The case holding that it is reasonable to view that the Korea Electric Power Corporation's membership fees paid each year for participating in research by concluding joint research agreements with the United States Electric Power Research Institute, a non-profit research institute of the United States, cannot be seen as usage fees, and rather paid research and development expenses for joint development of electric technology

In full view of the definition of related Acts and subordinate statutes, the concept of know-how and facts, etc., the case holding that the Korea Electric Power Corporation's annual membership fees paid each year by entering into a joint research agreement with the United States Electric Power Research Institute which is a non-profit research institute of the United States of America and taking part in research and using the results of research shall not be deemed as falling under the usage fees for industrial, commercial or scientific knowledge and experience under the Corporate Tax Act, and rather, it is reasonable to deem that the research and development expenses were paid for joint development of electric technology in the field of nuclear energy, and thus, it is illegal to withhold corporate

[1] Article 1 (1) 1 (see current Article 3 (2) (see current Article 3 (3)) of the former Corporate Tax Act (amended by Act No. 5581 of Dec. 28, 1998), Article 5 (1) 9 (see current Article 93 subparagraph 9 (b)) of the former Corporate Tax Act (see current Article 98 (1) 3) Article 59 (1) 3 (see current Article 98 (1) 3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970 of Dec. 31, 1998), Article 2 (1) 2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970 of Dec. 31, 1998), Articles 6 (3) and 14 (4) (a) of the Convention between the Abstention of Taxation on Income between the Republic of Korea and the United States of America of America,

Korea Electric Power Corporation (Attorney Song-tae, Counsel for defendant-appellee)

Daejeon Head of the District Tax Office

Daejeon District Court Decision 99Gu3004 delivered on June 2, 2000

1. The defendant's appeal is dismissed.

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

1. Purport of claim

The Defendant’s disposition of imposition of KRW 191,059,130 for the business year of 1995 against the Plaintiff on June 11, 1998, the amount of KRW 216,105,530 for the business year of 1996, the amount of KRW 402,520,950 for the business year of 1996, and the amount of KRW 216,105,530 for the business year of 1997, was revoked.

2. Purport of appeal

The judgment below is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

The following facts are either in dispute between the parties or in each description of Gap evidence 1-3, Gap evidence 8, 9, and Eul evidence 1 through 3, and can be admitted by combining the whole purport of the pleadings.

(a) On May 19, 1995, the Plaintiff entered into a joint research agreement with the U.S. Power Research Institute (Electricty Poar hereinafter referred to as the "EPRI"), a non-profit research institute of the United States of America, with the main purpose of generating and supplying electricity.

(b)In accordance with the terms and conditions of the agreement with the above TPP, the Plaintiff, as a member company, has paid the TPP US$ 1,250,000 on December 19, 1995, around August 1, 1996, US$ 2,500,000 on August 1, 1996, and around February 13, 1997, US$ 1,250,000 on membership fees.

C. The Defendant paid the membership fees to the Plaintiff for the use of the research outcomes owned by the EPRI Nuclear Group (NPG) under the EPRI, and thus constitutes information on industrial or scientific knowledge and experience or cost for know-how, and thus, constitutes: (a) Articles 55(1)9(b) and 59 of the former Corporate Tax Act (amended by Act No. 5581 of Dec. 28, 1998); (b) Articles 28 and 29 of the former Adjustment of International Taxes Act (amended by Act No. 5584 of Dec. 28, 1998); (b) Articles 65(1)9(b); (c) and 59 of the former Adjustment of International Taxes Act; (d) Articles 28 and 29 of the Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income between the Republic of Korea and the United States of America; and (e) Articles 6(3) and 194 of the Convention for the Encouragement of International Trade and Investment (hereinafter referred to as “U.”).

2. Whether the instant disposition is lawful

A. The parties' assertion

The defendant asserts that the disposition of this case is lawful as it is in accordance with the above grounds and relevant laws and regulations. First, the plaintiff merely bears expenses incurred in conducting joint research and development as the plaintiff's member company participated in research and development as a member company of EP and did not pay it as a price for using the research results of EPNG. Thus, the disposition of this case where the plaintiff imposed corporate tax on the domestic source income of foreign corporations on the plaintiff, considering the royalty income of PEI, is unlawful. Second, even if not, the disposition of this case is illegal because it violates the principle of trust protection.

B. Whether membership fees paid by the Plaintiff constitute usage fees

(1) Relevant statutes

* Former Corporate Tax Act (wholly amended by Act No. 5581 of Dec. 28, 1998)

Article 1 (Liability for Tax Payment) (1) Any corporation having its head office or principal office in the Republic of Korea (hereinafter referred to as "domestic corporation") shall be liable to pay corporate tax under this Act: Provided, That any corporation established under the provisions of Article 32 of the Civil Act or Article 10 of the Private School Act as a domestic corporation and any corporation established under other special Acts, which has the purpose of establishment and purpose of establishment similar thereto as provided for in Article 32 of the Civil Act (hereinafter referred to as "non-profit domestic corporation") shall be liable to pay corporate tax only on income accruing from profit-making business or revenue (hereinafter referred to as "profit-making business")

1. Agriculture, hunting, and forestry, fisheries, mining, manufacturing, electricity, gas, retail, and waterworks, construction, wholesale, retail, and consumer product repair business, lodging and restaurant, transportation, storage and communications, transportation, storage and communications, financial and insurance, real estate, rental and business services, educational services, health and social welfare services, health and social welfare services, social and private service business, and household service business, as prescribed by Presidential Decree;

(3) Where a corporation having its head office or principal office in a foreign country (hereinafter referred to as "foreign corporation") has income generated from domestic source under the provisions of Article 55 (hereinafter referred to as "domestic source income"), it shall be liable to pay corporate tax under this Act: Provided, That in cases of a foreign government, local government, organization considered as a corporation, or foreign corporation not for profit-making purposes (hereinafter referred to as "non-profit foreign corporation"), it shall be liable to pay corporate tax only on the income generated from profit-making business under the subparagraphs of paragraph (1)

Article 55 (Domestic Source Income) (1) The term "domestic source income" in Article 53 means income as prescribed in the following subparagraphs:

9. Where any of the following assets, information or rights is used in Korea or the price therefor is paid in Korea, the relevant price and income accruing from the transfer of such assets, information or rights (the short term omitted):

(b) Information or know-how on industrial, commercial or scientific knowledge and experience;

Article 59 (Special Cases of Withholding or Collection for Foreign Corporations) (1) Any person who pays a foreign corporation the income amount generated from sources in Korea under Article 5 (1) 1, 2, 4 through 6, and 9 through 11, which is not substantially related to the domestic place of business under the provisions of Article 56 (1) through (3) or does not belong to such place of business (including the amount paid to a foreign corporation with no domestic place of business), with respect to the income of the concerned corporation for each business year, shall withhold the amount under the provisions of the following subparagraphs as corporate tax on the income of the concerned corporation, and pay it to the Government under the conditions as prescribed by the Presidential Decree, by the tenth day of the month following the month in which the date of withholding falls

3. 25/100 of the amount paid, in cases of income enumerated in Article 55 (1) 1, 2, 9 and 11;

* former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970 of Dec. 31, 1998)

Article 2 (Scope of Profit-Making Business) (1) The term "those prescribed by the Presidential Decree" in Article 1 (1) 1 of the Act shall be the earnings from the projects under the Korean Standard Industrial Classification Table publicly notified by the Commissioner of the Statistics Korea (hereinafter referred to as the "Korea Standard Industrial Classification Table"), but shall not include the following projects:

2. Research and development business among service business (excluding commercial research and development business; hereinafter the same shall apply);

* The Korea-U.S. Tax Convention

Article 6 (Income Sources) For the purposes of this Convention, the sources of income shall be treated as follows:

(3) With respect to the right to use or use the property(s) as provided in paragraph (4) of Article 14 (Rent), only if the right to use or use the property is paid for within a Contracting State, the fees provided in that paragraph shall be treated as income derived from sources in that Contracting State.

Article 14 (User Fee)

(4) The term "user fee" used in this section means:

(a)all kinds of payments received in consideration of the copyright of literary, artistic or scientific works, or of the copyright, patent, design, draft, drawing, secret or secret, trademark or other similar property or rights, knowledge, experience, skills (technology), ships or aircraft (hereinafter referred to as "aircraft") of films or tapes for film, radio or television broadcast;

(2) point of dispute

Article 55 (1) 9 (b) of the Corporate Tax Act provides that "information on industrial, commercial or scientific knowledge and experience or know-how is one of the royalty income." "information or know-how" refers to any technical information which is not published directly necessary for the industrial production or production process of the product regardless of whether it can be the subject of a patent right, and the characteristics of know-how include ① non-public technical information; ② The ultimate purpose of introducing know-how lies in reducing production costs or creating excess profits by repeating it industrial or commercial repeated use; ③ Now know-how is the duty of confidentiality that should not disclose the information to others instead of being granted the exclusive right to use it; ④ Whether the cost of know-how is calculated in response to the frequency, period, production or use of the supplied technology or industrial property; ② whether the cost of know-how is calculated in proportion to the profit-making business; ② whether it exceeds the amount of membership fees paid for research and development or non-profit corporation in addition to the result of research and development of the case.

(3) Facts

The following facts may be acknowledged if Gap evidence 8, 9, Gap evidence 12 through 16, Eul evidence 5, and Eul evidence 5, and evidence of the court below's testimony of the defendant 1, the defendant 1, the defendant 1, the defendant 1, and the defendant 1, the defendant

(A) EPRI is a non-profit research institute established by major power companies in the U.S. for the purpose of joint research, which is a non-profit corporation that operates membership fees of participating members. Among which, the nuclear group (EPRI NPG) under the EPRI, 42 companies, including the Plaintiff, France Emergie de France, U.K. Nlectriccc, have subscribed to membership fees.

(B) On May 19, 195, the main contents of the joint research and development agreement concluded with the EP are as follows.

(1) The Convention aims at the research and development of nuclear groups and the plaintiff's nuclear related organizations, while nuclear-related organizations in Korea may use the EPI's technology, information, etc. through the plaintiff.

(2) A meeting shall be held at least once a year to establish strategic issues, research priorities, etc. between the Plaintiff and the EPRI, exchange wide range of opinions related to joint research program planning, budget, major project plans, and systematic research between senior technical personnel on both sides, and each representative on both sides shall participate in mutual management committee.

③ The Plaintiff’s benefits

The plaintiff has the right to use and grant non-exclusive rights to the results of research in progress or completed by all nuclear groups except for advanced landscape development programs, and may pay and use usage fees at a price lower than the standard price supplied to the nuclear group for the results that the nuclear group does not own in whole or other organizations have exclusive rights to use. In order to participate in all operating committees except for advanced landscape development programs, and to assist the plaintiff in making technical decisions or analysis, technical support is provided by the nuclear group.

(4) Benefits of the Atomic Energy Group.

The plaintiff shall pay the US$ 3,800,000 each year for three years ($ 2,500,000 among them shall be used for a nuclear group project that is new or in progress according to the decision of the TPP, and the remaining US$ 1,300,000 shall be used for research and development expenses selected by the employer groups within the nuclear group desired by the plaintiff, and the research and development technology developed or already owned by the plaintiff for three years in the future shall be provided to the TPP free of charge in accordance with the mutual authorization and permission agreement, and the nuclear related agency in the Republic of Korea shall provide the results obtained by using the technology of the TPP within a certain limit.

(5) Exchange of skills and human resources.

The PEI may have one nuclear group researcher permanently stay in order to transfer his/her technology to the Plaintiff, and the group of nuclear groups bears the Institute's salaries and other expenses, and the Plaintiff bears his/her relevant office expenses, and the Plaintiff may have the researcher stay in the TPP by up to five to five to obtain information from the PEI, but the PEI bears expenses related to the office, duties, travel expenses, etc. within a certain scope.

(6) The term of an agreement shall be three years, and decision on the renewal of the agreement shall be made through mutual consultation after three years.

(C) Membership fees paid by members of the TPP shall be determined according to the annual amount of development and sales profit of members.

(D) During the term of the above agreement, the president of the Plaintiff’s electric power research institute participated in the research and development plan, strategies, decision on research tasks, budget allocation, etc. by attending the PEI’s nuclear advisory committee each year, and the Plaintiff’s researchers participated in the evaluation of the progress of the task, decision on the order of priority for the selection of annual research tasks, etc.

(E) The Plaintiff: (a) designated a domestic person responsible for each research task; (b) dispatched five researchers with ten or more years of experience to the TPP; (c) in cooperation with the domestic responsible person; and (d) performed the work by having them present their opinions on the joint research tasks of the TPPNG; (c) while carrying out 436 joint research tasks of the TPPNG, the Plaintiff’s dispatched researchers performed five tasks to solve the Plaintiff’s pending issues during the agreement period; and (d) performed four joint research tasks at home.

(f) Membership fees paid by other member companies, including the Plaintiff, shall be allocated and used as expenses necessary for the implementation of the common study research tasks of the members and the pending research tasks requested by a specific member, and the Plaintiff may use all outcomes (excluding the advanced waterway development program) produced from the EPI NPG during the relevant agreement period without any separate consideration. The outcomes for the past 20 years prior to the agreement period may also be perused without any separate consideration.

(4) Determination

(A)In light of the aforementioned legal definition, the concept of know-how and factual relations, etc., the membership fees paid by the Plaintiff cannot be deemed as falling under the usage fees for industrial, commercial, or scientific knowledge and experience prescribed by the Corporate Tax Act, and rather, it is reasonable to deem that the research and development costs for joint development of electric technology in the field of nuclear energy have been paid to PEI.

(1) The PEI is a non-profit corporation established for the joint use of the research outcomes, which is a major power company in the United States and a part of a foreign company in the United States by participating in the membership fees and paying membership fees, and carries out research and development activities concerning the thermal power, nuclear energy, transmission, distribution, environment, etc. with funds, and there is no evidence to regard that the research outcomes were carried out for commercial purposes by receiving membership

(2) In general, if any other person intends to use information or know-how on industrial, commercial or scientific knowledge and experience, which another person has exclusive right, it shall be premised on the fact that such information or know-how already brings more profit than before he uses such information or know-how, or that it will bring more loss to the person in need of such information or know-how. In this case, even if the Plaintiff paid membership fees and allocated the membership fees to the members for the research tasks in common in the members or for the implementation of pending issues requested by the Plaintiff, the Plaintiff shall not be guaranteed that the research is successful, and thus, a significant portion of the risk burden on failure in the research should be borne by the Plaintiff. Accordingly, it should be viewed as different from the case where the Plaintiff pays consideration on the premise of a certain excess profit-making, and uses information or know-how on industrial, commercial or scientific knowledge and experience.

③ In light of the contents of the above agreement, the plaintiff also has developed or already owned a part of the research and development technology during the period of the agreement to the TPP free of charge, and had the researcher dispatch one another. The payment of the research staff's wages and other expenses that the TPP dispatched to the plaintiff for technical transfer is required to be made in a nuclear group. The plaintiff's president of the Korea Power Research Institute directly participates in the meeting of the representative and present his opinion on the decision of research tasks, budget allocation, etc., and actively participated in the decision-making process through voting, it is difficult to view that the plaintiff unilaterally paid user fees to the TPP and used the research results.

(B) Furthermore, even if the above membership fees constitute usage fees, insofar as there is no evidence to deem that the EPI, a non-profit foreign corporation, obtained membership fees from its members and engaged in research and development business for commercial purposes, the above membership fees cannot be deemed taxable income for profit-making business pursuant to the proviso of Article 1(3) and Article 1(1)1 of the former Corporate Tax Act, and Article 2(1)2 of the former Enforcement Decree of the Corporate Tax Act, and thus, the Defendant’s withholding of corporate tax on the above membership fees is unlawful.

3. Conclusion

Thus, the plaintiff's claim seeking the revocation of the disposition of this case is justified under the premise that the disposition of this case is illegal, and the judgment of the court below is just, and the defendant's appeal is dismissed.

Judges Jeong-ju (Presiding Judge) Kim Dong-dong Jin-hun