The meaning of Article 55 (1) 9 (a) of the Corporate Tax Act that "where patent rights, etc. are used in Korea, income accrued from such consideration" or Article 6 and Article 14 (4) of the Korea-U.S. Tax Convention that "only where a royalty on patent rights, etc. is paid for the right to use or use such property in a Contracting State, it shall be treated as income derived from such source in that Contracting State."

In Korea where a foreign corporation’s patent right is not registered and exports or sells the pertinent patented product to a foreign country where the patent right is registered, the issue of the use or infringement of the pertinent patent right means the income received in compensation for the use of the patent license where the foreign corporation having the patent right has the patent right to import or sell the patented product in a foreign country where the patent right has its effect and does not relate to the use of the patented product itself in the Republic of Korea. Thus, Article 55(1)9(a) of the Corporate Tax Act provides that “if the patent right, etc. is used in Korea, it shall be treated as income resulting from the use of the patent right, etc. as one of the domestic source income of the foreign corporation under Article 5(1)9(a) of the Corporate Tax Act or Articles 6 and 14(4) of the Korea-U.S. Tax Convention.”

Articles 55(1)9(a) of the Corporate Tax Act and Articles 6 and 14(4) of the Korea-U.S. Tax Convention

Attorney Lee Jae-chul et al., Counsel for the defendant-appellant

Head of the tax office;

Seoul High Court Decision 90Gu21508 delivered on June 21, 1991

The judgment below is reversed and the case is remanded to Seoul High Court.

We examine the grounds of appeal.

1. According to the reasoning of the judgment of the court below, the plaintiff's domestic corporation producing the above evidence and the non-party 1's domestic subsidiary's domestic corporation's non-party 1's non-party 1's domestic subsidiary's non-party 1's domestic subsidiary's domestic subsidiary's non-party 1's domestic subsidiary's non-party 2's domestic subsidiary's non-party 1's domestic subsidiary's domestic subsidiary's non-party 1's domestic subsidiary's domestic subsidiary's non-party 1's domestic subsidiary's domestic subsidiary's non-party 9's domestic subsidiary's non-party 1's domestic subsidiary's non-party 1's domestic corporation's non-party 9's domestic corporation's non-party 1's domestic corporation's non-party 1's domestic corporation's non-party 9's domestic corporation's non-party 1's domestic corporation's non-party 9's domestic corporation's non-party 1's domestic corporation's domestic corporation'.

2. Article 1 (3) of the Corporate Tax Act provides that a corporation having its head office or principal office in a foreign country shall be liable to pay corporate tax pursuant to this Act if any domestic source income under the provisions of Article 55 exists, and Article 55 (1) of the same Act provides that the term "domestic source income" means the income as specified in any of the following subparagraphs, and subparagraph 9 of the same Article provides that "where information or right is used in Korea or the price therefor is paid in Korea, the income arising from the consideration therefor shall be the same." Article 1 (3) of the Corporate Tax Act provides that "the copyright of scientific or artistic works, patent right, trademark right, design, model or secret formula or process, radio, film and tape for television broadcast and other similar assets or rights, and Article 59 (1) of the same Act provides that with respect to a foreign corporation having no business place in Korea, the domestic source income of the person who pays the amount of domestic source income as specified in Article 55 (1) 9 shall be liable to withhold taxes:

In addition, Article 6 of the Korea-U.S. Tax Convention provides that the user fee (which refers to the user fee for patent, copyright, etc.) stipulated in paragraph 4 of Article 14 shall be treated as income derived from the source in a Contracting State only if it is paid for the right to use or use the property in a Contracting State

3. However, the right to grant a patent to a patent applicant by the disposition of a patent by the State is a right to grant a patent under the patent law of each country and the law thereof, and the patent holder's exclusive right to exclusively produce, use, transfer, lease, import, or exhibit patent goods, etc. shall be effective only in the territory of the country where the patent is established and registered. Therefore, in cases where the patent right of a foreign corporation is exported or sold to a foreign country where the patent is manufactured and registered in the Republic of Korea where the patent right of the foreign corporation is not registered, the issue of use or infringement of the patent right is merely a matter concerning the use or infringement of the patent license granted by the foreign corporation having the patent right to import or sell the patented goods in the foreign country where the patent right of the foreign corporation is not registered.

In the end, the meaning of Article 55 (1) 9 (a) of the Corporate Tax Act, which provides that "if patent rights, etc. are used domestically, the income accrued from such consideration or the right to use or use the patent rights, etc. under Article 6 and Article 14 (4) of the Korea-U.S. Tax Convention shall be treated as income derived from the source in a Contracting State only if it is paid for the right to use or use the property in a Contracting State."

4. Therefore, if the court below is true, it is clear that the patent use fee of this case paid by the local subsidiary to the Subdivision company is paid for the infringement or use of the patent license of the Subdivision company in the United States because the automobile produced by the plaintiff was imported, sold, and paid in return for the infringement or use of the patent license of the Subdivision company in the United States, and it is not paid in return for the use of the patent substance in the Republic of Korea. Thus, it cannot be deemed as income of the Subdivision company in the Republic of Korea.

5. Nevertheless, the lower court’s determination that the instant taxation disposition was lawful on the grounds as indicated in its reasoning does not err by misapprehending the legal principles on relevant statutes and treaties, thereby adversely affecting the conclusion of the judgment.

The argument pointing this out is with merit.

Therefore, the judgment of the court below is reversed and the case is remanded to the court below. It is so decided as per Disposition by the assent of all Justices.

Justices Kim Yong-sung (Presiding Justice)