IP Newsletter | Summer 2015
	PATENT
	Supreme Court Rules Employee Invention Remuneration Is Non-Taxable Other Income
	Recently, the Korean Supreme Court determined that an institute's payments to its inventor-employees based on the institute's royalty income derived from the employees' in-service inventions (i.e., inventions made by the employees in connection with their work and assigned to the institute) are deemed compensation for in-service inventions under Article 15 of the Invention Promotion Act ("IPA") and thus non-taxable other income under Article 12, Subsection 5(d)(i) of the Personal Income Tax Law ("PITL"), regardless of whether the payments were made regularly or repeatedly (Supreme Court, Case No. 2014Du15559, decided on April 23, 2015). The plaintiff in the case is a government-operated research institute with the highest royalty income among Korean entities. It acquired ownership of in-service inventions from its employee-inventors, granted licenses to third parties, and earned royalty income as a result. A portion of said royalty income was paid to the inventor-employees as "compensation for exploitation of the invention" in accordance with the formula set forth in the plaintiff's internal regulations. The plaintiff regarded such payments as in-service invention compensation in accordance with Article 15 of the IPA, and did not withhold personal income taxes from the payments. The tax authority (defendant in this case) viewed the invention remunerations as research incentives and taxable earned income on the grounds that the remuneration was paid in a continuous and repeated manner and the inventions resulted from the plaintiff's normal business operations. The tax authority charged unpaid taxes (including penalties) of over 10 billion Korean Won (approximately USD 9 million) in connection with remunerations paid to current and former employees from September 2006 to December 2010. Article 15 of the IPA provides that an employee who assigns or grants an exclusive license to an in-service invention to his/her employer in accordance with a contract or an employment policy is entitled to reasonable compensation. Under Article 12, Subsection 5(d)(i) of the PITL, remuneration paid to an employee by the employer in accordance with the IPA is deemed to be non-taxable other income. However, the Korean tax authorities have narrowly interpreted this provision and have only recognized as non-taxable the remuneration specifically paid after the grant of a patent for an in-service invention. The remunerations at issue in this case constituted compensation based on continuing exploitation of the inventions (i.e., royalties earned from grant of licenses to third parties), but the Supreme Court affirmed that such remunerations are non-taxable other income. This Supreme Court decision clearly confirms the principle that remuneration paid by an employer to an inventor-employee in return for assignment of his/her in-service invention to the employer should be treated as non-taxable other income to the extent the remuneration is within the scope of reasonable compensation, regardless of whether the remuneration is paid in a continuous or repeated manner. Companies operating R&D centers or otherwise conducting research in Korea may wish to review their current tax withholding practices for in-service invention remunerations in accordance with this Supreme Court decision.
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