The Supreme Court recently rendered a landmark decision (Supreme Court Decision 2021Du59908, September 18, 2025, Grand Bench) regarding whether royalties for the use of patent rights unregistered in Korea constitute domestic-source income under the Korea-US Tax Treaty. This ruling is expected to bring significant changes to the tax practices and the contractual relationship between Korean licensees and US licensors. In this newsletter, we aim to provide an overview of the key points of this ruling and its practical implications.

The Korea-US Tax Treaty, unlike the tax treaties that Korea has concluded with many other countries with the residence of payor principle, adopts the place of use principle for determining the source of royalty income. Under this principle, income is considered to have its source within a treaty country only if it is paid for the use of, or the right to use, property within that country. Regarding whether royalties for the use of patents unregistered in Korea constitute domestic-source income, the Supreme Court had previously held that the determining factor should be whether the patent was registered domestically, and thus royalties for patents not registered in Korea were not considered domestic-source income. However, the recent Supreme Court en banc decision has overturned this interpretation.

In determining the use of a patent right in Korea, the Supreme Court had previously considered whether the patent was licensed within the territory where the exclusive rights on the patent are in effect, rather than whether the patent right was actually used in Korea under the territorial principle of patent rights. Accordingly, since patent rights are effective only within the registered country, patents unregistered in Korea could not, in principle, be “used” in Korea, and thus royalties for the use of patents unregistered in Korea could not constitute Korean-source income within the context of the Korea-US Tax Treaty.

However, the Supreme Court’s en banc decision held that the meaning of “use” should be interpreted in accordance with the Corporate Income Tax Law (the “CITL”), as the Korea-US Tax Treaty does not define the meaning of the term and Article 93(8) of the former CITL defines the “use” of patent rights to mean “the use of the patented technology subject to the patent right”. The Supreme Court overturned the existing legal principle by holding that even if a patent right is not registered in Korea, the relevant royalty income may constitute Korean-source income if the related patented technology is used in Korea.

The recent Supreme Court en banc decision presents a significant turning point in tax practice regarding royalties paid to US licensors for the use of patent rights unregistered in Korea. Specifically, in future disputes regarding a domestic corporation’s payment of royalties for patent rights unregistered in Korea to a US patent owner, the key issue will be whether the patented technology is “used in Korea.” Where such domestic use is established, further disputes may arise as to how much of the royalties should be treated as consideration for the use of the patented technology in Korea.

Accordingly, this decision increases taxpayers’ need to carefully review, in advance, the withholding provisions of patent royalty agreements between Korean licensees and US licensors and seek alternative dispute resolution procedures, such as the Mutual Agreement Procedures between the competent authorities of the US and Korea, to resolve withholding tax issues.
 

[Korean Version]