SOUTH KOREA Trends and Developments Contributed by: Tom Kwon, Jung-Ho Ryu, Steve Kim and Philje Cho, Lee & Ko
Supreme Court Overturns 30 Years of Precedent Case Law on Royalty Paid to US Licensors On 18 September 2025, the Supreme Court (en banc) issued a landmark ruling (Supreme Court Decision 2021Du59908, 18 September 2025 – hereinafter, the “Decision”) overturning long-standing case law on whether licence fees, royalty payments and other similar consideration (“Royalty”) for patents not regis - tered in Korea constitute Korean-source income under the Korea–US tax treaty (“Treaty”). This Decision rep - resents a significant departure from more than three decades of judicial precedents, and may have major implications for US licensors of registered patents and other similar IP. From “place of patent registration” to “place of use of patent technology” As a bit of background, the Decision arose out of a patent infringement dispute in the US between an entity holding patents related to semiconductor manu - facturing (“US Company”) and a Korean semiconduc - tor manufacturer (“Korean Company”). To resolve the dispute, the Korean Company and the US Company settled out of court, and the parties entered into a settlement and licence agreement. The US Company agreed to drop the lawsuit in consideration for a Roy - alty payment. The Korean Company, as the withhold - ing agent, deducted 16.5% withholding tax (WHT) from the Royalty payment. This was the reduced WHT rate under the Treaty for the Royalty payment. The Korean Company (as withholding agent) subse - quently sought a refund of this WHT on the basis that the Royalty was not Korean-source income because none of the patents subject to this dispute were regis - tered in Korea. The Korean tax authorities denied the refund, prompting the Korean Company to appeal to the Korean courts. At issue was the interpretation of “use” and how to determine the “place of use” under Article 6 (3) of the Treaty. The reason is that, under the Treaty, Royalty payments made by a Korean entity to a US licensor are characterised as Korean-source income if the “use” occurs in Korea. Since 1992, the Supreme Court had consistently applied a “territorial approach” to patent rights, hold - ing that patents not registered in Korea have no legal effect in Korea, and thus their “use” cannot occur
in Korea under the Treaty (see, eg, Supreme Court Decision 91Nu6887, 12 May 1992; Supreme Court Decision 2005Du8641, 7 September 2007; Supreme Court Decision 2012Du18356, 27 November 2014; Supreme Court Decision 2013Du9670, 11 Decem - ber 2014; Supreme Court Decision 2016Du42883, 27 December 2018; Supreme Court Decision 2018Du36592, 10 February 2022; Supreme Court Decision 2019Du50946, 10 February 2022; Supreme Court Decision 2019Du47100, 24 February 2022 – collectively, the “Prior Precedents”). However, in this Decision, rendered by a ten to three majority, the Supreme Court revisited and changed the interpretation of “use” to mean not the use of the patent right itself (ie, not the place of patent registra - tion), but rather the use of the underlying technology protected by the patent. Accordingly, the Supreme Court held that even if a patent is not registered in Korea, Royalty paid for the patent technology used in manufacturing or sales activities in Korea constitutes Korean-source income. Based on this reasoning, the Supreme Court expressly overturned the Prior Prec - edents. The Supreme Court remanded the case back to the Suwon High Court (the “Appellate Court”) for further review and proceedings consistent with this new legal principle, and instructed the Appellate Court to review the place of use and determine the amount of Korean-source income, which should be subject to WHT. Observations and possible implications for US licensors How to determine place of “use” based on the Decision It could be asserted that the Decision introduces more uncertainty by reversing the Prior Precedents and thus no longer treating the place of patent registration as dispositive under the Treaty. In cases involving actual licensing and the use of patented technology, Royalty payments might be allocated based on methodology or indicia like place of manufacturing, sales location or other measurable methodology. However, applying this framework broadly as a blanket rule becomes challenging when payments stem from US patent litigation settlements. Korean companies often settle with US licensors to avoid litigation and
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