The issue was whether “technical fees” received after a purported “transfer of patent rights” instead constituted business income – royalties – earned from continuous and recurring activities for profit and therefore subject to a higher income tax and VAT.
During an audit, the tax authority found that “IP developer” had entered into a “technology transfer agreement” with a related party to transfer patent rights on four occasions between 2008 and 2020. Upon entering into the agreement, “IP developer” was to receive a “technology fee” of 5% of the annual sales of the subject technology.
“IP developer” had registered a total of 78 patents, 8 design rights and 15 trademark rights, and had also entered license agreements with third parties and received income from these agreements in the form of royalty.
On that basis the tax authorities considered that “IP developer” was engaged in the continuous and repeated act of licensing patent rights, and therefore the “technical fees” in question constituted business income, and the contract in question, although given the form of a transfer of patent rights, should instead be regarded as license agreement for use of patent rights. The “technical fees” received was therefore in fact royalties subject to higher tax and VAT.
Judgement of the Court
The Court found it reasonable to conclude that the technical fees received in exchange for the assignment of the patent rights constituted business income derived from activities carried on continuously and repeatedly, and that the payments were therefore subject to comprehensive income tax and VAT.
“…In view of the above, it is difficult to conclude that it is unreasonable to expect the Claimant to declare and pay comprehensive income tax and VAT on the transfer of the patent rights at issue as business income, or that there is any justifiable reason to blame the Claimant for failing to comply with its obligations (see, e.g., Seoul Administrative Court’s judgement of 8 February 2022, 2021 No. 52112).
(2) Therefore, we find no error in the decision to impose additional tax on the claimant’s failure to declare the income from the technical fee as business income and to pay the relevant comprehensive income tax and VAT.”
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Korea vs Royalty Corp 인쇄 - 국세법령정보시스템