Scambling Commerz Duz LC (Attorney Choi Jae-hwan, Counsel for the plaintiff-appellant)

The superintendent of the tax office

June 20, 2012

Suwon District Court Decision 201Guhap3891 Decided February 9, 2012

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 disposition against the plaintiff on January 28, 2010 regarding the amount of tax withheld for March 2009 3,245,130,000 won is revoked.

2. Purport of appeal

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

1. cite the judgment of the first instance;

The reasoning for the use of the instant case is as follows: (a) the part on the pertinent judgment of the first instance court (from the second to the sixth to the third to the third to the third to the third to the following), except for the following: (b) whether the instant disposition is legitimate; (b) the part on the grounds for the use of the instant case is stated in Article 8(2) of the Administrative Litigation Act; and (c) the main text of Article 420 of the Civil Procedure Act.

○ 6 9th "(2)" shall be deleted.

○ The following shall be added to the 6th 11th:

2) Even if domestic usage fees for a patent right that has not been registered in Korea constitute domestic source income through the revision of the Corporate Tax Act, the instant income does not constitute the Plaintiff’s domestic source income, a foreign corporation, since it did not pay domestic unregistered patent rights as the price for domestic use, but paid as the cost for the use of patent

B. Defendant’s assertion

1) As a concept of “use”, Article 6(3) of the Korea-U.S. Tax Convention assumes both the actual use of a patent that does not entail any legal right and the right to use a patent accompanying the right under the law. Meanwhile, upon the amendment of the Corporate Tax Act on December 26, 2008, the latter part of Article 93 Subparag. 9 of the Korea-U.S. Tax Convention (amended by the Corporate Tax Act on December 26, 2008, “if a right necessary for the exercise of a right, such as a patent, is registered overseas and is used for manufacture, sale, etc. in the Republic of Korea, regardless of domestic registration, it shall be deemed domestic source income.” In full view of the contents and the proviso of Article 6(3) of the Korea-U.S. Tax Convention and the proviso of Article 93 Subparag. 9 of the newly established Corporate Tax Act, the income of this case paid for the use of the Plaintiff’s patent in Korea, which was not registered only in the Republic of Korea, constitutes the

2) The instant income is a domestic source income in light of the fact that Samsung Electronic bears the entire amount of the instant reconciliation and is treated as deductible expenses at the time of reporting Samsung Electronic Corporate Tax, and that Samsung Electronic, which is a party to the instant reconciliation contract, stipulates that the instant reconciliation price is the price for domestic use regardless of whether it is registered

2. A new part.

C. Determination

1) Whether the Korea-U.S. Tax Convention is applied

According to Article 28 of the Adjustment of International Taxes Act, tax treaties shall take precedence in application to the classification of domestic source income of foreign corporations, notwithstanding Article 93 of the Corporate Tax Act. Accordingly, with respect to the classification of domestic source income between the Republic of Korea and the United States of America, the Korea-U.S. Tax Convention shall take precedence over the Corporate Tax Act.

According to Article 6(3) of the Korea-U.S. Tax Convention, the user fee for the right to use or use the property (other than the property stipulated in paragraph (5) of this Article concerning ships or aircraft) stipulated in Article 14(4) of the same Convention shall be treated as income derived from sources in a Contracting State only in cases where the right to use or use the same property within a Contracting State is paid for the right to use or use the same property. According to Article 14(4)(a) of the same Convention, the user fee shall be charged for any kind of money received in consideration of literary, artistic, scientific works copyright or films or tapes for film or tape for film, radio or television broadcast, patent, design, new design, drawing, secret or confidential form, trademark or other similar property or rights, knowledge, experience, skills, vessel or aircraft use.

According to Article 93 Subparag. 9 of the Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same), where patent rights, etc. are used or paid in Korea, the relevant consideration is one of domestic source income. The latter part of the proviso provides, “if the relevant patent right, etc. is registered in a foreign country and the relevant right required to be registered is used for manufacturing, selling, etc. in Korea, the relevant right is deemed used in Korea regardless of whether it is registered in Korea

However, under the territorial principle of patent right, a patent holder’s right to practice a patent takes effect only within the territory of the country where the patent right is registered (see, e.g., Supreme Court Decision 2005Du8641, Sept. 7, 2007). Since a patent right that is not registered in Korea does not exist in Korea, it cannot be said that a patent right that is not registered in Korea is used for a patent right that is not registered in Korea. Therefore, under the latter part of Article 93 Subparag. 9 of the Corporate Tax Act, “patent right registered in Korea and used for manufacturing, selling, etc. in Korea” under the latter part of Article 93 Subparag. 9 of the Corporate Tax Act is not a patent right under the Patent Act, even if the term “patent right” is used under the Corporate Tax Act, it shall be deemed that the patent right refers to manufacturing method, technology, information, etc. included in the registered patent right actually used for manufacturing, selling, and thus, it constitutes a patent right that is actually similar to the patent agreement or the patent right granted in Korea.

2) Whether it is a consideration used in Korea

Comprehensively taking account of the following circumstances, the income of this case does not constitute domestic source income since the Plaintiff’s overseas-registered patent right does not include the cost of using the patent in Korea (the de facto patent use cost).

① The instant compromise contract was aimed at completing patent infringement lawsuits, such as damages that the Plaintiff et al. infringed upon the Plaintiff et al.’s patent registered in the U.S., or infringed on the patent right, such as Samsung Electronic et al. registered in the U.S., and at granting patent license

② Article 4.3 of the Settlement Contract of this case provides that the payment for the settlement in this case shall be apportioned to each country for “manufacturing and selling products in each country with a patent right registered, in proportion to the number of patent registered.” The scope of distribution is limited to each country with a patent right registered. This is to determine the payment for the settlement in this case in return for the use of a patent right, such as manufacturing and selling products, in each country

③ Under the territorial principle of patent right, the patent license is still effective only within the territory of the country where the patent is registered. Thus, even if Samsung Industries uses the patent that it did not have been registered in the Republic of Korea for manufacturing, selling, etc. products in the Republic of Korea, the Plaintiff et al. did not assert the patent infringement and could use Samsung Industries without any restriction.

3. Conclusion

The defendant's appeal is dismissed.

Judges Kim Jong-dae (Presiding Judge)