Money received by Genosco, the U.S. subsidiary of Korean biotech firm Oscotec (039200), from domestic pharmaceutical company Yuhan Corporation (000100) in exchange for technology know-how cannot be unconditionally classified as a "capital asset" exempt from taxation under the Korea-U.S. tax treaty, the Korean Supreme Court has ruled.
According to the legal community on Tuesday, the third division of the Supreme Court, presided over by Justice Oh Seok-jun, overturned a lower court ruling that had favored Genosco in its lawsuit against the head of Seoul's Dongjak Tax Office seeking to cancel the rejection of its withholding corporate tax refund. The case was remanded to the Seoul High Court.
Genosco signed a contract with Yuhan Corporation in 2016 to transfer liver cancer treatment technology. Yuhan paid 500 million won as a down payment and withheld 75 million won in corporate tax, which it remitted to the tax office. Genosco filed the lawsuit seeking a refund, arguing that the income was taxable only in the United States, not in Korea. The company contended that the transferred technology know-how qualified as a "capital asset" fully exempt from domestic taxation under the Korea-U.S. tax treaty.
Both the trial court and the appellate court ruled in favor of Genosco. The appellate court determined that the payment was not a "royalty" linked to sales but a fixed lump-sum consideration, making it eligible for tax exemption as "capital gains from the transfer of capital assets."
The Supreme Court, however, reversed the lower court's ruling. The court held that Genosco's know-how is depreciable property used in business operations and therefore does not constitute a capital asset under the Korea-U.S. tax treaty. The court noted that since Korean law lacks a clear definition of "capital asset," the term must be interpreted based on the U.S. tax code in effect at the time the treaty was concluded in 1976. Under that U.S. tax code, "property used in a company's business that depreciates in value" was excluded from capital assets, and the court determined that corporate technology and know-how fall precisely into this category. "The lower court's ruling, which exempted the tax by treating Genosco's know-how as a capital asset, erred in its understanding of the law," the court explained.
The Supreme Court nevertheless acknowledged that while Genosco's technology know-how does not qualify as a tax-exempt asset, it could fall under intangible personal property as defined in the treaty. Accordingly, the court instructed the Seoul High Court to reexamine whether the actual location of the technology transfer was Korea or the United States and to make a final determination on tax liability.
