News & Infomation
简报
September 2025
September 2025The National Tax Service of Korea (NTS) may impose taxes on royalties for patents that are not registered in Korea — The Supreme Court of Korea overturned its precedent for the first time in 33 years. (Supreme Court (En Banc), Case No. 2021Du59908; decision rendered on September 18, 2025)
1. Introduction
The Supreme Court has issued an en banc decision recognizing the Korean tax authorities’ right to impose taxes on royalties paid by Korean companies to foreign companies including U.S. companies for the use of patents that are not registered in Korea.
This is the first precedent that overturned the previous legal principle that, under the Convention Between the Republic of Korea and the United States of America for the Avoidance of Double Taxation (or “Korea – U.S. Tax Treaty”), income received by U.S. companies in connection with patents not registered in Korea does not constitute Korean-source income.
This marks the establishment of a new precedent in the controversy over taxing rights on patents, which has persisted for more than 30 years since the 1990s. Going forward, a new principle has been established that the NTS may impose taxes even when a Korean company uses a foreign company’s patents within Korea. The NTS has noted that pending tax disputes related to this issue amount to approximately USD 2.9 billion (KRW 4 trillion), and the decision is expected to significantly increase tax revenue.
2. Case Overview
SK hynix, a semiconductor manufacturer, was sued in 2011 by a U.S.-based company (Company A) for patent infringement. The dispute was settled through an agreement allowing SK hynix to use approximately 40 U.S.-registered semiconductor-related patents owned by Company A in exchange for annual royalty payments of USD 1.6 million (approx. KRW 2.2 billion) for five years.
In accordance with the agreement, SK hynix paid patent royalties to Company A and remitted USD 225,000 (approx. KRW 310 million) as withholding corporate tax to the Icheon Tax Office, which has jurisdiction over SK hynix’s place of business.
Subsequently, SK hynix filed a claim for a refund of corporate tax, arguing that, under the Korea - U.S. Tax Treaty, the royalties at issue were paid for patents not registered in Korea and therefore do not constitute Korean-source income. The gist of its argument was that, because the patents used were registered only abroad and not in Korea, the royalties do not constitute Korean-source income and therefore are not subject to taxation.
However, the NTS rejected the amended tax return claim, stating that even if the patents were not registered in Korea, taxes must be paid if the patents were used domestically for manufacturing or sales. SK hynix then filed the present lawsuit seeking revocation of the disposition, arguing that imposing tax on the use of foreign patents in Korea would amount to double taxation.
3. Court’s Decision
Both the trial court and the appellate court ruled in favor of SK hynix, holding that royalties for patents not registered in Korea do not constitute Korean-source income. The lower courts reasoned that, consistent with previous precedents of the Supreme Court, patent rights cannot be infringed outside the country in which they are registered, and thus it is inconceivable to pay consideration for their use; therefore, the royalties at issue for patents not registered in Korea do not constitute taxable income in Korea under the Korea – U.S. Tax Treaty and related laws.
However, the Supreme Court (En Banc), serving as the court of final appeal, overturned this precedent for the first time in 33 years. The Court held that even if a patent is not registered in Korea, if the patented technology is used domestically in manufacturing or sales, the royalties constitute Korean-source income.
The Supreme Court stated:
“The lower court erred in finding that the royalties do not constitute Korean-source income solely because they relate to patents not registered in Korea, without examining whether the patented technology was actually used in Korea, thereby misapplying the relevant legal principles and failing to conduct the necessary review, which affected the outcome of the judgment.”
4. Conclusion
The NTS expects this Supreme Court decision to contribute to strengthening national finances, noting that Korean companies will continue to pay patent royalties to foreign companies and that, in the long term, this could generate several billion U.S. dollars in additional tax revenue.
In light of this change in Supreme Court precedent, it is advisable that, going forward, companies carefully review the methods of tax payment when entering into patent royalty agreements.
* 如果您想退订，请点击 [浏览].
| ▲ Prev | 2025年 9月 - 韩国国税厅可以对未在韩国授权登记的专利权的使用费进行征税。最高法院时隔33年变更了判例（最高法院全体合议组2021DU59908号案件；2025年9月18日宣告）。 |
|---|