Supreme Court: U.S. Firms Must Pay Tax in Korea on Technology Sale Proceeds

Case Remanded After Appellate Court Ruling Overturned

Yonhap News Agency

The Supreme Court of Korea has ruled that a U.S. corporation cannot be exempted from taxation on compensation received for transferring technology to a Korean company. The court found that, under the Korea-U.S. Tax Treaty, "capital assets" eligible for tax exemption do not include business-related technology or know-how.

According to the legal community on May 18, the Supreme Court (Presiding Justice Oh Seokjun) overturned a lower court decision that had ruled in favor of the U.S. biotech company Genosco in its lawsuit against the Seoul Dongjak Tax Office, which challenged the office’s refusal to refund withholding corporate tax. The case has been sent back to the appellate court for further review.

In 2016, Genosco entered into a contract with Yuhan Corporation to transfer technology and know-how related to a compound for targeted liver cancer treatment. Yuhan Corporation paid a contract fee of 500 million won and withheld corporate tax, which was paid to the tax authorities. Genosco subsequently claimed that this income from technology transfer constituted “income from the sale of capital assets” under the Korea-U.S. Tax Treaty and was therefore tax-exempt in Korea, and requested a tax refund. When the tax office refused, Genosco filed a lawsuit. Article 16, Paragraph 1 of the Korea-U.S. Tax Treaty stipulates that the Korean government cannot tax income derived by a U.S. resident from the disposal of “capital assets” except for real estate and certain other specified assets.

The appellate court had ruled that the technology in question constituted a capital asset under the Korea-U.S. Tax Treaty and was thus eligible for a tax exemption, siding with Genosco.

However, the Supreme Court took a different position. The court stated that since the concept of “capital asset” is not explicitly defined in Korean law, the term should be interpreted based on the context at the time the treaty was concluded and under the U.S. Internal Revenue Code. The Supreme Court held that the know-how transferred by Genosco to Yuhan Corporation constitutes property used in business and is subject to depreciation, and therefore cannot be regarded as a capital asset eligible for tax exemption under the treaty.

The Supreme Court stated, “The technology and know-how in this case may not be capital assets but rather fall within the scope of intangible personal property; in such cases, the income should be treated as being sourced from the place where the know-how is sold.” Accordingly, the Supreme Court instructed the appellate court, upon remand, to further examine whether the know-how in question can be considered intangible personal property, and whether the place of sale for the technology should be regarded as Korea.

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