In this case, “Fuel Injection Corp” had acquired a patent from its shareholder. The patent related to the manufacture of fuel injectors for marine engines.
The tax authorities considered that the value placed on the patent by the related parties was unsubstantiated. On this basis, a tax assessment was issued in which “Fuel Injection Corp”‘s depreciation and taxable profits were adjusted accordingly. Furthermore, the amount paid to the shareholder was considered to be a non deductible “bonus”/distribution of profit.
Judgment of the Court
The District Court upheld the assessment issued by the tax authorities.
Excerpt in English
“a) Article 26(2) of the former Corporate Income Tax Act and Article 43(1) of the former Enforcement Decree of the Corporate Income Tax Act stipulate that ‘bonuses paid by a corporation to its officers or employees by disposing of profits shall not be counted as losses.Article 88(1) of the Enforcement Decree of the former Corporate Income Tax Act, which establishes the types of wrongful acts to be calculated pursuant to Article 52(4) of the former Corporate Income Tax Act, establishes individual and specific types of acts under items 1 to 7, item 7(2), item 8, and item 8(2) in cases where it is deemed that the burden of taxation has been unfairly reduced, and item 9 establishes a general type of act under item 1 to 7, item 7(2), item 8, and item 8(2) in cases where it is deemed that the profits of the corporation have been distributed.
b) As mentioned above, A holds 82.15% of the shares of the Plaintiff, and the remaining shares of the Plaintiff are held by A’s family members; the Plaintiff has been producing fuel injection nozzles for marine engines using the invention at issue since before the patent application for the invention at issue was filed in the name of A; Article 10(1) of the former Invention Promotion Act provides that ‘When an employee or other person obtains a patent for an occupational invention, the employer shall have the right of ordinary practice for the patent right.’ In light of the fact that the Plaintiff is a small and medium-sized enterprise under Article 2 of the Basic Act on Small and Medium-sized Enterprises and is not subject to the provisions of Article 10(1) of the former Invention Promotion Act, which stipulates that the Plaintiff shall conclude a contract on the right to obtain a patent for an occupational invention, the succession of the patent right, and the establishment of an exclusive right of practice, or make a working regulation to that effect, it is difficult to see that there is any reasonable reason for the Plaintiff to transfer the patent rights in this case from A or to pay A the purchase price of KRW 945,000,000. Therefore, the Patent Transfer Agreement and the calculation of the amount of income thereunder should be disallowed in the calculation of the amount of income of the Plaintiff for fiscal year 2019 pursuant to Article 52(1) and (4) of the old Corporate Income Tax Act and Article 88(1) and (9) of the old Corporate Income Tax Act as a case of allocation of the Plaintiff’s interests to a related party under the guise of a patent transfer transaction, and the purchase price paid to A should be disallowed as a “bonus” pursuant to Article 67(2) of the old Corporate Income Tax Act and Article 106(1)(1) of the old Corporate Income Tax Act.
C) Ultimately, Plaintiff’s argument, which rests on a different premise, cannot be accepted.
5) Whether the depreciation expense of the patent rights in this case can be added to the loss.
a) As we have seen, the patent transfer agreement and the calculation of the amount of income in this case are subject to the denial of wrongful calculation, so the depreciation expense of the patent rights in this case cannot be deducted from the plaintiff’s assets on the premise that the patent rights in this case have been accounted for in the plaintiff’s assets. Therefore, the defendant’s imposition of corporate income tax on the patent rights in this case by deducting the depreciation expense of the patent rights in 2019 from the plaintiff’s assets is legitimate.”
Click here for English translation
Click here for other translation