[News] 2016 Tax Law Amendment and Tax Exemption Benefits for Employee Inventions

There is a heated discussion regarding the tax exemption benefits for employee inventions, which is one of the 13 legislative amendments in the 2016 tax law revision. If the 2016 tax amendment is implemented, for employee invention compensation paid after January 1, 2017, a certain threshold will be set for the compensation amount, and any excess will be classified as earned income. Additionally, if the compensation is paid after retirement, it will be classified as other income and taxed accordingly, raising questions about its practical impact.

In many small and medium-sized enterprises (SMEs), the patent applicant and registered inventor is often the company representative, who may not have actually contributed to the invention. As a result, discussions have continued regarding the unchecked benefits of receiving both income tax and corporate tax deductions as a user while also enjoying tax exemption benefits as an inventor. The 2016 tax amendment, announced on July 28, 2016, seems to aim at restricting such benefits through employee invention compensation.

It appears that this amendment addresses the issue of including non-inventors as inventors to receive tax-exempt compensation while simultaneously treating it as a company expense. However, the amendment specifically targets employee invention compensation and does not change tax credit benefits for employers (such as tax deductions on compensation payments for employee inventions).

Future revisions to tax benefits related to employee inventions are expected to continue. From the perspective of legal loopholes, cases of abusing revised laws will likely persist. For example, since tax-exempt compensation is currently recognized only for registered patents, applicants may attempt to separate dependent claims into independent inventions for additional registrations. Restricting compensation eligibility to original applications would be challenging legislatively. Moreover, due to the financial burden of annual fees, companies may choose to forgo payments after the third year, and design applications might increase because design rights also fall under employee invention compensation rules and are easier to register compared to patents.

Debates on the scope of tax-exempt compensation are also ongoing. It is clear that compensation paid to employees after a patent is registered is fully tax-exempt. In the past, the National Tax Service and the Board of Audit and Inspection ruled that royalties received for registered rights were not considered invention compensation and thus were taxable. However, institutions such as the Electronics and Telecommunications Research Institute (ETRI) objected, and the Supreme Court ultimately ruled (Supreme Court ruling on April 23, 2015, Case No. 2014du15559) that royalties for technology usage constitute inventor compensation and are, therefore, tax-exempt.

However, in reality, many SME representatives are listed as inventors. To prevent abuse of the supporting laws while encouraging genuine inventions, it may be necessary to grant maximum flexibility in defining compensation scope and payment limits while enforcing strict punitive measures against those who exploit the system for tax evasion.

Fostering a mature sense of ethical responsibility in individuals makes a significant, albeit silent, contribution to societal progress. While efforts to fundamentally control human greed are valuable, it is our responsibility to establish a society where maximum autonomy is guaranteed, yet strict penalties apply universally to those who exploit the system.

Taxation Targets Related to Employee Inventions Under Current Tax Law

1. Compensation related to patents and utility models received from the employer is classified as non-taxable other income under Article 5 of the Income Tax Act.

2. According to the current tax law, employee invention compensation is only tax-exempt if the invention has been registered (simple applications or rejected applications are excluded).

3. In some cases, the employer may provide compensation in the form of a reward (e.g., bonuses or consolation payments), rather than as employee invention compensation. In such cases, it is considered earned income and is subject to taxation.

4. In the case of reward payments for outstanding inventors, these are classified as other taxable income when awarded for exceptional contributions in competitions, business, seniority-related events, exhibitions, etc.

5. Employee invention compensation paid by the employer is considered research and human resource development expenses and is eligible for income tax or corporate tax deductions.