South Korea Tax Tribunal Classifies Royalties for Foreign Patents Used Domestically as Korean-Source Income

Key Decision and Statutory Basis

On April 18, 2025, the South Korean Tax Tribunal issued its decision in Case No. Josim 2025Jung0213, concluding that royalty payments made by a Korean entity to a United States-based company for the use of patents registered only in the United States, but used within Korean territory, qualify as Korean-source income. This ruling was made despite the absence of domestic registration for the patents involved.

The Tribunal based its finding on Article 93(8) of the Corporate Income Tax Law (CITL), which provides that if foreign-registered intellectual property is utilized within Korea for production, distribution, or related business activities, the resulting income is to be considered as having a Korean source for taxation purposes.

Departure from Previous Judicial Interpretations

This administrative ruling differs from the position historically adopted by South Korean courts. In a decision issued by the Supreme Court in 2022 (Case No. 2018Du36592), the Court ruled that royalties paid for the use of patents not registered in Korea could not be treated as Korean-source income under the Korea–United States tax treaty. That judgment applied the territoriality principle in patent law and concluded that enforceable rights must exist within the country where protection is claimed. As a result, the Court held that royalties paid for unregistered patents did not fall within Korea's taxing jurisdiction.

Implications for Multinational Enterprises

The Tribunal’s interpretation may indicate a broader administrative shift toward prioritizing the place of use over the place of registration when evaluating the source of income for tax purposes. This approach could increase the risk of tax exposure for foreign licensors whose patents are actively used within Korea but registered abroad.

Entities engaged in cross-border licensing arrangements involving Korean licensees should assess whether the royalty income they receive may now be subject to Korean withholding tax. This decision may affect treaty-based tax planning and could prompt further scrutiny by the tax authorities.

Given the contrast between the Tribunal’s position and the judicial precedent, future legal developments should be closely observed. Whether this administrative stance will be challenged in court or lead to further legislative or regulatory clarification remains uncertain.

Other Recent Tax Developments in Korea

Additional recent tax rulings and Tribunal decisions demonstrate evolving interpretations in various aspects of South Korean tax law:

• Rejection of VAT Zero-Rating: In Josim 2024Se2641, the Tribunal denied zero-rated VAT status for services where the principal activities were performed in Korea, even though the client was located overseas.

  
  

• Ownership Threshold Clarified in Canada Treaty: A tax ruling clarified the methodology for calculating ownership percentages when Canadian pension funds invest through multi-layered structures (Ruling Gijun-2024-Beopgyugukjo-0232).

  
  

• Royalty Withholding on Software Licensing: Authorities addressed the applicable withholding tax rate for software license payments made to a Thai recipient (Ruling Seomyun-2024-Gookjesewon-3149).

  
  

• Below Market Value Share Contributions: In Josim 2022Se7930, the Tribunal evaluated whether contributing Korean shares at less than fair market value constituted taxable income under the CITL.

  
  

• Taxability of Flexible Benefits: The Seoul Administrative Court held in Case No. 2022Guhap51956 that points provided to employees under a flexible benefits scheme constituted taxable salary income.

  
  

• Foreign Tax Credit in CFC Context: In Ruling Seomyeon-2024-GukgyuGukjo-0250, the authorities clarified whether taxes paid by foreign branches could be included when calculating foreign tax credits under the Controlled Foreign Corporation (CFC) rules.