Supreme Court Expands Taxable Korean-Source Income to Foreign Patent Royalties > Newsletter 2025

Supreme Court Expands Taxable Korean-Source Income to Foreign Patent Royalties

26-01-20

The Korean Supreme Court has ruled that royalties paid for the use of U.S. patents not registered in Korea constitute Korean-source income under the Korea–U.S. Tax Treaty. This decision overturns 33 years of precedent holding that royalties paid for foreign patents not registered in Korea did not constitute Korean-source income based on the territoriality principle of patent rights.

On September 18, 2025, the Supreme Court en banc overturned the decision of the Suwon High Court, which had ruled in favor of the plaintiff, SK Hynix, in litigation challenging the tax authority’s refusal to correct SK Hynix’s tax assessment (Supreme Court Case No. 2021 Du 59908). The Supreme Court remanded the case to the High Court for further proceedings.

The dispute originated from a 2011 patent infringement lawsuit filed against SK Hynix by a U.S. patent management company. In 2013, the parties entered into a settlement agreement, under which SK Hynix paid royalties in exchange for a patent license. SK Hynix paid corporate income tax on these royalty payments to the Korean tax authority, then later sought a refund on the grounds that the royalties related to U.S. patents not registered in Korea, and therefore should not be treated as Korean-source income. However, the tax authority denied the claim, prompting SK Hynix to file the lawsuit.

The High Court held for SK Hynix, relying on prior case law (Case No. 2012 Du 18356) that, under the principle of patent territoriality, the use of a patent not registered in Korea cannot be contemplated, and therefore the royalties for such foreign patents do not constitute Korean-source income.

The Supreme Court reached a different conclusion. According to the Court, under the Korea–U.S. Tax Treaty, the “use of a patent” should be understood as the use of the “patented technology” that is the subject of the patent, rather than the exercise of the patent right itself. The principle of patent territoriality merely means that the domestic use of patented technology does not constitute patent infringement against a foreign patent holder; it does not imply that the technology lacks economic value or that the parties cannot agree to pay consideration for its use. The Court emphasized that, under the freedom of contract, parties may validly enter into an agreement to domestically use the patented technology covered by a patent registered abroad but not in Korea, and may agree to pay royalties for such use.

In dissent, several justices maintained the earlier view that, under the Korea–U.S. Tax Treaty, “use of a patent” should be interpreted as practicing the patented invention within the territorial scope where the patent right is effective, and does not extend to domestic use of technology covered only by foreign patents.

This landmark decision is expected to have significant implications for foreign companies licensing technology to Korean companies. Because royalties may now be treated as Korean-source income, and therefore subject to tax in Korea, regardless of whether the patent is registered in Korea, foreign licensors may need to review and possibly restructure existing license agreements, royalty structures, and withholding tax allocations with Korean licensees.

Professionals

Jae-Gap KIM

Patent Attorney / Attorney at Law (IL)

Other News

IP High Court Introduces New Procedural Requirements and Case Management Tools | 2026-01-20

Korea Announces Plans to Accede to the Patent Law Treaty by 2029 | 2026-01-20