If Samsung SDI produced batteries in Korea using domestic unregistered patents owned by a U.S. corporation, a portion of the royalties that the U.S. corporations should receive must be paid as corporate tax, the Supreme Court ruled. It is a ruling with the same purport that came after the Supreme Court changed precedent for the first time in 33 years in a related lawsuit by SK hynix in September.
The Supreme Court's Second Division (presiding Justice Oh Kyung-mi) said on the 12th that on Oct. 4 it overturned the appellate ruling that ordered a refund of 475.4 million won in corporate tax (withholding tax) in a suit filed by Company A seeking to cancel the refusal to revise a tax assessment against the chief of the Giheung Tax Office, and remanded the case to the Suwon High Court.
Company A is a U.S. corporations that develops nano-composite separators for lithium-ion batteries and infrared optical coating technology. In July 2017, the company signed a contract to allow Samsung SDI to use 20 patents and to receive $147,500 per patent (166.8 million won at the exchange rate at the time). Only one of these was a patent registered in Korea.
In Aug. 2017, Samsung SDI paid about 3.3 billion won in royalties, withholding about 500 million won corresponding to a 15% corporate tax rate under the Corporate Tax Act and the Korea-U.S. tax treaty before payment. It then paid the withheld tax to the Giheung Tax Office in July 2019.
Company A filed a request for correction seeking a refund of about 475.4 million won from the domestic tax authorities, arguing that the 19 patents not registered in Korea were not subject to corporate tax. In Dec. 2019, the Giheung Tax Office rejected the request for correction, saying that royalty income from patents constitutes domestic-source income regardless of whether the patent is registered in Korea. Company A then took the case to court.
The first trial sided with Company A. The first-instance court said, "The Korea-U.S. tax treaty should take precedence in classifying domestic-source income of a U.S. corporation," and added, "Under the interpretation of the Korea-U.S. tax treaty, income received by a U.S. corporation from a patent right not registered in Korea cannot be considered domestic-source income." The tax authorities appealed, but the second-instance court dismissed the appeal.
The Supreme Court determined that the royalties are subject to withholding, saying, "If the royalties are consideration for manufacturing or selling patented technology in Korea, then under the Korea-U.S. tax treaty they are for domestic use."
The Supreme Court first pointed out that because the meaning of "use" is not separately defined in the Korea-U.S. tax treaty, it must be interpreted under Korea's laws where taxes are determined. It went on to say that the Corporate Tax Act provides that use in Korea is deemed to have occurred if the patent right is used for domestic manufacturing or sales, regardless of whether the patent is registered in Korea.
Earlier, in September last year, the Supreme Court overturned the appellate ruling and remanded the case to the Suwon High Court in a suit by SK hynix seeking to cancel a refusal to revise a tax assessment against the chief of the Icheon Tax Office. Similar to Samsung SDI, SK hynix paid royalties for semiconductor-related patents to U.S. corporations. When part of this had to be withheld and paid as corporate tax, the company filed suit, arguing it was not taxable.
Courts had held that patents are valid only in the countries where they are registered, so if a patent was not registered in Korea, the income was not domestic-source income. The first and second instances reached the same conclusion, but the Supreme Court en banc changed the precedent for the first time in 33 years.