Newsletter | April 2015, Issue 1
	Tax
	The Supreme Court Decision on withholding tax on fees for patents registered abroad
	The Korean Supreme Court recently rendered a decision holding that royalties received by a US corporation from a Korean corporation pursuant to a settlement agreement regarding a dispute involving infringement of patents registered abroad (but not in Korea) is not domestic-source income under the Korea-US Tax Treaty, regardless of whether the patents were used in Korea in manufacturing or sales activities, and that such royalties should be excluded from domestic-source income subject to Korean withholding tax.
	The Supreme Court ruled that, under Article 6, paragraph 3 and Article 14, paragraph 4 of the Korea-US Tax Treaty, the license fee paid by a Korean corporation for use of patent should be treated as domestic-source income only to the extent that the patents are duly registered in Korea by the US corporation on grounds that patent rights (e.g., exclusive rights for production, usage, transfer, lending, importation, exhibition, etc.) are only effective in the country where the patents are registered in accordance with the territorial principle of patents.  A previous Supreme Court case in 2007 already took the position that royalties arising from the use of patents only registered outside of Korea should not be treated as domestic-sourced income based on the above mentioned article of the Korea-US Tax Treaty.
	However, soon after the above 2007 Supreme Court case decision, Article 93 of the Korean Corporate Income Tax Law was revised on December 26, 2008 to include a new provision stating that income or fees obtained by a foreign company from a Korean licensee’s use of patents registered overseas in connection with manufacture and sale, etc. in Korea are considered domestic-source income even if they are not registered in Korea.  Based on the revised law, the Korean tax authorities imposed withholding tax on US corporations’ royalty income from foreign patents not registered in Korea.
	In its latest decision, the Supreme Court held that, under Article 28 of the International Tax Coordination Law, the relevant tax treaty should take precedence over the Korean Corporate Income Tax Law with regard to the domestic-source income classification, and thus whether or not the patent royalty income is a domestic-source income should be determined by the Korea-US Tax Treaty.  This decision reaffirmed the court’s previous position on the income classification issue arising from domestic payment of royalty on patents registered overseas.
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