SOUTH KOREA Trends and Developments Contributed by: Tom Kwon, Jung-Ho Ryu, Steve Kim and Philje Cho, Lee & Ko
injunctions for patent infringement that could block sales in the US market. These settlements typically do not involve actual “use” of any underlying technology in the commercial sense, making it hard to determine “place of use” as prescribed in the majority opinion of the Decision. From the taxpayer’s perspective, such payments should all be characterised as US-source income, as they relate to resolving patent infringement claims in the US. While the Korean tax authorities may attempt to argue that the underlying technology was “used” in Korea, it could be argued that Korean courts should not be able to deny that the Royalty payments in such case should be primarily attributable to the Korean company’s sales in the US (or those of its US affiliate). Contract terms Although the Decision does not formally place the bur - den of proving “place of use” on the US licensor, in practice such proof may be necessary to claim treaty benefits or a refund of WHT in Korea. Since relevant information may only be known by the Korean compa - ny or licensee, US licensors should include, in consid - eration for tax withholding by the Korean entity, more robust provisions in settlement agreements, prescrib - ing that the Korean entity must provide substantive assistance and support to the US licensor in seeking a refund of WHT, including (to the extent commer - cially reasonable) detailed information on sales and the use of products using the underlying technology if requested by the Korean tax authorities. The alternative would be for the US licensor to argue for gross-up provisions for any Royalty WHT in the licence agreement, shifting the economic cost of WHT to the Korean payor. Monitoring the case on remand In the Decision, the Supreme Court remanded the case back to the Appellate Court to determine the place of use of patents and apportion the Royalty pay - ments between Korean and foreign source-income. However, if manufacturing facilities and sales are spread across multiple jurisdictions, it is unclear which allocation metric or methodology (gross sales, cost of goods manufactured, production volume, etc) will be recognised by the Appellate Court, or even how to split lump-sum Royalty payments between manu -
facturing and sales. Therefore, close monitoring of these developments on remand will be essential to determine the next steps and future strategies for US licensors seeking to claim refunds of WHT. Moreover, there are a number of other similar Royalty WHT cases pending at the Supreme Court and the trial courts, and these cases should also be closely monitored. New Enforcement Penalty Regime in Tax Audits A shift toward stronger tax compliance Recent changes to the National Tax Basic Law have introduced a revised system of Enforcement Penal - ties for taxpayers who fail to submit requested docu - ments during an audit. This measure came into effect for audits starting after 15 September 2025, and aims to enhance the effectiveness of tax investigations. Previously, authorities relied on one-time administra- tive fines, but the new system is designed to provide a much stronger incentive for co-operation through recurring financial charges. Key differences from previous fine provisions The most significant change is that these new penal - ties have no upper limit and can be imposed repeat - edly. Unlike the old system, which was capped at KRW50 million, Enforcement Penalties can be levied every 30 days until the documents are provided. The amount is calculated based on a percentage of the taxpayer’s daily revenue (ranging from 0.1% to 0.2%), meaning the financial burden can accumulate signifi - cantly over time. How the penalty system works If a taxpayer fails to submit documents without a “jus - tifiable reason”, the regional tax office can begin the penalty process following a formal review. Authorities must first provide a grace period of at least 30 days for the taxpayer to comply. If the deadline passes, a new Enforcement Penalty Deliberation Committee reviews the case to determine the penalty, with the power to reduce the amount by up to one-half or to grant an exemption based on the taxpayer’s efforts. Challenges in the new procedure A major point of concern will be what constitutes a valid excuse for not providing information, such as
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