SOUTH KOREA Trends and Developments Contributed by: Kyu Dong Kim and Yong Whan Choi, Yulchon LLC
1. Korean Supreme Court Changes 30-Year Precedent on Taxation of Royalties for Foreign- Registered Patents On 18 September 2025, the Korean Supreme Court issued an en banc decision in Case No. 2021Du59908 (the “En Banc Decision”), changing its long-standing position on the taxation of royalties derived from patents registered outside Korea but not registered in Korea (“foreign-registered patents”, commonly referred to as “unregistered patents”). In its prior decisions (for example, Supreme Court Decisions 91Nu6887 dated 12 May 1992, 2005Du8641 dated 7 September 2007, 2012Du18356 dated 27 November 2014, 2013Du9670 dated 11 Decem - ber 2014, 2016Du42883 dated 27 December 2018, 2018Du36592 dated 10 February 2022, 2019Du50946 dated 10 February 2022 and 2019Du47100 dated 24 February 2022), the Supreme Court consistently held that the “use” of a patent right for purposes of Articles 6 (3) and 14 (4) of the Korea–US tax treaty means “use within the country in which the patent right is effec - tive”, and therefore, the use in Korea of a patent not registered in Korea cannot be recognised. However, in the En Banc Decision, the Supreme Court overturned this legal principle, holding that for foreign-registered patents, the determination of whether a patent is used in Korea should be based not on whether the patent rights are exercised in Korea under the “territoriality principle”, but on whether the “patented technology” is effectively used in Korea for activities such as man - ufacturing and sales. In many tax disputes involving patent royalties paid by Korean companies to US companies, the key question has been how to determine what portion of the royal - ties constitutes “Korean-source income” subject to taxation in Korea; in other words, how to calculate the portion attributable to the use of the patent in Korea (ie, royalties arising from sources within Korea) versus the portion attributable to its use outside Korea. The Supreme Court’s En Banc Decision directly addresses and clarifies this question. Since the Supreme Court rendered its decision in Case No. 91Nu6887 on 12 May 1992, the Supreme Court has, for the past 33 years, consistently held based on the “territoriality principle” that:
“patent rights are effective only within the territory of the country in which the relevant patent is registered. Patent infringement cannot occur in countries other than the country in which the relevant patent is regis - tered, and accordingly, the notion of using or paying consideration for the use of, or the rights to use, pat- ents cannot exist in countries other than the country in which the relevant patent is registered. Thus, where a US corporation registers a particular patent outside of Korea but not in Korea, income derived by the US cor- poration in relation to such patent cannot be treated as consideration received for the use of, or the rights to use, the patent, and therefore, cannot be viewed as Korean-source income.” Based on this legal principle established by Supreme Court precedents, when a US resident without a per - manent establishment in Korea receives patent royal - ties, the courts have ruled that only the portion attrib - utable to patents registered in Korea should be treated as Korean-source income and taxable in Korea. However, the En Banc Decision directly overturned the previous Supreme Court rulings. The Supreme Court in the En Banc Decision ultimately held that, for pur - poses of the Korea–US tax treaty, “use of a patent” refers not to the use of the patent right itself, but to the effective use of the patented technology in activities such as manufacturing and sales. The Supreme Court reversed the lower court’s decision and remanded the case to the Suwon High Court on the basis that “the lower court determined that the royalties in ques - tion were not Korean-source income solely based on where the patents are registered, without examining whether the patented technologies were effectively used in manufacturing or sales in Korea”. In light of this En Banc Decision, significant disputes are expected going forward. Future cases concern - ing whether patent royalties constitute Korean-source income are likely to focus on two key issues: (i) wheth - er the “patented technologies” specified in the licence agreement fall within the scope of royalty payments and are effectively used in activities such as manufac - turing and sales in Korea, and (ii) if so, what portion of the royalties received by the patent holder constitutes consideration for such use in Korea, and how that por - tion should be apportioned and calculated.
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