[E-Daily Reporter Kim Jinsoo ] Concerns about “tax risks” have been raised in some quarters of the financial investment, pharmaceutical, and biotech markets regarding Genosco, a subsidiary of OSCOTEC Inc.(039200)specializing in new drug development. Consequently, some argue that Genosco’s corporate value has declined and that a revaluation is necessary. However, Genosco has clearly stated that all tax issues related to “Lekraza,” a treatment for non-small cell lung cancer, have been resolved, and that the value of its pipeline and future milestone payments remains unchanged.

In mid-last month, the Supreme Court overturned the lower court’s ruling and remanded the case (2023Du54761) regarding the compensation received by Genosco, a U.S. subsidiary, from Yuhan Corporation for the technology export (technology transfer) of a targeted liver cancer treatment. The Supreme Court ruled that the consideration for the FGFR technology export constituted capital gains rather than royalty income, and determined that further deliberation was necessary regarding its taxability under the Korea-U.S. Tax Treaty.

Initially, Genosco had viewed the contract payment it received from Yuhan Corporation for the transfer of liver cancer targeted therapy technology (FGFR) and know-how as a “disposal of capital assets” exempt from taxation under the Korea-U.S. Tax Treaty. However, the Supreme Court overturned the lower court’s ruling—which had treated the amount as a tax-exempt capital asset—stating that it could not be definitively classified as capital gains under the tax exemption provisions of the Korea-U.S. Tax Treaty. Consequently, the final determination of whether the amount is taxable will be decided in the upcoming retrial.

Following this Supreme Court ruling, concerns have been raised that the same criteria may be applied to “Lekraza”—a technology Genosco previously exported—potentially requiring the company to pay substantial withholding taxes. Given that the global commercial success of Lekraza is expected to generate significant royalty income, some argue that if taxes are imposed on these revenues, the actual amount Genosco secures will be drastically reduced, ultimately necessitating a revaluation of the company’s market value.

In response to these market concerns, a Genosco official drew a clear line, stating, “This Supreme Court ruling pertains solely to the consideration for the transfer of liver cancer targeted therapy technology (FGFR) and is a matter entirely distinct in legal nature from the receipt of royalties for Lecraza.”

Royalty Income Is Tax-Exempt

The key issue regarding Genosco’s tax situation is whether the income qualifies as “capital assets,” which are exempt from taxation under the Korea-U.S. Tax Treaty. According to Genosco, the primary reason these two matters are clearly distinct is that the nature of the income itself differs under tax law.

The consideration for the FGFR technology transfer is classified as “capital gains” under tax law. In contrast, the revenue share from Lekraza is classified as “royalty income.” Generally, the criterion for distinguishing between these two types of income is not simply whether they are labeled as “advance payment” or “royalty.” Under tax law, the key criterion is whether the payment is linked to the actual use or disposal of intellectual property rights, such as patents.

In the case of FGFR, the contract fee for the technology export was classified as capital gains; while the Supreme Court recognized it as such, it ruled that it did not meet the tax treaty’s exemption requirements for the “disposal of capital assets.” In contrast, the Lekraza royalties, given their transaction structure and nature—which clearly involve the distribution of revenue generated from an overseas licensing agreement in accordance with the contract—do not constitute domestic-source income. This Supreme Court ruling pertains to capital gains and is therefore entirely unrelated to the taxation of Lexaza.

“All tax issues regarding Lekraja have been resolved… this case is unrelated”

The strongest basis for Genosco’s confidence that there are no tax risks related to Lekraja is the “place of use” criterion, which serves as the basis for taxing royalty income.

According to current tax law and the Korea-U.S. Tax Treaty, whether withholding tax applies to royalty income is determined based on where the relevant patent or technology was actually used. Although Genosco receives sales royalties related to Lekraza directly from its partner, Yuhan Corporation, the structure essentially involves Genosco receiving a share of the revenue generated under the global license agreement that Yuhan Corporation entered into with the overseas pharmaceutical company Johnson & Johnson. Therefore, the actual place of use for the relevant patent and technology is “overseas,” not Korea.

Consequently, royalty income from rights used abroad is not considered “domestic-source income” and is fundamentally exempt from withholding tax. In other words, all milestone payments and sales royalties that will flow to Genosco in the future from global sales of Lecraza will be directly added to the company’s net income without any tax deductions.

Furthermore, Genosco stated that “tax issues related to Lecraza have already been fully resolved through past litigation.” According to Genosco, although the amounts related to Lecraza—being royalty income generated from use abroad—were not subject to withholding tax, withholding was carried out at the time due to the tax authorities’ conservative administrative handling.

To rectify this, Genosco filed separate lawsuits against the Dongjak Tax Office and the Dongjak District Office, seeking refunds of the withholding taxes already paid. After a fierce legal battle, the High Court, in its second-instance ruling, determined that Genosco’s claim of “tax exemption due to overseas use” was valid and issued a recommendation for settlement. The tax authorities accepted this ruling, and Genosco has since received a full refund of the withholding tax it had paid.

A Genosco official stated, “This ruling has no impact whatsoever on Lecraza’s contract or taxes. The tax issues related to Lecraza have already been permanently resolved.”