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| IP Newsletter | Spring 2015 | |
As background to this decision, the Korean Supreme Court previously ruled in 2007 that, under the Korea/U.S. Tax Treaty, patent royalties received by a U.S. taxpayer from a Korean corporation should be treated as domestic-source income only to the extent that the licensed patents are registered in Korea by the U.S. corporation and licensed to a Korean resident for use in Korea (Case No. 2005du8641, decided on September 7, 2007). The Court specifically recognized that patent rights (e.g., exclusive rights for production, usage, transfer, lending, importation, exhibition, etc.) are only effective in the country where the patents are registered, in accordance with the territorial principle of patents.
However, Article 93 of the Corporate Income Tax Law of Korea was revised on December 26, 2008 to state that income or fees obtained by a foreign company from a Korean licensee's "use" in Korea of patents registered overseas in connection with manufacture and sale, etc., are considered domestic-source income even if the patents are not registered in Korea. Based on this revision, the Korean tax authority has been collecting withholding tax on all patent royalties paid to U.S. corporations, even for foreign patents not registered in Korea.
The 2012du18356 case began with the settlement of a patent infringement lawsuit in the United States between a U.S. corporation and a Korean corporation, which included a patent cross-license. In 2009, the Korean corporation paid royalties to the U.S. corporation in return for the right to use about 900 patents registered globally by the U.S. corporation, and withheld 16.5% of the total royalty amount as tax, pursuant to the rate specified in the Korea/U.S. Tax Treaty. The U.S. corporation then petitioned the Korean tax authority for a refund of the withholding tax imposed on royalty income from solely foreign patents (while accepting the withholding tax as to royalty income from Korean patents). The petition was rejected by the Korean tax authority, and the U.S. corporation filed a lawsuit seeking the refund in Korean court.
The Supreme Court ultimately held that under Article 28 of the International Tax Coordination Law, tax treaties take precedence over domestic tax law (including the Corporate Income Tax Law) when classifying income as domestic-source. Thus, whether patent royalty income received in Korea by a U.S. entity is domestic-source income must be determined according to the Korea/U.S. Tax Treaty. Under Article 6, paragraph 3 and Article 14, paragraph 4 of the Korea/U.S. Tax Treaty, royalties are only domestic-source income if they are paid for use of a patent in the country where it is registered. Thus, the Korean tax authorities' withholding of tax on all royalty income in Korea without regard as to whether the relevant patents actually were registered in Korea was improper, regardless of the 2008 amendments to the Corporate Income Tax Law.
By strongly affirming the reasoning of its earlier decision in the 2005du8641 case, the Supreme Court has resolved a confusing split in the law, as well as providing a clear legal basis for U.S. companies to claim refunds of withholding taxes that may have been paid on royalties for non-Korean patents. U.S. companies interested in seeking such refunds should consult with their Korean legal counsel to determine whether such refunds are feasible.
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Mikyung (MK) CHOE mkchoe@kimchang.com |
Jae Hun SUH jaehun.suh@kimchang.com |