Who is the taxpayer for income from property held in another's name, and is payment for a patent registered only abroad Korean-source income? Decision 2016Du42883 on the substantial controller and the Korea–US tax treaty

Question

Article 14(1) of the Framework Act on National Taxes provides that where income, profits, property, an act or a transaction is attributed to one person only in name and is in fact attributable to another, the tax laws apply with that other person as the taxpayer. The former Corporate Tax Act made a foreign corporation liable to corporate tax only where it had Korean-source income, and its former Article 93(ix) treated a patent right registered abroad but used in Korea in manufacture or sale as used in Korea, whether or not it was registered in Korea. The former International Tax Adjustment Act gave tax treaties priority over those domestic rules. The question is who the taxpayer is for income from property whose nominal holder cannot control or manage it, and whether income received by a US corporation in relation to a patent registered only outside Korea is Korean-source income.

Decision 2016Du42883 raises the question in a dispute between Samsung Electronics Co., Ltd., as plaintiff, and the Director of the Dongsuwon Tax Office, as defendant. In 2010 the plaintiff paid royalties to Intellectual Ventures International Licensing (IV IL), an Irish company. Having considered IV IL's purpose of establishment and its operations, its personnel and physical facilities, the decision-making process for the transactions and the control and management of the royalty income, the court below found that IV IL acted only as a party to the transactions in form and that the real attributor of that royalty income was Intellectual Ventures Global Licensing, L.L.C. (IV US), a US corporation and IV IL's controlling company. Both sides appealed from the judgment of the Seoul High Court.

Material to check

The statute is Article 14 of the Framework Act on National Taxes, read in its current text at the National Law Information Center. Article 14(1) makes the person to whom income, profits, property, an act or a transaction is in fact attributable the taxpayer where the attribution is only nominal; paragraph 2 applies the rules for calculating the tax base according to substance, irrespective of name or form; and paragraph 3 treats indirect or multi-step transactions used to obtain tax benefits improperly as direct or single transactions according to their economic substance. Decision 2016Du42883 also cites the former Corporate Tax Act (2(1)(ii), 2(5), 93(ix), 98(1)), the former International Tax Adjustment Act (Article 28), and Articles 6(3) and 14(4) of the convention between the Republic of Korea and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and the encouragement of international trade and investment. The former versions of those provisions are given only as the decision cites them; their current text was not given.

The decisions examined are the decision itself and the precedents it cites on the two issues. On substance over form: Decision 2010Du25466 (25 October 2012), treating a Cayman limited partnership as the real attributor of dividends and as a foreign corporation; Decision 2015Du2611 (15 December 2016), stating the substance-over-form rule and its application to tax treaties; Decision 2015Du55134, whose text could not be opened; and Decision 2017Du59253 (28 December 2017), on conduit companies, entities without juristic personality and the withholding agent's duty to investigate. On Korean-source income from intellectual property rights, the decision cites Decision 91Nu6887 (12 May 1992), whose text could not be opened, and Decisions 2005Du8641 (7 September 2007) and 2012Du18356 (27 November 2014), whose text was not given for this brief.

Possible readings

Read with Decisions 2015Du2611 and 2017Du59253, Article 14(1) of the Framework Act on National Taxes means that the taxpayer is the person to whom the taxable object is in fact attributable, not the person in whose name it stands. The decisions state the conditions together: the nominal holder of the property lacks the ability to control and manage it, another person substantially controls and manages it through rights of control over the nominal holder, and the divergence between name and substance arises from a purpose of avoiding tax. Where those conditions are met, income from the property is attributed to the substantial controller and manager, who is the taxpayer. The rule extends to the interpretation and application of tax treaties, which have the same force as statutes, unless a special provision excludes it.

The decision reads the domestic rules and the treaty against each other. The former Corporate Tax Act imposed corporate tax on a foreign corporation only where it had Korean-source income and required the payer of certain Korean-source income to withhold; its former Article 93(ix), by the closing words of the proviso, deemed a patent right registered abroad but used in Korea in manufacture or sale to be used in Korea regardless of Korean registration. Article 28 of the former International Tax Adjustment Act provided that the classification of a non-resident's or foreign corporation's Korean-source income is governed by a tax treaty in preference to Article 119 of the Income Tax Act and Article 93 of the Corporate Tax Act. So the domestic deeming rule alone does not settle the question; the Korea–US tax treaty governs it.

On the treaty, the decision reads Articles 6(3) and 14(4) in their context and according to their ordinary meaning. Under the territoriality principle of patent law, a patentee's exclusive rights to produce, use, transfer, lease, import or display the patented article extend only within the territory of the state where the patent is registered. The treaty therefore treats as Korean-source income only the consideration a US corporation receives for the use of a right to work a patent it has registered in Korea. Outside the state where a patent is registered, the patent cannot be infringed, so neither its use nor payment for its use can be conceived. It follows that income received in relation to a patent registered only abroad cannot be consideration for use and so cannot be Korean-source income; the decision supports this reading with Decisions 2005Du8641 and 2012Du18356.

What the decisions held

The Seoul High Court, in its judgment of 24 May 2016 (2015Nu47043), relied on IV IL's purpose of establishment and its operations, its personnel and physical facilities, the decision-making process for the transactions and the control and management of the royalty income. It found that IV IL acted only as a party to the transactions in form, that the real attributor of the royalty income the plaintiff paid in 2010 was IV US, IV IL's controlling company, and that the divergence between form and substance arose solely from a purpose of avoiding tax by obtaining the benefits of the tax treaty between the Republic of Korea and Ireland. It therefore held that that treaty could not be applied to the royalty income.

Decision 2016Du42883, given on 27 December 2018, dismissed the plaintiff's appeal. It endorsed the conclusion that the Korea–Ireland tax treaty could not be applied, while noting that parts of the court below's reasoning were inappropriate, and found no error in the criteria for identifying the real attributor, the allocation of the burden of proof, the rules of evidence or the reasoning. On the defendant's appeal, it held that income received in relation to a patent registered only abroad cannot be Korean-source income under the Korea–US tax treaty. It also held that the court below was right to treat only the part of the royalties attributable to patents registered in Korea as a foreign corporation's Korean-source income under former Article 93(ix) of the Corporate Tax Act, and not the remainder, and so to hold the disposition in question unlawful as to the part corresponding to that remainder. Both appeals were dismissed, each party bearing its own costs.

Points left open

The decision states the three conditions of the substance-over-form rule but does not say which facts in the file satisfied each of them, and it does not decide what follows where the divergence between name and substance has a purpose other than tax avoidance. Nor does it identify which parts of the court below's reasoning it found inappropriate. The phrase 'unless a special provision excludes it' in the rule on tax treaties is also left without examples of what would count as such a provision.

On Korean-source income the decision is tied to Articles 6(3) and 14(4) of the Korea–US tax treaty and to a patent registered only outside Korea. It does not decide how to treat a patent registered in Korea but exploited elsewhere, income governed by a differently worded treaty, or the same facts under the current text of the Corporate Tax Act. Its citations note that former Article 28 of the International Tax Adjustment Act has since been repealed. The decision also does not revisit the scope of a withholding agent's duty to identify the real attributor, which Decision 2017Du59253 addresses separately.

When to reconsider

This brief would change if a later decision stated which parts of the reasoning in the judgment below were inappropriate, set out how the three conditions of the substance-over-form rule are proved, or applied the treaty reading to a patent registered in Korea or to differently worded treaties, or if the Korea–US tax treaty or the Corporate Tax Act were amended to replace the provisions the decision construed. The repeal of former Article 28 of the International Tax Adjustment Act is already one such change.

Statutes referred to

• 국세기본법 제14조
• 구 법인세법 제2조, 제93조, 제98조
• 구 국제조세조정에 관한 법률 제28조, 제6조, 제14조

Decisions referred to

• 대법원 2018. 12. 27. 선고 2016두42883 판결 · Decision ledger
• 대법원 2012. 10. 25. 선고 2010두25466 판결
• 대법원 2016. 12. 15. 선고 2015두2611 판결
• 대법원 2017. 12. 28. 선고 2017두59253 판결

Verification status

The texts for this brief were read at the National Law Information Center on 24 October 2026: the published holdings, summary and full reasons of Decision 2016Du42883, and the current text of Article 14 of the Framework Act on National Taxes. The published holdings and summaries of Decisions 2010Du25466, 2015Du2611 and 2017Du59253 were read; Decisions 2015Du55134 and 91Nu6887 appear only as numbers, while Decisions 2005Du8641 and 2012Du18356 appear only in the decision's citation list, with no text given.