Whether income received in relation to a patent right that was registered in a foreign country by a U.S. corporation and not registered in the Republic of Korea can be deemed domestic source income (negative)

Articles 2(1)2 and (5), 93 subparag. 9 (see current Article 93 subparag. 8), and 98(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Articles 6(3) and 14(4)a 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

Supreme Court Decision 2005Du8641 Decided September 7, 2007

e. Digal Corporation (Law Firm Spagal Corporation, Attorneys Ba-man et al., Counsel for the plaintiff-appellant)

The superintendent of the tax office

Seoul High Court Decision 2012Nu33111 decided April 25, 2013

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. A. Article 2(1)2 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) provides that a foreign corporation is liable to pay corporate tax only when it has income generated from domestic sources. Articles 2(5) and 98(1) provide that a person who pays a foreign corporation the amount of certain domestic source income, such as Article 93 subparag. 9, is liable to withhold the pertinent corporate tax.

However, Article 93 of the Corporate Tax Act provides that "if a foreign corporation uses any of the following rights, assets, or information (hereafter referred to as "rights, etc." in this subparagraph) in Korea or pays the price therefor in Korea, the relevant consideration and income accruing from the transfer of such rights, etc.: Provided, That where a contract for preventing double taxation on income provides that the relevant income constitutes domestic source income on the basis of the place of use in the contract for preventing double taxation on income, the consideration for the rights, etc. used overseas shall not be deemed domestic source income, regardless of whether it is paid in Korea. In such cases, where the relevant patent right, etc. is registered overseas and it is used in manufacturing, selling, etc. in Korea, the right required to be registered in the exercise of the right, such as patent right, utility model right, trademark right, design right, etc. (hereafter referred to as "patent right, etc." in this subparagraph) shall

Meanwhile, Article 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 Income and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Convention”) provides that “The term “use fees used in this Article shall mean the following:” (a) provides that “the copyright of literary, artistic, and scientific works, or the copyright, patent, design, new design, drawings, secret or confidential formula, trademark or other similar property or rights, knowledge, experience, skills, vessels, or aircraft in consideration of the right to use or use such property within a Contracting State,” and Article 6(3) provides that “the use fees provided for in Article 14(4) shall be treated as the income of a Contracting State only in cases where the right to use or use such property is paid within a Contracting State:

B. The latter part of the proviso of Article 93 subparag. 9 of the Corporate Tax Act stipulates that even if a foreign corporation registered a patent right outside of Korea and did not register the patent right in Korea, income received in return for the use thereof shall be deemed domestic source income if the patent right was used in manufacturing, selling, etc. However, Article 28 of the Adjustment of International Taxes Act provides that “in regard to the classification of domestic source income of a nonresident or foreign corporation, tax treaties shall prevail notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act, with regard to the classification of domestic source income of the nonresident or foreign corporation,” and it cannot be determined pursuant to the Korea-U.S. Tax Convention as to whether the income received in return for the use thereof should be deemed domestic source income if the patent right of the U.S. corporation was registered outside of Korea and is used in manufacturing, selling, etc. in Korea. Therefore, the patent right holder cannot be deemed domestic source income paid in return for the use of the patent right within the territory of the registered country, and thus, the patent right cannot be deemed domestic source income paid in Korea.

2. A. citing the reasoning of the judgment of the court of first instance, the court below acknowledged the following facts: ① The Plaintiff, a U.S. corporation, while proceeding with the U.S. court in a patent infringement lawsuit against Samsung Electronic Co., Ltd. (hereinafter “S.”), concluded a patent intersection license and a resolution agreement with Samsung Electronic Co., Ltd. (hereinafter “instant contract”); ② Samsung Electronic Co., Ltd, on October 14, 2009 under the instant contract, paid the Plaintiff the amount of USD 1250,00 (1,48,50,000) for the patented invention registered or pending in the U.S. in the U.S. (hereinafter “instant income”) as the agreed price, and withheld corporate tax of KRW 217,275,727,500 and resident tax of KRW 21,727,500 for the Defendant on November 10, 209, the Defendant reported and paid corporate tax of KRW 217,275,000, Mar. 13, 2009.

Furthermore, the lower court determined that the Plaintiff’s disposition rejecting the Plaintiff’s claim for correction was unlawful on the ground that, under the premise that Article 28 of the Adjustment of International Taxes Act provides that the income received as consideration for the use thereof shall be deemed domestic source income under the Korea-U.S. Tax Convention, since Article 93 of the Corporate Tax Act preferentially applies to the classification of domestic source income of foreign corporations, and thus, whether the income received as consideration for the use thereof shall be deemed domestic source income pursuant to the Korea-U.S. Tax Convention, on the ground that the U.S. corporation registered a patent in the Republic of Korea and received as consideration for the use of the patent license for the patent registration, on the premise that the patented invention protected by the pertinent patent right is not actually implemented, but the patent right shall be classified into source income based on the country where the patent right is registered, the instant income received as consideration for the use of the patent license for the patent registration in the U.S. shall not be deemed domestic source income without domestic registration, and that it cannot be deemed that the manufacturing method, technology, information, etc. included in the relevant patent right.

B. In light of the above provisions, legal principles, and records, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to whether the U.S. corporation is a domestic source income received in return for the use of patent rights registered in a foreign country only and not registered in the Republic of Korea

3. Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)