Seoul Administrative Court-2014-Gu 62685 ( November 14, 2014)

Income from domestic unregistered patent fees shall not be deemed domestic source income under the Korea-U.S. Tax Treaty.

Income from domestic unregistered patent fees shall not be deemed domestic source income under the Korea-U.S. Tax Treaty.

Article 93 of the Corporate Tax Act

2014Nu71520 Revocation of revocation of revocation of corporate tax rectification

AAAAAA Corporation

BB Director of the Tax Office

Seoul Administrative Court Decision 2014Guhap62685 decided November 14, 2014

August 28, 2015

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The defendant's rejection of correction of corporate tax of 38,798,640 won and corporate tax of 339,057,480 won for the business year of 2011 against the plaintiff on November 11, 2013 shall be revoked in entirety.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Quotation of the reasons for the judgment of the first instance;

This judgment is based on the reasoning of the judgment of the court of first instance, except for dismissal or addition of the following matters, and thus, it is based on Article 8(2) of the Administrative Litigation Act and the main text of Article 420 of the Civil Procedure Act.

(1) The interval between Grades 5, 8 through 7, and 8 shall be as follows:

B. Whether it constitutes domestic source income

1) Criteria for determination

The latter proviso of Article 93 subparag. 8 of the former Corporate Tax Act (amended by Act No. 11063, Jan. 1, 2013; hereinafter the same) stipulates that even if a foreign corporation registers a patent right, etc. outside of Korea and does not register it in Korea, if the patent right, etc. was used in manufacturing, selling, etc. in Korea, the income paid in return for the use thereof shall be deemed domestic source income. However, Article 28 of the Adjustment of International Taxes Act stipulates that "the classification of domestic source income of a nonresident or a foreign corporation is preferentially applied to a tax treaty notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act," so it is merely registered outside of Korea and whether a U.S. corporation’s patent right, etc., which was not registered in Korea, should be deemed domestic source income in Korea

No determination may be made in accordance with the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes and the Encouragement of International Trade and Investment (hereinafter “Korea-U.S. Tax Convention”). However, Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention provide that a patent holder’s right to grant a patent exclusively produces, uses, transfers, leases, imports, or displays patent articles only within the territory of the country where the patent right is registered and has a patent license in the Republic of Korea, only the income that a patent holder is granted a patent license in the Republic of Korea if the U.S. corporation registered a patent right in the Republic of Korea and has the patent license in the Republic of Korea, is limited to domestic source income, and the interpretation of the Korea-U.S. Tax Convention does not mean that the patent right cannot be infringed upon, and thus, the income that a U.S. corporation received in connection with the patent cannot be considered as domestic source income (see, e.g., Supreme Court Decision 2014Du12686, Dec. 17, 2014).

2) In the case of the instant patent contract

In light of the above legal principles, the Plaintiff is a U.S. corporation through the patent contract of this case.

Inasmuch as the Plaintiff acquires and holds all rights, such as ownership, to a technology patent that was registered in a foreign country, including the United States, and that is not registered in the Republic of Korea, the amount paid in return for the right to the technology patent cannot be deemed domestic source income of a U.S. corporation without considering whether the patent right was actually used in manufacturing, selling, etc. in the Republic of Korea (the Defendant is prohibited from supplying goods infringing on intellectual property rights abroad, and Article 4(1)1 of the Act on the Investigation of Unfair International Trade Practices and Remedy against Injury to Industry prohibits the supply of goods, etc. in the Republic of Korea, and also shows a tendency to relax the territorialism in the TRIPS Agreement, the amount paid by the Plaintiff to the U.S. corporation in return for the right to the technology patent of this case shall be deemed domestic source income of the U.S. corporation. However, according to each provision of the former Corporate Tax Act, the Adjustment of International Taxes Act and the Korea-U.S. Tax Convention, respectively, cannot be deemed to be the amount paid by the Plaintiff to the U.S. corporation in return for the right to the technology of this case.

(2) On face 11, the following shall be added to Chapter 8:

"The actual substance" is the former Act on the Investigation of Unfair International Trade Practices and Remedy against Injury to Industry (Amended by Act No. 12290, Jan. 21, 2014).

Article 4 (Prohibition of Unfair International Trade Practices)

(1) No one shall engage in any of the following acts (hereinafter referred to as "unfair international trade practices"):

1. The following acts involving goods, etc. which violate patent rights, utility model rights, design rights, trademark rights, copyrights, neighboring rights, program copyrights, layout-design rights of semiconductor integrated circuits, geographical indications, or trade secrets protected by the statutes of the Republic of Korea or the treaties to which the Republic of Korea is a party (hereinafter referred to as "goods, etc. violating intellectual property rights"):

(a) Supplying goods, etc. violating intellectual property rights into Korea from overseas, or importing goods, etc. violating intellectual property rights or selling such imported goods domestically;

(b) Acts of exporting goods, etc. violating intellectual property rights or manufacturing them domestically for the purpose of export;

2. Conclusion

Therefore, the plaintiff's claim of this case shall be accepted on the grounds of its reasoning, and the judgment of the court of first instance is just, and the defendant's appeal is dismissed as it is without merit, and it is so decided as per Disposition.