In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered in Korea resulted in double taxation. The Trail court issued a decision in favour of Microsoft. The decision of the Trail court was brought before the Court of Appeal by the tax authorities. The authorities argued that royalties paid by Samsung also included payments for Microsoft technologies whose legal status was not clear and thus subject to withholding tax. In 2019 the appellate court rejected the tax authorities appeal. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court allowed the appeal and remanded the case to the appeals court, ordering additional proceedings to re-calculate the tax refund amount. According to the court royalties paid by Samsung for patent rights not registered in Korea by Microsoft do not correspond to domestic source income subject to withholding tax. However, the calculations should have been revised in accordance with facts of the case. Excerpts “Tax Office argued in the lower court that ‘the royalties in this case include consideration for the use of copyright, know-how, and trade secrets, which are subject to withholding tax as domestic source income’. Since it can be considered that they have been added or changed, the trial court should have considered and judged these claims.” “Considering the context of the Korea-US tax treaty and the ordinary meaning of its words, Articles 6 (3) and 14 (4) of the Korea-U.S. Tax Convention According to the principle of territoriality, the patentee’s right to use the patent exclusively for the production, use, transfer, rental, import, or display of the patented product is only effective in the territory of the country in which the patent right is registered. In the case of obtaining a patent license in Korea by registering a patent right, only the income paid in exchange for the use of the patent license is defined as domestic sourced income, and the patent right cannot be infringed outside the country where the patent right is registered, so the use or consideration for the use of the patent right cannot occur. “Therefore, if a US corporation has registered a patent right abroad but not in Korea, the income received by the US corporation in connection with it cannot be considered for its use, so It cannot be viewed as source income.” “On a different premise, in the lower court’s judgment that the claim of the Dongsuwon Tax Office was not subject to the court’s examination, there was an error that affected the judgment by misunderstanding the jurisprudence regarding the subject of the court’s examination”. Click here for translation ...