Seoul Administrative Court-2013-Gu -13457 (2015.05)

early trial 2012west 5245

The user fee for domestic unregistered patent does not constitute domestic source income (national plaque)

(As in the judgment of the court of first instance) The source of patent fee income is only the country with which the patent is registered, so it does not constitute domestic source income unless registered in the Republic of Korea.

In the second instance, 100% of the judgment of the first instance is accepted, and the contents of the judgment are the contents of the judgment of the first instance.

Article 93 Subparag. 9 of the Corporate Tax Act (No. 8 after amendment)

2015Nu48114 Revocation of Disposition of Rejecting Corporate Tax;

Foreign corporations 00

AA Head of the Tax Office

The second instance decision

National Flag

December 11, 2015

15, 2016

1. The corporate tax amount assessed against the Plaintiff on August 27, 2012, which was withheld for July 2009 by the Defendant.

The rejection disposition regarding the application for correction of KRW 1,513,440,00 and KRW 283,770,000 shall be revoked.

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. The plaintiff is a corporation of the United States of America (hereinafter referred to as the "US"), and multiple patents registered in the United States of America

Patent Law No. 5,235,635 (Patent Law No. 5,235) has the right to patent.

B. On October 18, 2007, the Plaintiff filed a patent suit against the Plaintiff’s patent right (No. 592,555, No. 571, 394, 502, 502,689, 5,247,621 of the U.S. Patent No. 5, 502, 5489, 621 of the U.S. Industrial Complex District Court (U.S.) (U.S.) in the U.S. Tech’s U.S. subsidiaries and 00 U.S. subsidiaries (0 U.S. subsidiaries) claiming the prohibition of patent infringement and damages against the U.S. patent right (hereinafter referred to as “the patent infringement suit”).

(C) On April 9, 2009, the Plaintiff and the 00 electronics entered into a patent license agreement and a compromise agreement (hereinafter referred to as the "conciliation agreement of this case") with the main contents of the termination of the patent infringement lawsuit of this case and the grant of a patent license to 00 electronics, and the main contents of the agreement are as stated in the "conciliation agreement of this case". (d) on July 20, 2009, when the Plaintiff paid 8 million US dollars to the Plaintiff in return for the grant and exemption of patent license and the special agreement for the non-permission of this case, the Plaintiff withheld corporate tax of 15%,513,440,000 ($ 1.2 million US dollars) and the corporate tax of 2837,700,000 US dollars received from the Defendant on July 20, 2009 (hereinafter referred to as the "electronic settlement agreement of this case") and the corporate tax of 1.5 million US dollars was withheld to the Defendant around 1.5 million US dollars.

E. On April 12, 2012, the Plaintiff filed a request for correction with the Defendant for the correction and refund of the total amount of corporate tax withheld on July 2009, by asserting that the settlement price in the instant case does not constitute the Plaintiff’s domestic source income. Accordingly, according to Article 93 Subparag. 9 of the Corporate Tax Act as amended on December 26, 2008, and Articles 14(4) and 6(4)1 of the Korea-U.S. Tax Convention, the Defendant notified the Defendant of the refusal of the request for correction on the ground that the royalty subject to the request for correction falls under the domestic export related to the products that the patent right was registered in Korea and constitutes the domestic source income (hereinafter “instant disposition”).

F. The Plaintiff was dissatisfied with the instant disposition and brought an appeal with the Tax Tribunal on November 16, 2012.

B. The Tax Tribunal dismissed the appeal on February 26, 2013.

[Grounds for Recognition] Unsatisfy, entry in Gap evidence 1 to 11 (including the relevant branch numbers), pleading

The purport of the whole

2. Whether the instant disposition is lawful

A. The grounds for the instant disposition asserted by the Defendant are as follows.

1) The principal claim between the Republic of Korea and the United States of America regarding USD 8 million among the settlement cost of this case: (a) 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 “Korea-U.S. Tax Convention”) adopt the principle of place of use concerning the standard for determining the source of royalty income; (b) there is no express provision regarding the "use of a patent registered overseas" in accordance with the Corporate Tax Act of the Republic of Korea in accordance with Article 2(2) of the Korea-U.S. Tax Convention; (c) on December 26, 2008, the meaning of "use" should be interpreted in accordance with the Korean Corporate Tax Act. Meanwhile, if the Corporate Tax Act was amended on December 26, 2008, the rights required for registration of patent rights, such as patent rights, were registered overseas and used domestically, regardless of whether they were registered or not registered in Korea.

B) Preliminary assertion: According to the Korea-U.S. Tax Convention, a contracting party, and the patent fees income registered in addition to the U.S. are not income generated from sources in Korea, but also income generated from sources in the U.S.; thus, there is a vacancy in which the Korea-U.S. Tax Convention alone cannot determine the source of the above income. Thus, pursuant to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, the source of royalties for patent registration in the third country should be determined. According to

2) Corporate tax on USD 1,500,000 among the reconciliation charges in the instant case

Article 14 of the Korea-U.S. Tax Convention does not distinguish between the cost of patent use and the cost of patent transfer and includes both the cost of patent use and the cost of patent transfer, so if the pertinent technology is used for domestic manufacture, etc., the cost of patent transfer that is not registered in the Republic of Korea constitutes domestic source income under Article 93 subparagraph 9 of the former Corporate Tax Act

B. Relevant statutes

Attached Form 3 is as listed in the "relevant Acts and subordinate statutes".

C. Determination

According to Article 2(1)2 of the former Corporate Tax Act, a foreign corporation is obligated to pay corporate tax only on domestic source income, unlike domestic corporations. Thus, in order to impose corporate tax on the Plaintiff’s income as a U.S. corporation, the income must first be divided into domestic source income pursuant to Article 93 of the former Corporate Tax Act. Meanwhile, pursuant to Article 28 of the former Tax Adjustment Act (amended by Act No. 9914 of Jan. 1, 2010), where a tax treaty is concluded between Korea and the resident state of the foreign corporation, a tax treaty is preferentially applied to the classification of domestic source income of the foreign corporation, notwithstanding Article 93 of the former Corporate Tax Adjustment Act. Thus, even if a certain amount of income of a foreign corporation constitutes domestic source income under the Corporate Tax Act of Korea, the tax treaty shall also be treated as a domestic source income in the tax treaty, but Korea may impose the corresponding income of the foreign corporation as a result of distribution of the tax treaty with the resident state of the foreign corporation and the taxation authority of the foreign corporation.

1) As to corporate tax on the portion of USD 8 million in the settlement of this case

Of the reconciliation cost of this case, US$8 million is composed of 00 electronic exemption from liability for using the Plaintiff’s overseas registered patent right prior to the reconciliation contract of this case, and compensation for using the Plaintiff’s overseas registered patent right after the reconciliation contract of this case, and 00 electronics are composed of compensation for using the Plaintiff’s overseas registered patent right after the reconciliation contract of this case. Thus, the portion of the settlement cost of this case which is 8 million US dollars out of the settlement cost of this case paid to the Plaintiff from 00 electronics to 00 U.S.’s overseas registered patent right of the Plaintiff’s overseas patent right of the Plaintiff’s possession, and we examine whether such royalty income constitutes the Plaintiff’s domestic source income pursuant to the former Corporate Tax

A) Judgment on this part of the Defendant’s primary argument

(1) Whether a disposition to impose tax on Korea under Article 93 subparagraph 9 of the former Corporate Tax Act occurs

(A) According to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, income accrued when a patent right is used in Korea or when the price is paid in Korea shall be deemed domestic source income of a foreign corporation. However, according to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, where a contract for preventing double taxation on income provides for whether the income falls under domestic source income based on the place of use in the contract for preventing double taxation on income, the price for the patent right, etc. used overseas shall be deemed domestic source income of a foreign corporation, regardless of whether the patent right is paid in Korea. However, the latter proviso of the same Article provides that "if the patent right, etc.

In addition, Article 6 (3) of the Korea-U.S. Tax Convention which is a kind of agreement on the avoidance of double taxation on income provides that "the user fee for the right to use or to use the property (property other than that provided for in paragraph (5) of this Article concerning ships or aircraft) under Article 14 (4) of the same Convention shall be treated as income derived from the source in a Contracting State only when it is paid for the right to use or to use the same property in a Contracting State." This means that the source of royalty income is determined in Korea or the United States on the basis of the place of use of the property which is subject to the payment of the user fee. However, in the territorial principle of patent right, the patent right's right to practice a patent becomes effective only within the territory of the country where the patent right is registered (see, e.g., Supreme Court Decision 2005Du8641, Sept. 7, 207; Article 93 (main sentence) of the former Corporate Tax Act and Article 93 (main sentence) of the former Corporate Tax Act are not registered in the country.

In full view of the aforementioned provisions and legal principles, when a foreign registered patent owned by a corporation of the United States, which is a party to the Korea-U.S. Tax Convention, is used in the country of its registration by manufacturing, selling, importing, etc., the royalty income for the relevant patent under the former Corporate Tax Act shall not be the domestic source income of the U.S. corporation, even if our resident or domestic corporation pays the price. However, unless considering the Korea-U.S. Tax Convention, if a domestic unregistered patent owned by a U.S. corporation is used for manufacturing and selling in the Republic of Korea,

(B) There is no dispute between the parties that produced mobile phones and television using the Plaintiff’s domestic unregistered patent that is a U.S. corporation. Therefore, if the Plaintiff’s domestic unregistered foreign patent out of the settlement amount was used in the manufacture, sale, etc. of mobile phone terminals in Korea prior to the settlement agreement of this case and the Plaintiff’s unregistered foreign patent out of the settlement amount paid for the use in Korea after the settlement agreement of this case, it constitutes the Plaintiff’s domestic source income pursuant to Article 93 subparag. 9 of the former Corporate Tax Act. However, in full view of the following circumstances revealed by adding up the overall purport of the arguments, the portion of the settlement amount of this case’s 8 million U.S. dollars out of the settlement amount was used in the registered area except for the Plaintiff’s U.S. or the third country’s registered patent right prior to the settlement agreement of this case, it should not be said that the 000 electronic patent amount was paid for the manufacture, sale, etc. of the Plaintiff’s domestic unregistered foreign patent in Korea prior to the settlement agreement of this case, or paid for the Plaintiff’s domestic sales in Korea.

① The settlement agreement of the instant case terminated a lawsuit claiming damages, etc. filed by the Plaintiff on the grounds that the Plaintiff infringed the Plaintiff’s patent registered in the U.S., and concluded to grant a patent license to part of an overseas registered patent right owned by the Plaintiff, or to transfer part of an overseas registered patent right.

② Under Article 2.1 of the Settlement Agreement, the Plaintiff may manufacture, use, sell, propose, or otherwise process all products using the Plaintiff’s patent right anywhere in the world other than the Republic of Korea, with the exception of the Republic of Korea, on condition that the settlement price is paid. The Plaintiff explicitly excluded the Plaintiff from the subject of usage fees in cases where the Plaintiff’s overseas-registered patent right is used for the manufacture, sale, etc. of products in the Republic of Korea. There are no circumstances suggesting that the Plaintiff would have agreed to pay the Plaintiff’s overseas-registered patent right to pay the price for the manufacture, sale, etc. of products in the Republic of Korea by disregarding the language and text of the Settlement Agreement.

③ Under the territorial principle of patent right, a patent license is still effective only within the territory of a country where the patent is registered. Thus, even if the Plaintiff’s unregistered overseas patent that was not registered in Korea is used for the manufacture, sale, etc. of goods in Korea, the Plaintiff may not assert patent infringement and use the 00 electronic patent without any restriction. Therefore, there is no reason to pay a royalty to the Plaintiff for using the Plaintiff’s unregistered overseas patent in Korea for the manufacture, sale, etc. of goods in Korea.

(C) If so, the portion of USD 8 million out of the settlement of this case is a consideration for patent rights used overseas, and thus, it does not constitute the Plaintiff’s domestic source income even according to Article 93 subparag. 9 of the former Corporate Tax Act. Therefore, since there is no taxation authority in Korea on the portion of USD 8 million out of the settlement of this case, this part of the Defendant’s primary argument is without merit without further review.

(2) Whether the right to taxation exists in Korea pursuant to Article 6(3) of the Korea-U.S. Tax Convention

Even if the portion of the settlement of this case is 8 million U.S. dollars for the plaintiff's domestic source income pursuant to Article 93 subparagraph 9 of the former Corporate Tax Act, and thus, the above income is subject to the Korea-U.S. Tax Convention prior to determining the regional source of the above income, it should be determined in accordance with the Korea-U.S. Tax Convention.Article 14 (4) of the Korea-U.S. Tax Convention provides that "the royalty for use" shall be deemed as "the royalty for domestic source income of the plaintiff" and "the royalty for domestic source income of the plaintiff's domestic source income" under Article 93 subparagraph 4 of the former Corporate Tax Act shall not be deemed as "the royalty for use" under Article 14 (1) of the Korean-U.S. Tax Convention and the royalty for use shall not be deemed as "the royalty for domestic source income of the plaintiff's domestic source income, such as the royalty for use, patent, new design, secret or other similar property, experience, function, or the royalty for use of the plaintiff's domestic source income."

B) Judgment on the Defendant’s conjunctive assertion on this part

The Korea-U.S. Tax Convention applies on the income of a corporation of the United States. However, according to the main text and proviso of Article 93 subparag. 9 of the former Corporate Tax Act, even if the U.S. corporation, which is a contracting party to the Korea-U.S. Tax Convention, pays for the use of a patent right owned by the corporation overseas, the royalty income for the patent right falls under “the cost for the patent right used overseas” and does not constitute a domestic source income of the U.S. corporation. corporation. In this context, the term “foreign country” is not limited to the U.S. corporation, which is a contracting party to the Korea-U.S. Tax Convention. Thus, even if the Plaintiff paid the amount equivalent to the cost for the use of the patent right of the third country-registered corporation of USD 8 million among the reconciliation in this case, it cannot be deemed as a domestic source income under the former Corporate Tax Act, and thus, it cannot be viewed that the taxing right on the above income does not accrue in Korea. Therefore, even if the Korea-U.S. Tax Convention provides for the above portion of the patent fee for the Plaintiff-registered income payment.

2) As to corporate tax on the portion of USD 1,500,000 among the reconciliation in the instant case

A) Whether taxation is imposed in Korea pursuant to Article 93 subparag. 9 of the former Corporate Tax Act

According to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, income generated from the transfer of a patent or other similar asset is classified as income generated from a foreign corporation’s domestic source income. According to the above facts, among the reconciliation fees in this case, the part concerning the transfer of the Plaintiff’s U.S. or a third country’s registered patent falls under “income generated from the transfer of a patent” and among the above US$ 1500,000,000, 000, 000, 00 electronics are “income generated from the transfer of a patent right” and the part concerning the right to grant a right to use a registered patent (U.S. Patent No. 5,608,873) of the above US dollars 1.

Therefore, since the portion of USD 1.5 million among the settlement cost of this case constitutes domestic source income under the main sentence of Article 93 subparagraph 9 of the former Corporate Tax Act, the plaintiff's taxation right on the above income arises in Korea.

B) Whether the right to taxation exists in Korea pursuant to Article 6(3) of the Korea-U.S. Tax Convention

Even if the portion of the settlement cost of this case falls under USD 1,50,000,00, which is the domestic source income under the former Corporate Tax Act, the issue of whether Korea can impose tax on the Plaintiff, a U.S. corporation is finally decided in accordance with the Korea-U.S. Tax Convention that takes precedence over Article 93 of the former Act pursuant to Article 28 of the Korea-U.S. Tax Adjustment Act. According to Article 14(4)b of the Korea-U.S. Tax Convention, the amount acquired through the same sale, exchange, or other disposal of a patent, among the income generated from the sale, exchange, or other disposal of a patent, constitutes "user fee corresponding to productivity, use, or disposal of a patent right". Under Article 6(3) and (7) of the same Convention, the royalty income from the sale or other disposal of a patent right, as well as the source of the royalty income from the use of the patent right, falls under USD 50,000,000,000,000,0000 won won, which is equivalent to 7,00,000.

3) Sub-determination

Since the settlement price of this case does not fall under the Plaintiff’s domestic source income, the corporate tax reported and paid by 00 electronics pertaining thereto constitutes “where the tax base and tax amount on the receipt of withholding exceeds the tax base and tax amount to be reported under the tax law” pursuant to Article 45-2(4)3 and Article 45-2(1)1 of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013), and both the corporate tax reported and paid by 00 electronics must be refunded to the Plaintiff. Nevertheless, the Defendant deemed the settlement price of this case as the domestic source income under the former Corporate Tax Act and the Korea-U.S. Tax Convention, and thus refused the Plaintiff’s request for correction. Accordingly, the disposition of this case is unlawful.

3. Conclusion

Therefore, the plaintiff's claim of this case is justified and it is ordered to accept all of them.

The decision shall be rendered as above.