Supreme Court rules US trademark sales exempt from Korean tax

The Supreme Court ruled that income derived from the sale of US-registered trademarks is not subject to Korean corporate tax, settling a key interpretation of the bilateral tax treaty between South Korea and the United States.

The high court dismissed an appeal in a case where a domestic company purchased a trademark from a US entity. The lower court had previously ordered a refund of the taxes paid, arguing the income fell outside Korea's taxing rights.

In its judgment delivered April 2, the court clarified that payments for such trademarks do not qualify as royalty income under Article 14 of the Convention for the Avoidance Double Taxation. The justices reasoned that the treaty defines royalties narrowly to include only conditional variable consideration linked to future productivity or use, such as a percentage of sales revenue, rather than a fixed lump-sum purchase price.

The bench determined that trademarks constitute capital assets under Article 16 of the agreement, meaning gains from their disposal are taxable only in the seller's home country. Since the seller was a US resident, Korea lacked the jurisdiction to impose taxes on the transfer proceeds.

To reach this conclusion, the court examined the legal context existing when the treaty was signed in 1976. Because the term capital asset is not explicitly defined within the treaty text, the justices looked to the US Internal Revenue Code as it stood at that time. They found that under US law then, trademarks were not subject to depreciation and thus qualified as capital assets. The court noted that while a 1993 amendment to the US code later allowed for trademark amortization, this change occurred after the treaty's execution and could not alter the original agreement's context.