The Supreme Court has ruled that the tax authorities' decision to impose taxes on Hotel Lotte, the registrant of the Lotteria trademark, for not receiving trademark usage fees from its affiliate using the Lotteria trademark is unlawful, deeming the transaction as unreasonable.
Hotel Lotte, the trademark owner, did not make efforts to use the Lotteria trademark in business or to enhance its value after registering it. Meanwhile, since most of the economic value of the Lotteria trademark was created by Korea Lotteria, the court recognized the economic rationality of Hotel Lotte not receiving trademark usage fees.
According to the legal community on the 21st, the Supreme Court's Second Division (Presiding Justice Cho Jae-yeon) upheld the lower court's ruling in favor of the plaintiff in the corporate tax cancellation appeal filed by Hotel Lotte against the Namdaemun Tax Office.
In February 2013, the Seoul Regional Tax Office conducted a tax investigation on Hotel Lotte and notified the Namdaemun Tax Office of tax assessment data including an amount of approximately 29.2 billion KRW calculated by multiplying the net sales of the 2008 to 2012 fiscal years by the trademark usage fee rate. This was based on the claim that Hotel Lotte had underreported income by not receiving usage fees for the Lotteria trademark from its affiliate, Lotteria GRS (formerly Korea Lotteria).
Article 52(1) of the Corporate Tax Act (Denial of Unfair Transaction Calculations) stipulates that if a corporation reduces its tax burden unfairly through transactions with affiliates or related parties, the corporation's income must be calculated regardless of such transactions. The measure was taken on the judgment that Hotel Lotte's failure to receive trademark usage fees constituted such unfair transaction calculations.
Based on this, the Namdaemun Tax Office additionally imposed corporate taxes totaling approximately 33.8 billion KRW on Hotel Lotte: about 4.3 billion KRW for 2008, 5 billion KRW for 2009, 9.2 billion KRW for 2010, 7.1 billion KRW for 2011, and 8.2 billion KRW for 2012.
Hotel Lotte filed an appeal with the Tax Tribunal against the tax assessment, and the Tax Tribunal revised the decision to calculate the trademark usage fee based only on the net sales of the hamburger business division using the trademark, rather than the entire corporation's sales. Consequently, the additional corporate tax burden on Hotel Lotte was reduced to about 2.8 billion KRW, but Hotel Lotte filed another lawsuit.
The first and second trials ruled in favor of Hotel Lotte, canceling the tax assessment. The Supreme Court also found this judgment appropriate.
The court stated, "It is not appropriate to immediately conclude that the act of a trademark owner not receiving usage fees from the trademark user lacks economic rationality," and added, "A comprehensive consideration of all circumstances surrounding the registration and use of the trademark is necessary."
As criteria for determining whether the trademark owner’s failure to receive usage fees constitutes an economically irrational abnormal transaction, the court presented the following factors: ▲the legal and contractual basis and content of trademark use ▲the relationship between the trademark owner and user ▲the functions performed by both parties related to the development, enhancement, maintenance, protection, and utilization of the trademark and the scale of capital and effort invested in performing those functions ▲whether and to what extent the functions contributed to generating profits through the trademark ▲and the general perception of consumers regarding the trademark.
The court judged, "While Korea Lotteria, which uses the Lotteria trademark, has directly borne the costs necessary for management, Hotel Lotte, the trademark owner, did not make efforts to use the trademark in business or to enhance its value after registration," and concluded, "Most of the economic value of the trademark was created by Korea Lotteria."
It further concluded, "The lower court’s judgment that not receiving trademark usage fees does not constitute an economically irrational abnormal transaction subject to denial of unfair transaction calculations is justified."
A Supreme Court official stated, "This is the first ruling to explicitly state that economic rationality can be recognized even when a trademark owner does not receive usage fees from the trademark user."
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