares in, and managing their shares. EE was established on May 21, 2010 in accordance with the laws of the United States of Netherlands, and it was established on June 21, 2010 under the laws of Ireland, and it has 9.9% of the EE shares.

3) On September 21, 2010, IVU entered into a contract with IPL and USL and IIF1 and IIF2, a subsidiary established by IIF1 and IIF2, and entered into a contract with IVIL to re-grant the said patent on November 8, 2010.

C. The Plaintiff’s failure to pay and withhold patent fees

On August 31, 201, the Plaintiff used patent rights owned by IIF1 and IIF2 for eight years, and paid 3 million U.S. dollars each year (2.3 million U.S. dollars each year, 15% or more, 3.3 million U.S. dollars each time, 20% or more, 4.3 million U.S. dollars each time). On the other hand, the Plaintiff concluded a contract with IV U.S. to pay 20 million U.S. dollars in cash and pay 20 million U.S. dollars to the Plaintiff (hereinafter referred to as the “instant contract”). Accordingly, the Plaintiff did not consider the Plaintiff’s application for tax exemption on September 29, 201, 200 U.S. dollars and 20 million U.S. dollars each time on October 5, 201, 300 U.S. dollars tax exemption under Article 200, Aug. 16, 2012.

D. Defendant’s collection disposition

After conducting a tax investigation with respect to the Plaintiff on April 1, 2013, the head of the Seoul Regional Tax Office determined that the beneficial owner of the pertinent royalty income is not EE, but IIF1, IIF2, or IVU, a U.S. corporate entity, and notified the Defendant of the determination that the application of the Korea-U.S. Tax Convention should be denied and that 15% of the withholding tax rate on the royalty income should be applied pursuant to Article 14(1) of the Korea-U.S. Tax Convention. The Defendant imposed the Plaintiff tax on August 1, 2013, on the ground that the Plaintiff should have collected corporate tax on the domestic source income of a foreign corporation upon paying the pertinent royalty, on the ground that the Plaintiff did not have to collect corporate tax on the foreign corporation’s domestic source income at issue (amended by Act No. 11128, Dec. 31, 201; hereinafter the same shall apply), Article 98(1) of the former Corporate Tax Act and Article 14(1) of the Korea-U.S.

(e) Execution of the procedure of the trial;

The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on November 8, 2013, but the Tax Tribunal dismissed the appeal on November 4, 2014.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 7, 26, and 27, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Since E is the beneficial owner of the instant royalty income with physical and human facilities and carrying out substantial business activities, it is not allowed to impose the said royalty income pursuant to Article 12(1) of the Korea-Japan Tax Convention, and there is no obligation to withhold corporate tax on the Plaintiff accordingly. Nevertheless, the instant disposition based on a different premise is unlawful.

2) Even if the beneficial owner of the royalty income of this case is not EE, but IV US or IIF1, and IIF2, the payment received as consideration for the use of the patent right that is not registered in the Republic of Korea by the resident of the United States pursuant to Article 28 of the Adjustment of International Taxes Act (hereinafter “International Taxes Adjustment Act”) and Article 6(3) of the Korea-U.S. Tax Convention does not constitute domestic source income. Therefore, the disposition of this case was unlawful for the Plaintiff without withholding corporate tax on the royalty income of this case, not domestic source income, and on the premise otherwise.

3) Even if the EE is not a beneficial owner of the pertinent royalty income, but a domestic source income, the Plaintiff determined that the EE is a beneficial owner through faithfully investigating and securing the data in the process of paying the pertinent royalty income, such as resident certificates, board of directors list, office lease agreement, etc., which can be known that the EE is a resident of Ireland. Therefore, the Plaintiff’s failure to perform the duty of withholding taxes in the instant disposition is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination as to whether EE is a beneficial owner of the royalty income of this case

1) The principle of substantial taxation and beneficial owner

Article 12(1) of the Korea-U.S. Tax Convention requires that the user fee be not only the "resident of the other Contracting State" but also the "beneficial owner" as a requirement to be imposed only on the user fee derived from the source in a Contracting State. Although the meaning of the "beneficial owner" is not separately defined in the Korea-U.S. Tax Convention, according to Article 3(2) of the Convention, the term not defined in the Convention has the meaning under the domestic law of a Contracting State unless the context otherwise requires. Therefore, the meaning of the "beneficial owner" should be understood through the principle of substantial taxation under the domestic law.

The substance over form principle under Article 14(1) of the Framework Act on National Taxes and Article 4(1) of the former Corporate Tax Act, in cases where there are other persons to whom such income, profit, property, transaction, etc. belongs, unlike those under the nominal owner, the nominal owner of the property is not the person to whom such income, etc. belongs, but the person to whom such income, etc. belongs is to be the person to whom such income, profit, property, and transaction, etc., belongs. Thus, the nominal owner of the property has no ability to control and manage it, and there is another person who substantially controls and manages it through the control, etc. over the nominal owner, and such disparity arises from the purpose of tax evasion, the income from the property shall be deemed to have been reverted to the person who actually controls and manages the property, and such principle applies to the interpretation and application of a tax treaty having the same effect as the law, unless there is any special provision excluding it (see, e.g., Supreme Court Decision

In this case, the purport of Article 12(1) of the Korea-Japan Tax Convention, as seen above, demanding that the resident of Ireland be a "beneficial owner" as a requirement to refrain from tax liability only in his or her country with respect to the royalty income that he or she received from a resident of the Republic of Korea is understood as a "beneficial owner" in order to prevent tax avoidance and tax evasion, and the substance over form principle and its context are the same.

Therefore, in light of the legal principles of substance over form principle as seen above and the purport of demanding that the applicant be the beneficial owner under Article 12(1) of the Korea-U.S. Tax Convention, it is reasonable to view that the term "the beneficial owner" under Article 12(1) of the Korea-U.S. Tax Convention is deemed as belonging to the income actually as the result of applying the substance over form principle

2) The burden of proof

With respect to domestic source income paid to a foreign corporation, the taxation requirement to impose corporate tax is satisfied by asserting and supporting that the recipient of domestic source income is a foreign corporation, that is, a corporation that does not have its head office or principal office in the Republic of Korea, and furthermore, it is not necessary to confirm the fact that the main office of the foreign corporation is specific (see Supreme Court Decision 93Nu13162, Apr. 15, 1994). In addition, the burden of proving the non-taxation and tax exemption requirement in a lawsuit is against the taxpayer (see Supreme Court Decision 98Du16095, Jul. 7, 200). In order for the Plaintiff to enjoy non-taxation benefits under the Korea-Japan Tax Convention, E must actively prove the fact that the beneficial owner of the royalty income in this case is the beneficial owner of the royalty in this case.

(iii) the facts of recognition

A) Circumstances and purpose of establishment

EE was established under the laws of Ireland on June 21, 2010. The articles of incorporation of the said company provides for "application, purchase or acquisition of intellectual property rights in a patent right or in any other form registered or unregistered, and the use, development, or granting of licenses for such property." On September 16, 2010, the meeting of the board of directors of the EE held on September 16, 2010 verified that the active marketing of products owned by IV against European and Asian corporations, along with support for regional customer management, development of regional IP sports, is the main purpose of the EE (see evidence 8 and 9).

(B) capital;

EE decided to increase the capital to 25,020 square meters at the meeting of the board of directors held on September 16, 2010, which was less than 20 square meters at the time of establishment, and after June 30, 201, it increased the capital to 547,587 square meters (see evidence A, e.g., evidence 8, 9, 222).

(c)physical facilities;

After the establishment, EE intended to lease from Alcove E 1straw E, Ivegh Court, Harcurt Rod, and Dublin 2 (hereinafter referred to as the “workplace of this case”), but it is necessary to perform additional tegus work inside the above office, etc. On September 29, 2010, EE concluded a lease agreement of 1,842 monthly rent, 200 from 1,842, from 200, from 10 to 31,200, from 2010 to 31,200, from 2010 to 15,70, from 2010 to 31,000, from the place of business of this case. After the short-term lease agreement of 4,41,000 to 31,000,000 from 20,000 to 15,000 from 31,201.

(d)human resources;

(1) Although EE was composed of three executive officers and employees at the time of establishment, the board of directors on September 16, 2010 decided to employ eight executive officers and employees, including the preferential employment of financial managers and office managers, and the Adam Pearson, who is an employee of the IV Group, as a project manager, for 12 to 18 months as a project manager, and the board of directors on August 18, 201 reported on the employment status of employees.

(2) EE publicly announced the employment of Liberer, marketing program manager, patent acquisition administrator, financial manager, office manager, office manager, and secretary, etc. At this time, Helen Kelly, Heud, Dan Ricardson, Kiran Firles, Decian Crew, Decian Crew, Mim-lou Nol in 2013, where 13 executives and employees worked in EE in 2013, and most of the above employees were the nationality of Ireland or the United Kingdom.

(3) EE paid wages to executives and employees from October 201 to March 2012, 2012, withheld income tax and social insurance contributions (see Evidence A9, 12, 14 to 18).

E) Operation of the Board

On September 16, 2010, at the meeting of the board of directors held on September 16, 201, discussed the progress of patent-use transactions with Samsung Electronic Co., Ltd. and the selection of an accounting corporation and law firm that will support the work of the EE. On August 5, 2011, the board of directors held on August 5, 201 decided to open the bank account of the Republic of Korea to grant its authority to Miclel Moson and to grant its authority to negotiate with the Plaintiff on the transaction with the Plaintiff. In addition, on August 18, 2011, the board of directors held on August 18, 201 discussed the price under the instant contract, and agreed to pay 20 million U.S. dollars paid for the acquisition of the Plaintiff’s stocks as patent fees to IV U.S. US, and agreed to grant the Plaintiff the authority to set terms and conditions of the contract with the Plaintiff and to grant its authority to Samsung 10 U.S. tax authorities and Samsung 10 U.S.

F) Business status and payment status of corporate tax

“(1) Prior to the conclusion of the instant contract with the Plaintiff, EE appears to have earned sales from the NOKA, French corporate TRE ALA, and concluded a patent license agreement with a resident of the Federal Republic of Germany (hereinafter referred to as “the Germany”), a resident of the Federal Republic of Germany, after concluding the instant contract with the Plaintiff, respectively, with an Olympus Cporo (hereinafter referred to as “Olympus”), which is a resident of Japan, and continued business activities such as concluding a patent license agreement with the Canadian corporation.” (2) EE was exempted from withholding tax pursuant to the tax agreement with Germany and Ireland when receiving royalty income from the Infine, and was subject to the Japanese limited tax rate of 10% when receiving royalty income from the Omus.

(3) Since EE made sales of USD 513,325,670 in the business year of 2010 and the business year of 2011 (the first half), it had made sales close to USD 500 million in total from the business year of 2011 to the business year of 2013, and it has reported and paid corporate tax to the tax authorities in Ireland on the business profits of the corporation resulting from the sales.

(4) EE prepares and maintains an account book, and the instant royalty paid by the Plaintiff to EE is also recorded in the entire account book (see Evidence A, 22 through 25, 28 through 36, 38).

4) Determination

In the instant case, in full view of the following circumstances acknowledged in addition to the purport of the entire argument, EE is reasonable to deem that it is the beneficial owner of the royalty income of this case, and the circumstances alleged by the Defendant alone are insufficient to reverse the aforementioned recognition. Therefore, the instant disposition on a different premise should be revoked because it is unlawful not to examine the remainder of the Plaintiff’s assertion.

① As seen earlier, EE has reached 547,587 U.S. capital and has independent human and material facilities to operate a business. It is difficult to view it as an acute company to avoid withholding tax on the royalty income in the light of the fact that the EE continues to engage in business activities after the contract of this case entered into with the Plaintiff, and that it pays corporate tax on its profits.

② EE appears to hold a board of directors several times in Ireland to have practically discussed the pending business issues, and there is no reason to deem that the decision was dependent on IV US or Dodos.

③ EE has a business structure that can enjoy the difference between the patent fee to be paid to IV US and the patent fee to be paid by the other company. Thus, even if EE remitted a considerable portion of the revenue earned from the patent re-permission contract, etc. to IV US, it is merely deemed as a result of a patent re-permission contract between the both companies. Meanwhile, according to Articles 2 and 3.5 of the Patent Re-permission Agreement (Evidence 7) between EE and IV US, the royalty to be paid to IV US US shall not be calculated by each case, but shall be calculated at a certain rate out of the revenue other than the source tax from the sales revenue of the NA, which is a patent right granted for one year, by calculating the royalty to be paid to EE at a certain ratio. In light of the above, it cannot be readily concluded that there is no actual income accrued from the royalty of this case solely on the ground that the Plaintiff paid 20 million US dollars to EE immediately.

④ In light of the fact that EE is exempt from withholding taxes in accordance with the German and Ireland Tax Convention on the royalty income received from Infine and that the 10% limited tax rate of 10% has been applied to the royalty income received from the Olympus, the tax authorities in Germany and Japan are deemed to have recognized that EE is the beneficial owner of the above royalty income.

⑤ The inherent nature of a company whose primary purpose is to lower the tax burden by establishing a subsidiary in a country where a multi-national company is less than a tax burden and trading through the subsidiary is reasonable in terms of economic profit trend. As such, it is insufficient to view EE as a document company for only concluding the instant contract solely on the ground that EE was established after February 26, 2010 and the Plaintiff started negotiations with EE around June 201, and the Plaintiff started negotiations with the Plaintiff.

6) The EE paid corporate tax (tax rate of 10%) to the Japanese tax authority in accordance with Article 13(2) of the Japan and Ireland Tax Convention on the royalty received under a patent license agreement with a resident of Japan. If the IV US entered into a patent license agreement with an Olympus who is a resident of Japan without going through EE and received a patent license fee, it is difficult to deem that the hidden establishment purpose of the EE is a tax avoidance using the tax treaty in that it does not have the duty to pay corporate tax to Japan pursuant to Article 12(1) of the Tax Convention concluded between the Government of Japan and the United States of America.

7. The latter part of the proviso of Article 93 subparag. 9 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter referred to as the “instant provision”) stipulates that a foreign corporation registers a right to use a patent right, utility model right, trademark right, design right, etc. outside the country (hereinafter referred to as “patent right, etc.”) that requires registration outside the country, and that even if the patent right, etc. is not registered in the Republic of Korea, income received in return for use shall be deemed domestic source income if the patent right, etc. is used in the Republic of Korea. However, Article 28 of the International Tax Adjustment Act provides that “if domestic source income of a nonresident or a foreign corporation is classified into domestic source income, a tax treaty treaty shall prevail, notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act.” Thus, if the patent right, etc., which was not registered in the Republic of Korea, is used as income generated from domestic sources, it cannot be deemed that the patent right of patent right is not registered in the Republic of Korea.

In light of the above legal principles, even if IVUS, a U.S. corporation, did not establish EE and entered into a contract with the Plaintiff directly, and received compensation for the use of patent rights from the Plaintiff, the patent right subject to the said contract appears not to have been registered in Korea, and thus, the pertinent royalty income cannot be deemed domestic source income. Therefore, it is difficult to view that IVUS established EE, a Domin company, in Ireland, and entered into the instant contract with the Plaintiff under its name in order to avoid withholding of the pertinent royalty income.

In this regard, the defendant does not have a specific definition provision on the meaning of "use" while taking the principle of use in the Korea-U.S. Tax Convention, and if the contents of the treaty are unclear, it should be interpreted in accordance with the domestic laws and regulations of the Contracting State. The above Supreme Court's precedents cannot be applied to this case where the above provision was newly established by Act No. 9267 of Dec. 26, 2008 and was enforced on January 1, 2009. However, even if the key provision is extended to "the scope of intangible assets subject to user income" in the domestic patent registration, which is actually used for the domestic manufacture and sale, the amendment of the law does not affect the scope of intangible assets subject to user income under the Korea-U.S. Tax Convention, and the above Supreme Court's precedent did not affect the establishment of the above new legal provision because it concerns whether the income paid to a foreign corporation on March 6, 2009, which is subsequent to the enforcement of the main provision.

3. Conclusion

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