Samsung Electronic Co., Ltd. (Law Firm Squa, Attorneys Lee In-bok et al., Counsel for the defendant-appellant)

The head of the Dongwon Tax Office (Law Firm LLC, Attorneys Gangnam-gu et al., Counsel for the defendant-appellant)

April 16, 2015

1. The Defendant’s disposition of collecting KRW 64,230,150,000 as corporate tax for the business year 2010 against the Plaintiff on March 20, 2012 and the disposition of imposing KRW 6,423,015,00 as additional tax shall be revoked.

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

The same shall apply to the order.

The following abbreviations are used within the table contained in the main text and below. 1. Incenture Management, L.L.C. ? IV. IV. IV. Investment Management I, L.P. ? Investment Management II, L.C. ? II. II. ? Inc. 4. Inc. Investmenting, L.L.C. II. ? Inc. 5.C. IV. IV. US US 5. Purpose of the Double Taxation Convention and the Double Tax 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 the Income and Income of the United States of America 106.7.8.8.106.16.2

1. Basic facts

(a) The establishment purpose and governance structure, etc. of IV, IV US, IV IL;

(1) IV was established around 200 as a patent-management specialized firm that resides in the United States where five funds, including IIF1, IIF2, are entrusted with the management of their patent rights.

(2) IVL was established under the laws of Ireland on June 21, 2010. At the same time, Senmanos established under the laws of Cenmanos owns all the shares of IV and IL. On the other hand, IV U. IV. established on May 21, 2010 under the laws of the United States Deterawa State has all the shares of Senmanos, and IV U. IV. U.S. U.S. is a company established for the purpose of managing the patent right owned by it by investing all shares in IIF1 and IIF2 (see, e.g., evidence 6, 55).

(3) On June 29, 2010, IV US entered into a contract for re-permission of the patent right owned by Sendos and IIF1 and IIF2 (see Evidence A 4). On June 30, 2010, Sendos entered into a contract for re-permission of the patent right with IVL on June 30, 2010, but terminated the contract on September 22, 2010 (see Evidence A 1).

(4) On November 8, 2010, IV US entered into a contract with IV IL and IIF1, and IIF2 for re-permission of a patent (see Evidence A 2).

B. Conclusion, etc. of the instant contract

(1) On September 17, 2010, the Plaintiff concluded a memorandum of understanding on the use of patent rights owned by IV IL and IIF1 and IIF2 (see Evidence A No. 11).

(2) On November 11, 2010, the Plaintiff entered into a contract with IV IL and IIF1 and IIF2 on compensation for damages and grant of patent rights (hereinafter “instant contract”) on a total of 32,819 patents owned by the Plaintiff (hereinafter “instant patent”). On November 30, 2010, IV IL paid 370 million U.S. dollars (hereinafter “instant royalty”) in return for the infringement and use of the instant patent right until the date of entering into the contract (see, e.g., Evidence Nos. 3, 27, 28, 56, and evidence Nos. 5). ② The patent right registered in the Republic of Korea among the instant patent rights is about 1,902, about 5.7% (i, 902/32, 1819/100/60/60/60) of the instant patent right

(3) IVL paid US dollars 39,073,075 on December 21, 2010 among the instant royalty income received from the Plaintiff from the Plaintiff to IV US, and USD 1,207,373 on June 29, 201. The IV US immediately paid the royalty received from IV ILO to II 1 and IIF2.

C. Circumstances of the instant disposition

(1) On March 20, 2012, the Defendant: (a) was merely a conduit company established for the purpose of tax avoidance; and (b) was not a beneficial owner of the pertinent royalty income; and thus, (c) was not subject to the Korea-Japan Tax Convention; (d) thus, the Plaintiff should have paid the instant royalty pursuant to the main sentence of Article 98(1)3 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same shall apply); and (d) was not required to collect corporate tax on the domestic source income of a foreign corporation pursuant to Article 98(3) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2012; see Article 98(3) of the former Corporate Tax Act (amended by Act No. 94,204,200,2000,000 won, 8640,000,000 won and 405).

(2) The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on June 19, 2012. On June 4, 2013, the Tax Tribunal rendered a decision that “The instant disposition against the Plaintiff by the Defendant,” which was rendered on November 30, 2010, rendered on November 30, 2010 to the Plaintiff, that the Plaintiff’s payment for the infringement and grant of patent rights is attributable to the beneficial owner of IV US dollars or IIF1 and IIF2, and that the amount of tax shall be corrected according to the results of the reexamination into the resident state of the beneficial owner, and that “the remainder of the claim is dismissed” (see subparagraph 5 of the A).

(3) In accordance with the purport of the aforementioned decision of the Tax Tribunal, the Defendant re-examineed the instant royalty income into two F1, IIF2, and its investors, and the beneficial owner of the instant royalty income is the United States and most of these places of residence are the United States, and thus, deemed that the source tax rate (15%) prescribed in Article 14(1) of the Korea-U.S. Tax Convention ought to be applied, and accordingly, issued a corrective disposition to reduce the amount of the collected and assessed tax to KRW 70,653,165,00 (= principal tax + KRW 64,230,150,000 + penalty tax of KRW 6,423,015,00). (See subparagraph 1, 2)

[Judgment of the court below] The ground for recognition is without merit, each of the above evidences, and the purport of whole pleadings

2. The plaintiff's assertion and relevant statutes

A. The plaintiff's assertion

The instant disposition should be revoked in that it is unlawful in that it is as follows.

① Since IV is a resident in Ireland who is equipped with physical and human facilities and is engaged in substantial business activities and the beneficial owner of the instant royalty income, the instant royalty income does not constitute domestic source income pursuant to Article 12(1) of the Korea-ASEAN Tax Convention, and therefore, the Plaintiff is not liable to withhold corporate tax.

② As alleged by the Defendant, if the beneficial owner of the royalty income of this case is deemed to be an investor in IV US or IIF1, or IIF2, the Korea-U.S. Tax Convention shall apply with respect to the royalty income of this case. According to Article 6(3) of the Korea-U.S. Tax Convention, the amount paid as compensation for the use of a patent right that is not registered in the Republic of Korea by a resident of the United States does not constitute domestic source income. Accordingly, the amount paid by the Plaintiff as compensation for the use of the portion not registered in the Republic of Korea among the patent rights

③ Even if IVL is a Doctrine company, the Plaintiff, who was not in a special relationship with IVL, was not in a position to know it. Since the Plaintiff fulfilled its duty of care to confirm the beneficial owner of the royalty income in this case, the imposition of additional tax on the Plaintiff’s failure to withhold taxes is unreasonable.

B. Relevant statutes

It is as shown in the attached Form.

3. Determination as to whether IV IL is an authorized company established for the purpose of tax avoidance

A. substance over form principle and beneficial owner

Article 12(1) of the Korea-U.S. Tax Convention requires that a person who has received a user fee, as a requirement to be imposed only in the other country, on the user fee derived from sources in a Contracting State, be a "resident" in the other Contracting State, as well as a "beneficial owner". Although the meaning of "beneficial owner" is not separately defined in the Korea-U.S. Tax Convention, according to Article 3(2) of the Convention, terms not defined in the Convention have the meaning under the domestic law of a Contracting State, unless the context otherwise requires: (a) the meaning of "beneficial owner" under the domestic law shall be understood as having the substance over form principle.

The principle of substantial taxation 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 is a person to whom the property belongs, different from the name of the person to whom the property belongs, is to be the person to whom the property belongs, not the person to whom the property belongs, because of form or appearance. Thus, the nominal owner of the property is not capable of controlling and managing it, and there is another person who substantially controls and manages it through the control, etc. over the nominal owner, and in cases where the disparity between name and substance arises from the purpose of tax evasion, the income on the property shall be deemed to have been reverted to the person to whom the property is substantially controlled and managed, and such principle shall be applied as it is, unless there is any special provision excluding the interpretation and application of a tax treaty having the same effect as law (see, e.g., Supreme Court Decision 2010Du1948, Apr. 26, 2012)

In the instant case, the purport of Article 12(1) of the Korea-China Tax Convention, as seen earlier, demanding that the resident of Ireland be a “beneficial owner” as a requirement to refrain from tax liability only in its country with respect to the royalty income that he/she received from a resident of the Republic of Korea from the resident of the Republic of Korea, is understood 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 earlier and the purport of demanding the beneficial owner under Article 12(1) of the Korea-U.S. Tax Convention, it is reasonable to deem that “the beneficial owner” under Article 12(1) of the Korea-U.S. Tax Convention is “a person who is deemed to have accrued income as a result of the application of the substance over form

(b) the burden of proof;

The burden of proof exists to the claimant that there is only nominal ownership of income and there is a person who actually obtains such income (see Supreme Court Decision 84Nu505 delivered on December 11, 1984). As the IVIL is an authorized company established for the purpose of tax avoidance, it is merely a transaction party in the form of the contract of this case. Since the beneficial owner of the royalty income of this case is separate owner, it is reasonable to deem that there is the burden of proof to the defendant who asserts that the Korea-ASEAN Tax Convention cannot be applied to the contract of this case.

In this regard, the defendant asserts that the beneficial owner of the royalty income of this case is IV IL, and therefore, the Korean Tax Convention should apply to the contract of this case, and as a result, the plaintiff should assert and prove that the plaintiff has no obligation to withhold corporate tax.

However, according to each provision of Article 98(1), Article 93 subparag. 9 (a), and Article 98-4 of the former Corporate Tax Act and Article 138-4 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010), it is sufficient for the tax authority to assert and prove that the person who received the consideration is a foreign corporation that is not a foreign corporation, that is, a corporation that has no head office or principal office in the Republic of Korea, or a corporation that has no head office or principal office in the Republic of Korea. Furthermore, it is not necessary to determine which the main office of the foreign corporation is located in the Republic of Korea. Thus, it is reasonable to establish that the Plaintiff is merely a resident of Ireland as a resident of Ireland and to prove that the Korea-China Tax Convention applies to the Defendant. However, it is more reasonable to deem that the Plaintiff only obtained a resident tax authority's certificate of non-taxation and exemption from the income for the purpose of this case.

Therefore, the defendant's above assertion is not accepted.

C. Standard for determining whether an authorized company is an authorized company

In order to determine whether a beneficial owner is a separate person, the nominal owner of the income from the transaction, which is the basis of external taxation, belongs to the nominal owner of the transaction, is merely the nominal owner of the income. In order to determine whether a nominal owner is a separate person, the following should be taken into account: (a) the purpose and details of the establishment; (b) details of the business activities; (c) human and physical facilities, including officers and employees; (d) the location of the office; (e) decision-making process related to the transaction in question; (e) details of the movement of funds paid in compensation for the transaction; and (e) whether the purpose of tax avoidance is the primary purpose in relation to the purpose of the establishment; and (e) in this case, by applying the aforementioned criteria, whether the IV

(d) Details of the establishment of IV IL and its business activities;

(1) Since around 2010, Ireland took measures to reduce tax burden, such as reducing corporate tax rates to attract foreign enterprises’ investment, as part of efforts to overcome the financial crisis promoted by real estate economic depression, and was selected on July 2013 as a result of such efforts by the U.S. Economic Specialist S. S. S. S. Embs selected on the one hand (see Evidence 36, 37).

In response to the active measures of Ireland, a large number of multilateral corporations have established a subsidiary in Ireland, which can be determined as a natural effort to reduce the tax burden, and it cannot be concluded that it is a tax avoidance.

(2) On September 16, 2010, the meeting of the board of directors of IV, held on September 16, 2010, confirmed that the active marketing of products owned by IV against European and Asian corporations, along with the support for local customer management, and the development of regional IP, was the main purpose of IV, and decided to employ eight employees, including the preferential employment of financial managers and office administrators (see evidence 7). This means that the IV, which may be viewed as holding company from the time of the establishment of the IL, had a separate member from the IV US, whose business purpose is distinct from those of the IV US.

(3) In fact, IV, even before entering into the instant contract, seems to have been continuously engaged in business activities such as entering into a patent license agreement with the resident of the Federal Republic of Germany, Inc., Inc., Ltd., a resident of the Federal Republic of Germany, AG, and Japan, even after entering into the instant contract (see Evidence A, 26, 27). In this regard, IV, even after entering into the instant contract with the Canadian corporation, seems to have continuously engaged in business activities such as entering into the patent license agreement with the Canadian corporation (see Evidence A, 58, 59, and 60). In that sense, IV, since the Plaintiff did not engage in business activities other than acquisition and transfer of stocks or realized the liquidation process after realizing the liquidation process, it is not possible to conclude the instant contract with the ILO company, it is not possible to conclude the instant Article IV to conclude the instant contract.

In addition, IVL paid corporate tax (tax rate of 10%) to the Japanese tax authority in accordance with Article 13(2) of the Tax Treaty concluded between Ireland and Japan on the royalty received under the Lympus Cpool contract, which is a resident of Japan. If IV US entered into a patent license agreement with the Japanese resident and the patent fee is paid, it is assumed that the Lymus Cpool contract, which is a resident of Japan, is not directly going through IV ILO and the patent fee is paid in accordance with Article 12(2) of the Tax Treaty between the Japanese government and the United States (see Article 12(2) of the Tax Treaty between the Japanese government and the United States). In that sense, it is difficult to see that the hidden establishment purpose of IVL is tax avoidance (see Article 53, 64, 65 of the Tax Treaty).

(e) Human and material facilities of IV IL;

IV following the incorporation of a company, L was employed as an executive officer or employee of the company concerned, who seems to have no special relationship with the company concerned, such as IV and IV US (the non-party 2, the non-party 3, the non-party 4, the non-party 5, the non-party 6, the non-party 7, the non-party 8, and the non-party 9). A large number of residents of Ireland were residents of Ireland, and the income tax from the payment of wages for them was withheld (see evidence 10-1, 2, 3, 15, 16, 40, 78, 79, and 80).

In addition, a separate office (Regus Harcurt Rod Doublin2, 1st Floloor Block, and Ivega District Court Hard Dubin2) leased and used a separate office (refer to evidence Nos. 17, 18, 19-1, 2, 3, 41-1, 68, 69, 70, 73, 74-1, 2, 75, 777-1, 2, 75, 77-1, 2, 42-1, 18, 19-1, 3, and 41-2, 3, and 41-1, 68, 69, 70, 73, and 74-1, 2, 75, and 77).

In light of the above point, IV IL may be deemed to have independent human and material facilities from IV US, which is suspected of the Defendant as the beneficial owner, and in this respect, it is different from the ordinary assistive company in which there is no human member or the executive or employee of the parent company concurrently holds office.

F. The decision-making process of the instant contract

(1) From around 2004 where IV ILO was much more established, the Plaintiff does not dispute the fact that IV had been engaged in negotiations on compensation for infringement of patent rights and patent rights with the Plaintiff. Since IV US was established in 2010, the Plaintiff appears to have been in charge of negotiations on IV US, and since June 21, 2010 where IV ILO was established, IV AL led to negotiations on September 17, 2010 in the name of IV ILO and prepared a memorandum of understanding with the Plaintiff on November 11, 2010, and during that process, IV ILO participated in the board of directors on September 16, 2010, and the minutes were written on September 16, 2010 with the agreement on the grant of patent rights to the Plaintiff (the date on which the agreement on the grant of patent rights to the Plaintiff 10 A.I.S. 3). The agreement on the grant of patent rights to the Plaintiff 10 A.M. 208.

(2) However, even if the subject of a certain legal act was affected by a third party in the course of decision-making that led to the said legal act, such circumstance alone does not necessarily mean that the right to control, manage, and dispose of income arising from such legal act belongs to a third party. This also applies where a holding company establishes a subsidiary and exercises a substantial control over the subsidiary.

As a controlling shareholder of a subsidiary, a holding company has human and material organizations necessary to exercise its influence on the decision-making of the subsidiary, and is in the position of exercising its influence on the decision-making of the subsidiary from an integrated and long-term perspective. Thus, the subsidiary is in the position of exercising its influence on the decision-making of the subsidiary in doing legal acts. However, as long as the subsidiary performs legal activities as an independent legal entity, as long as it performs independent business activities as an independent legal entity, profits and losses arising from its business activities belong to the subsidiary as a matter of principle, and the holding company can be attributed to its profits only when it receives profits

From this point of view, it is difficult to readily conclude that a multi-national company established a subsidiary in a country where the tax burden is low and traded through such subsidiary as a Doing company. This is because the efforts to lower the tax burden is attributable to the nature of the company that mainly focuses on economic profit trend.

Therefore, in order for a company established by a multi-national company to be a Do government-invested company to be deemed a Do government-invested company, the fact that the country in which the company is located has tax haven elements such as taxation at a low rate or non-taxation on overseas source income, etc. In addition, the fact that the company was formally created according to the investment structure and governance structure designed in advance for the main purpose of tax avoidance using the tax treaty should be acknowledged.

(3) In this case, the establishment of IV IL and the conclusion of the instant contract in its name after the negotiation with the Plaintiff can be deemed to have been engaged in business activities in its own name according to its establishment purpose. Thus, it is insufficient to recognize that IV IL is merely a company i.e., the document company as soon as possible only for the conclusion of the instant contract.

(g) Payment of sales performance and corporate tax of IV IL;

IV made sales of US$ 513,325,670, including the royalty income received from the Plaintiff in the business year 2010 and the business year 2011 (the first half), and thereafter made sales of US$ 500 million in total from the business year 2011 (the second half of the business year) to the business year 2013 (see Evidence A No. 12,20,43). As to the business profit of the corporation due to the sales, the Plaintiff reported and paid corporate tax to the tax authorities of Ireland every year, including the royalty income fee (see Evidence A).

In this respect, it is distinguished from a company that does not pay taxes in the country of origin or residence.

H. Transfer of the royalty income of this case

IVL paid to the Plaintiff, etc. the remainder of the gross income from the patent fee, etc. received from the Plaintiff, etc. as royalty (see subparagraph 2 of this paragraph) with the remainder of the amount calculated by deducting the amount set forth in total revenue from the total revenue (see subparagraph 2 of this Article) and paid the amount of 85% to 95% of the net profit earned from the area outside the United States of America to the IV US. Even if the amount of the revenue earned from the patent re-permission agreement, etc. was remitted to the IV US, it is deemed as a patent re-permission agreement between both companies and the two companies, and it is difficult to view that the profit ratio of IVL (5% to 15%) is unreasonably undermining the independence of IVL, taking into account the special relationship between IV and IV US.

I. Compared to the case where IVUS entered into the instant contract

(1) In order to determine whether IV is a corporation established for the purpose of tax avoidance using the tax treaty, it is meaningful to compare IV US with the tax burden under the domestic tax law that is held when IV US entered into the instant contract instead of IV IL.

(2) The latter part of the proviso of Article 93 subparag. 9 of the former Corporate Tax Act stipulates that a foreign corporation registers a right that is necessary to be registered in the exercise of rights, such as patent rights, utility model rights, trademark rights, and design rights (hereinafter “patent rights, etc.”) outside the Republic of Korea, and that when patent rights, etc. were used in the manufacture, sale, etc. in the Republic of Korea, income paid as consideration for use shall be deemed domestic source income. However, Article 28 of the Adjustment of International Taxes Act provides that “The classification of domestic source income of a nonresident or foreign corporation shall take precedence over the tax treaty notwithstanding Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act.” Thus, if a patent right, etc. of a U.S. corporation is used in the manufacture, sale, etc. outside the Republic of Korea, the determination of whether income paid as consideration for use shall not be made in accordance with the Korea-U.S. Tax Convention. Articles 6(3) and 14(4) of the Korea-U.S. Tax Convention cannot be deemed as income generated in the Republic of Korea.

(3) In light of the aforementioned legal principles, even if IVUS did not establish IV IL and entered into a contract with the Plaintiff on the same terms as the instant contract, and received compensation from the Plaintiff for the use of the patent, most of them do not constitute domestic source income. In other words, among the instant patent rights, the patent right registered in Korea is approximately 5.7%, and the amount of withholding tax corresponding to this portion is only KRW 1.380 million. In comparison with the instant royalty income, it is difficult to view that IV USUS established IVIL in Ireland and entered into the instant contract with the Plaintiff under its name in order to avoid the said amount of withholding tax.

(4) In relation to this point, the Defendant asserts to the effect that the Plaintiff’s royalty income paid to IV IL is not the price for the use of patent rights, but the price for the actual use of unregistered patent rights, or that the Korea-U.S. Tax Convention does not apply to the royalty for patent registered other than the U.S. among the royalty income in this case, it should be taxed as domestic source income.

However, according to the contract of this case, there is no evidence that it is a contract for the grant of a patent, and there is no fact that the U.S. corporation has paid the price for the use of the patent within the meaning of distinguishing from the royalty of the patent, and as seen earlier, the patent should be registered in Korea in order to become a domestic source income, so long as the patent is not registered in Korea, the patent cannot be regarded as a domestic source income in that the patent registration office, either the U.S. or a third party,

Therefore, the above arguments by the defendant are without merit.

j. Sub-committee

Considering the purpose and details of the establishment of IV IL, the details of business activities, the decision-making process related to the instant contract with human and material facilities, the details of the transfer of the royalty income of this case, and comparison with the case where IV US entered into the instant contract with the Plaintiff, the evidence submitted by the Defendant alone is insufficient to recognize that IVIL constitutes a case where there is a disparity between the name of attribution and the substance of the royalty income of this case as the Doctrine company, and there is no other evidence to recognize this otherwise, the prior disposition of this case on a different premise shall be revoked as it is unlawful without the need to examine the remaining arguments of the Plaintiff.

4. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is decided as per Disposition by the assent of all participating Justices.

[Attachment]

Judges, Senior Superintendent-Appellee (Presiding Judge) and Lee Jong-hee

Note 1) Generally, it appears that a subsidiary established in a country as an intermediate medium to enjoy benefits under a treaty concluded with any country is called a “domination company”.

2) It is stipulated that Doyaltling in the context of Construing and State acts is the State to be reconvened by the State may be reconvened by Doging.