Whether domestic unregistered patent fees constitute domestic source income

The cost of using a patent registered in a foreign country as the previous Supreme Court precedents but not registered in the Republic of Korea does not constitute domestic source income without examining whether the relevant patent has been actually used in the manufacture, sale, etc. in the Republic of Korea.

Article 93 (Domestic Source Income)

2013Guhap13457 Disposition of revocation of refusal to correct corporate tax

AAA ELS

000 director of the tax office

May 8, 2015

June 5, 2015

1. The defendant's rejection disposition against the plaintiff on August 27, 2012 regarding the amount of corporate tax withheld for July 2009 and the amount of corporate tax withheld for the plaintiff on July 2009 is revoked.

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

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a corporation of the United States of America (hereinafter referred to as the “U.S.”), and holds a large number of patent rights registered in the United States (such as patent rights No. 5,235,635).

B. Around October 18, 2007, the Plaintiff filed a lawsuit against the U.S. Telecommunications Eastern District Court (U.S.) (U.S.) (U.S. Patent No. 5,592,55,771,394, 5,502,689, 5,247,621) of the Plaintiff’s patent right (CCC U.S. Patent No. 5,592,555, 5,771, 394, 5,502,689, 5,6247,621) against the Plaintiff’s patent right, etc. (hereinafter “instant patent infringement lawsuit”). BB electronic and CCC U.S., a U.S. subsidiary of BB electronic company, filed a lawsuit against the Plaintiff’s U.S. U.S. patent infringement prohibition and damages (hereinafter “instant patent infringement lawsuit”).

C. On April 9, 2009, the Plaintiff and BB electronics entered into a patent license license agreement and a compromise agreement, the main contents of which are the termination of the patent infringement lawsuit in this case and the grant of patent license to BB electronics (hereinafter referred to as the “conciliation agreement in this case”). The main contents are as described in the “conciliation agreement in this case.”

D. On July 20, 2009, BBE paid US$ 15% to the Plaintiff for the grant of a patent license and exemption from a patent license, and for the non-establishment special agreement, BBE withheld corporate tax of US$ 15% among them, and withheld corporate tax of US$ 15% of them (OO$) in return for the transfer of patent right, etc. (hereinafter “the settlement price of this case”). BBE reported and paid each withheld corporate tax to the Defendant prior to August 10, 2009.

E. On April 12, 2012, the Plaintiff filed a request for correction with the Defendant for the correction and refund of the total amount of corporate tax withheld on July 2009, by asserting that the settlement price in the instant case does not constitute the Plaintiff’s domestic source income. Accordingly, according to Article 93 subparag. 9 of the Corporate Tax Act, amended on December 26, 2012, and Articles 14(4) and 6(4) of the Korea-U.S. Tax Convention, the Defendant notified the Defendant of the refusal of the request for correction on the ground that “the royalty subject to the request for correction is generated in relation to the products exported by the United States, etc. where a patent right is registered in Korea and constitutes domestic source income” (hereinafter “the instant disposition”).

F. On November 16, 2012, the Plaintiff dissatisfied with the instant disposition, filed an appeal with the Tax Tribunal, but the Tax Tribunal dismissed the appeal on February 26, 2013.

[Grounds for Recognition] Facts without dispute, entries in Gap evidence 1 to 11 (including the relevant branch numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The grounds for the instant disposition asserted by the Defendant are as follows.

1) Corporate tax on the portion of US$O out of the reconciliation of the instant case

A) Main argument: Article 14(4) of the 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 Taxes on Income and the Encouragement of International Trade and Investment (hereinafter referred to as the “Korea-U.S. Tax Convention”) adopts employer attention on the criteria for determining the source of royalties income; however, there is no explicit definition on the use of overseas registered patent rights that have not been registered in the Republic of Korea; thus, the meaning of "use" under the Corporate Tax Act of the Republic of Korea in accordance with Article 2(2) of the Korea-U.S. Tax Convention should be interpreted. Meanwhile, as the Corporate Tax Act was amended on December 26, 2008, the latter part of Article 93(9) of the same Act provides that "where a right necessary for the exercise of a patent right, such as a patent right, is registered outside the Republic of Korea and used for manufacturing, sale, etc. in the Republic of Korea, it shall be deemed domestic use regardless of whether a patent right is registered in the Republic of Korea."

B) Preliminary assertion: According to the Korea-U.S. Tax Convention, a contracting party, and the patent fee income registered in addition to the U.S. does not mean income generated from sources, but also income generated from sources in the U.S.; thus, there is a vacancy in which the Korea-U.S. Tax Convention alone cannot determine the source of the above income. Accordingly, pursuant to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, the source of royalties for patent registration in the third country should be determined, and according to

2) Corporate tax on the portion of US$O out of the reconciliation of the instant case

Article 14 of the Korea-U.S. Tax Convention (hereinafter “Korea-U.S. Tax Convention”) does not distinguish between the patent use cost and the transfer cost, and thus, if the pertinent patent-related technology is used for manufacturing, etc. in Korea, the transfer cost of patent registered with the U.S. or a third country constitutes domestic source income pursuant to Article 93 subparagraph 9 of the

B. Relevant statutes

Attached Form 3 is as listed in the "relevant Acts and subordinate statutes".

C. Determination

According to Article 2(1)2 of the former Corporate Tax Act, a foreign corporation is obligated to pay corporate tax only on domestic source income, unlike domestic corporations. Thus, in order to impose corporate tax on the Plaintiff of a U.S. corporation, the income must first be divided into domestic source income pursuant to Article 93 of the former Corporate Tax Act. Meanwhile, in cases where a tax treaty is concluded between the Republic of Korea and the resident state of the foreign corporation, notwithstanding Article 93 of the former Corporate Tax Adjustment Act (amended by Act No. 9914 of Jan. 1, 2010), as to the classification of domestic source income of the foreign corporation, notwithstanding Article 93 of the former Corporate Tax Adjustment Act, the tax treaty shall take precedence over the classification of domestic source income of the foreign corporation. Thus, even if a certain amount of income of the foreign corporation constitutes domestic source income under the Corporate Tax Act of Korea, the tax treaty shall also be deemed domestic source income of the foreign corporation as a result of distribution of the tax treaty with the resident state of the foreign corporation.

1) As to corporate tax withholding on the portion of USOO U.S. dollars out of the settlement of this case, the portion of USOO US dollars out of the settlement of this case is composed of BB electronics exemption from using the Plaintiff’s registered patent right prior to the settlement of this case and the portion of consideration for BB electronics to use the Plaintiff’s registered patent right after the settlement of this case. Thus, among the settlement of this case, the portion of USOOO USD out of the settlement of this case is paid by BB electronics to the Plaintiff from the past to the future of the registered patent right owned by the Plaintiff. Accordingly, we examine as to whether such royalty income constitutes the Plaintiff’s domestic source income pursuant to the former Corporate Tax Act and the Korea-U.S. Tax Convention.

A) Judgment on this part of the Defendant’s primary argument

(1) Whether a disposition to impose tax on Korea under Article 93 subparagraph 9 of the former Corporate Tax Act occurs

(A) According to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, income accrued when a patent right is used in Korea or when the price is paid in Korea shall be deemed domestic source income of a foreign corporation. However, according to the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, where a contract for preventing double taxation on income provides for whether the income falls under domestic source income based on the place of use in the contract for preventing double taxation on income, the price for the patent right, etc. used overseas shall be deemed domestic source income of a foreign corporation, regardless of whether the patent right is paid in Korea. However, the latter part of the proviso of the same Article provides that where the patent right

In addition, Article 6 (3) of the Korea-U.S. Tax Convention on Income provides that "the use fees for the right to use or use the property (property other than that provided for in paragraph (5) of Article 14 of the same Convention for ships or aircraft) as provided for in paragraph (4) of Article 14 of the same Convention shall be treated as income which is derived in a Contracting State only in cases where the right to use or use the same property in a Contracting State is paid for the right to use or use the same property in a Contracting State, which means that the place of use of the property subject to the payment of the user fees shall be determined in Korea

However, under the territorial principle of patent right, a patent holder's right to practice a patent, such as producing, using, transferring, leasing, importing, or displaying a patent product by monopolying the patent product, has its effect only within the territory of the country where the patent right is registered (see, e.g., Supreme Court Decision 2005Du8641, Sept. 7, 2007). "Use of a patent" under the main sentence of Article 93 subparagraph 9 and the main sentence of Article 93 subparagraph 9 of the former Corporate Tax Act means using a patent right of a foreign corporation for manufacturing, selling, importing, etc. goods, etc. in the country where the patent right is registered. On the other hand, since a patent right which is not registered in the Republic of Korea does not exist in the Republic of Korea, it cannot be presented that a patent right which is registered in a foreign country under the latter part of subparagraph 9 of Article 93 of the former Corporate Tax Act is not a patent right under the former Corporate Tax Act but a patent right that is actually used in the Republic of Korea (hereinafter referred to as "domestic manufacturing, etc.").

In full view of the aforementioned provisions and legal principles, if a foreign registered patent owned by a corporation of the United States, which is a party to the Korea-U.S. Tax Convention, is used in the country of its registration by means of title, sale, import, etc., the royalty income for the relevant patent under the former Corporate Tax Act is not the domestic source income of the U.S. corporation, even if our resident or domestic corporation pays the price. Provided, That unless considering the Korea-U.S. Tax Convention, if a domestic unregistered patent owned by a U.S. corporation is used for manufacturing and selling in Korea, the

(B) There is no dispute between the parties that BB electronics produced mobile phone terminals and television using the Plaintiff’s domestic unregistered patent that is a U.S. corporation. Therefore, if the Plaintiff’s domestic unregistered foreign patent out of the settlement amount was used in the manufacture and sale of mobile phone terminals in Korea prior to the instant settlement agreement and the Plaintiff’s domestic patent out of the settlement amount was paid as consideration for the use in Korea after the instant settlement agreement, it shall be deemed as the Plaintiff’s domestic source income pursuant to Article 93 subparag. 9 of the former Corporate Tax Act.

However, in full view of the following circumstances revealed in light of the purport of the entire pleadings, the portion of USD OO in the settlement of this case was used in the area where the patent right of the plaintiff was registered with the exception of the Republic of Korea prior to the settlement of this case, or was paid in consideration of the fact that the above patent right was granted in the place where the patent right was registered with the Republic of Korea other than the Republic of Korea after the settlement of this case. BB electronic used the plaintiff's domestic unregistered foreign patent prior to the settlement of this case for manufacturing, selling, etc. in Korea, or paid in consideration of the manufacture, sale, etc. of the plaintiff's domestic unregistered foreign patent after the settlement of this case.

① The settlement agreement of this case terminated a claim suit, such as an order of prohibition or damages, filed by the Plaintiff on the ground that BB electronic, etc. infringed the Plaintiff’s patent registered in the U.S., and entered into a contract with BB to grant the Plaintiff a patent license for part of the overseas registered patent right, or to transfer part of the overseas registered patent

② Under Article 2.1 of the Settlement Agreement, the Plaintiff may manufacture, use, sell, propose, or otherwise process all products using the Plaintiff’s patent right anywhere in the world other than the Republic of Korea, with the exception of the Republic of Korea, on condition that the settlement price is paid. The Plaintiff explicitly excluded the Plaintiff from the subject of usage fees in cases where the Plaintiff uses the Plaintiff’s overseas registered patent right for manufacture, sale, etc. of products in the Republic of Korea, by explicitly providing that the Plaintiff is granted a non-exclusive and impossible license that does not raise any objection to the already manufactured products. In light of the language and text of the Settlement Agreement, there is no ground to view that BB electronic agreed to pay the Plaintiff’s overseas registered patent right to the Plaintiff’s patent for manufacture, sale, etc. of products in the Republic of Korea.

③ Under the territorial principle of patent right, a patent license is still effective only within the territory of the country where the patent is registered. Thus, even if BB electronic uses the Plaintiff’s unregistered overseas patent not registered in the Republic of Korea for manufacturing, selling, etc. of products in the Republic of Korea, the Plaintiff does not assert patent infringement, and BB electronic can use it without any restriction. Therefore, there is no reason to pay the Plaintiff the royalty for using the Plaintiff’s unregistered overseas patent for manufacturing, selling, etc. of products in the Republic of Korea.

(C) Thus, since the portion of USD OO out of the settlement of this case was paid for patent rights used overseas, it does not constitute the Plaintiff’s domestic source income even according to Article 93 subparag. 9 of the former Corporate Tax Act. Therefore, since there was no taxation authority in Korea on the portion of USOO out of the settlement of this case, this part of the Defendant’s primary argument is without merit.

(2) Whether the right to taxation exists in Korea pursuant to Article 6(3) of the Korea-U.S. Tax Convention

Even if the portion of the settlement of this case, US$ 8 Q million, among the settlement of this case, constitutes a royalty income for the Plaintiff, a U.S. corporation, from the Plaintiff’s domestic unregistered patent, and thus, it constitutes a domestic source income under Article 93 subparag. 9 of the former Corporate Tax Act, and thus, there is a right to impose tax on the above income in Korea, pursuant to Article 28 of the former International Tax Adjustment Act, since the Korea-U.S. Tax Convention preferentially applies to determining the regional source of the above income, the issue of whether Korea can impose the above income

Article 14 (4) of the Korea-U.S. Tax Convention provides that "user fees used in this Article" means the following: (a) the copyright of literary, artistic and scientific works or the copyright, patent, design, drawing, drawings, secret or secret public formula, trademark or other similar property or rights, knowledge, experience, skills, vessel or aircraft, and all kinds of payments received as consideration for the use or the right of use of the vessel or aircraft: (b) the content of Article 6 (3) of the Convention is as seen earlier.

However, Articles 14(4) and 6(3) of the Korea-U.S. Tax Convention provides that a patent holder shall have the effect of exclusively producing, using, transferring, leasing, importing, or displaying patented goods only within the territory of the country where the patent right is registered, and only if a corporation has a patent license in the Republic of Korea after registering a patent right in the Republic of Korea, the income paid for the use of the patent license is determined as domestic source income. Under the interpretation of the Korea-U.S. Tax Convention, the interpretation of the Korea-U.S. Tax Convention does not mean that a patent infringement cannot occur outside the country where the patent right is registered, and thus, the payment for the use thereof shall not be made (see, e.g., Supreme Court Decision 2012Du18356, Nov. 27, 2014). Also, “other similar property or right” under Article 14(4)(a) of the Korea-U.S. Tax Convention is limited to a patent right holder or a person without exclusive license in light of the nature and nature of a patent, etc.

Therefore, even if the portion of USD OO in the settlement of this case was paid as consideration for the use of the Plaintiff’s unregistered overseas patent in the Republic of Korea as a U.S. corporation in the manufacture, intermediary, etc., it cannot be viewed as a royalty income under the Korea-U.S. Tax Convention as a domestic source income. In this regard, the Defendant’s primary argument is without merit.

B) Judgment on the Defendant’s conjunctive assertion on this part

The Korea-U.S. Tax Convention applies to certain income of U.S. corporations on the premise that Korea's taxation right has occurred.

However, according to the main text and proviso of Article 93 subparag. 9 of the former Corporate Tax Act, even if the corporation pays for the use of the registered patent right owned by the corporation overseas to a contracting party to the Korea-U.S. Tax Convention which determines the source of royalty income based on the place of use, the royalty income for the patent right concerned falls under “the cost for the patent right used overseas” and does not constitute a domestic source income of the U.S. corporation. corporation. In this context, the "foreign country, which is the place of use of the patent right, is the place of registration of the patent right, is not limited to the United States, which is the contracting party to the Korea-U.S. Tax Convention. Thus, even if the settlement of this case paid the amount equivalent to the cost for the use of the registered patent right owned by the plaintiff in the third country among US US dollars portion, it cannot be deemed domestic source income

Therefore, even if it is not possible to specify the source of royalty income paid by BB electronic to the third country registered patent right of the Plaintiff owned by the Plaintiff, a U.S. corporation, under the Korea-U.S. Tax Convention, Korea cannot impose tax on the above income. The Defendant’s conjunctive assertion is without merit.

2) As to corporate tax withholding on the portion of USOO out of the settlement of this case

A) Whether taxation is imposed in Korea pursuant to Article 93 subparag. 9 of the former Corporate Tax Act

According to the main sentence of Article 93 subparagraph 9 of the former Corporate Tax Act, income generated from the transfer of patent rights and other similar assets, rights, etc. shall be classified into domestic source income of foreign corporations.

According to the above facts, among the reconciliation fees in this case, the part of the transfer price for the Plaintiff’s registered patent right in the U.S. or the third country constitutes “income arising from the transfer of the patent right”, and among the above USOO, the payment for the right to grant the Plaintiff’s registered patent right (U.S. Patent No. 5,608,873) against Corco and tatachi constitutes “income arising from the transfer of rights similar to the patent right”.

Therefore, since the portion of USOO out of the settlement of this case constitutes domestic source income under the main sentence of Article 93 subparag. 9 of the former Corporate Tax Act, the plaintiff's taxation right on the above income arises in Korea.

B) Whether the right to taxation exists in Korea pursuant to Article 6(3) of the Korea-U.S. Tax Convention

Even if the portion of the settlement cost of this case, US$ 1.5 million, among those of the settlement cost of this case, constitutes a domestic source income under the former Corporate Tax Act, as seen earlier, whether Korea can impose tax on the Plaintiff, a U.S. corporation, is finally a matter of determination in accordance with the Korea-U.S. Tax Convention that takes precedence over Article 93 of the former Corporate Tax Adjustment Act

According to Article 14(4)(b) of the Korea-U.S. Tax Convention, an amount acquired through the same sale, exchange, or other compensatory disposal of a patent, among income generated from the sale, exchange, or other disposal of a patent, constitutes “user fee” for the part corresponding to the productivity, use, or disposal of a patent right. According to Article 6(3) and (7) of the same Convention, income from the sale, or other disposal of a patent right is treated as having been derived only when the user fee is paid for the patent right registered in Korea or the United States.

According to the above facts, the part concerning the transfer price of the Plaintiff’s patent right registered in the U.S. or a third country constitutes “the part corresponding to the productivity, use, or disposal of the patent right” among the income accrued from the sale of the patent right, and the part concerning the right to enforce the Plaintiff’s registered patent right (patent No. 5,608,873), among the reconciliation price in the instant case, to be the part concerning the right to enforce the Plaintiff’s registered patent right (patent No. 5,608,873) against coaches and tatataco, constitutes “the part corresponding to the productivity, use, or disposal of the patent right” from among the income accrued from the other disposal of the patent right, and thus, the part concerning USOOO out of the reconciliation price in the instant case constitutes usage fee under Article 14(4)(b)

However, since the patent right subject to transfer or other disposition through the settlement contract of this case was registered with the United States or third countries, it is not registered in Korea. As such, the income corresponding to US US US$ portion out of the settlement price of this case does not constitute domestic source income under the Korea-U.S. Tax Convention, and the Republic of Korea cannot be subject to corporate tax assessment.

3) Sub-determination

Since the settlement price of this case does not constitute the Plaintiff’s domestic source income, the settlement price of this case constitutes “where the tax base and tax amount entered in the receipt of withholding pursuant to Article 45-2(4)3 and Article 45-2(1)1 of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013) and “where the tax base and tax amount to be reported pursuant to the tax laws exceed the tax base and tax amount to be reported pursuant to the tax laws,” and both the corporate tax reported and paid by BB must be refunded to the Plaintiff. Nevertheless, the Defendant deemed the settlement price of this case as domestic source income pursuant to the former Corporate Tax Act and the Korea-U.S. Tax Convention, and thus, rejected the Plaintiff’s request for correction

3. Conclusion

Therefore, the plaintiff's claim of this case is justified and it is so decided as per Disposition by admitting all of the claims.