Judgment “Cannot be taxed according to the principle of territorial ownership of patents”… Application of the Korea-U.S. tax convention It was believed that Microsoft could not be taxed on patents that were not registered in Korea.
According to the judgment released by the Supreme Court on the 21st, Samsung Electronics signed a contract with Microsoft to use Android patents for mobile and tablet use in 2011. According to the contract, in 2013, Samsung Electronics paid the patent right usage fee to MS and paid the corporate tax for the withholding tax to the Dongsuwon Tax Office.
However, in 2017, the tax authorities notified Samsung Electronics to pay an additional 11.3 billion won in corporate tax on Microsofts domestic unregistered patent right usage fees. Samsung Electronics filed a lawsuit demanding cancellation of the disposition on the grounds that the patent right was registered abroad, but not in Korea.
Supreme Court view.
■ Corporate Tax Law “Possibility of taxation related to domestic unregistered patents” VS. “The principle of territoriality in patent rights”
In the first and second trials, Samsung Electronics won. The issue in the judgment was whether it could be taxed on royalties for unregistered patents in Korea. The Corporate Tax Act stipulates that “If the relevant patent right is registered overseas and used for manufacturing or sales in Korea, it is deemed to have been used in Korea, regardless of whether or not it is registered in Korea.” It is believed that even unregistered patent rights in Korea are subject to taxation if used in Korea.
But the courts decision was different. In accordance with the International Tax Coordination Act, the Korea-US Tax Convention was applied first. The Supreme Court explained that “the right to license a patent is effective only within the territory of the country in which the patent right is registered,” referring to the contents of the Korea-US tax treaty. He added, “If a US corporation has registered a patent right abroad but has not registered it in Korea, the income the US corporation receives in connection with it cannot be used as a consideration for its use.” In this case, it is judged that Samsung Electronics use of unregistered patents in Korea is not subject to taxation according to the principle of territorial ownership of patent rights.
The Supreme Court dismissed the appeal on the 24th of last month. The previous judgment was maintained as there was no reason to proceed with the lawsuit filed. Accordingly, the tax authorities must return the collected corporate tax of 11.3 billion won and bear the cost of appeal.