Supreme Court: Samsung's 11.3 Billion Won Corporate Tax on 'MS Patent Rights' Is Incorrect

[Image source=Yonhap News]

[Asia Economy Reporter Cho Hyun-ui] The Supreme Court has ruled that the tax authorities must refund approximately 11.3 billion KRW in corporate tax collected on patent royalties between Samsung Electronics and Microsoft (MS).

On the 20th, the Supreme Court's Third Division (Presiding Justice Noh Jeong-hee) announced that it upheld the lower court's ruling in favor of Samsung Electronics in the appeal case against the Dong Suwon Tax Office's corporate tax withholding disposition cancellation lawsuit.

According to the court, Samsung Electronics signed a contract in July 2011 to use MS's patents necessary for its Android-based smartphone business and agreed to pay MS royalties.

Subsequently, Samsung Electronics paid the patent royalties while withholding 15% of the total amount as corporate tax for MS, in accordance with the Korea-US Tax Treaty. In other words, a portion of the royalties was withheld as tax.

During an integrated corporate tax audit in 2016, the tax authorities confirmed that Samsung Electronics paid MS patent royalties excluding about 69 billion KRW that it should have received from MS for the 2013 fiscal year.

Since Samsung Electronics paid about 69 billion KRW less in patent royalties to MS, it naturally paid less corporate tax as well. The authorities viewed the underpaid corporate tax as approximately 11.3 billion KRW and collected it.

Samsung Electronics filed a lawsuit claiming this disposition was unfair. The legal issue was whether patent royalties for patents registered overseas by MS but not registered in Korea could be considered 'domestic source income.'

The royalties Samsung Electronics paid to MS included patents not registered domestically. As of 2013, MS held a total of 41,613 patents, of which only 1,222 (2.9%) were registered in Korea.

The first and second trial courts ruled that the tax authorities' withholding disposition was unjustified and canceled the corporate tax withholding amount of approximately 11.3 billion KRW.

While the Corporate Tax Act regards royalties for foreign corporations' patents not registered domestically as domestic source income, the International Tax Adjustment Act stipulates that tax treaties take precedence when distinguishing domestic source income.

The court explained the ruling, stating, "The Korea-US Tax Treaty defines domestic source income only as income received for the use of patents registered domestically by a US corporation and exercised domestically. If the patent is not registered domestically, it cannot be considered domestic source income."

The Supreme Court found no legal errors in the second trial's judgment and confirmed it as is.

This content was produced with the assistance of AI translation services.