Key takeaways

• Through the en banc decision, the Court departed from its previous interpretation of “place of use” for a patent—which, for purposes of determining the source of royalty income under the Korea-US Tax Treaty, had been linked to the exercise of exclusive legal rights conferred by domestic patent registration based on the principle of territoriality. Under the new interpretation, grounded in the Corporate Income Tax Law, “use” of a patent is now defined as the actual implementation or utilization of the patented technology in Korea, regardless of whether the patent is registered domestically.
• As an en banc decision, this ruling supersedes prior Supreme Court precedents. Going forward, royalties paid for the use of patented technology in Korea—regardless of whether the patent is registered domestically—will be treated as Korean-source income subject to withholding tax.
• As a result, the allocation of royalty payments between domestic and overseas use of patents is expected to receive increased attention in cross-border IP licensing transactions and related disputes. The decision may have broader implications, including whether the concept of “place of use” under the Korean Corporate Tax Act could also extend to other types of intellectual property beyond patents.

In depth

Overview of relevant facts

• Following a patent infringement lawsuit filed by a US limited liability company (“Company A”) against a Korean semiconductor company (“Company B”) in the United States, the parties entered into a settlement and license agreement in 2013. Under the agreement, the dispute was resolved, and Company A granted Company B a worldwide license to use the patents in question—all of which were registered exclusively in the US, and not in Korea—in exchange for royalty payments. Pursuant to the agreement, Company B paid USD 1.6 million in royalties to Company A in 2014 and withheld Korean corporate income tax on the payment.
• Company B subsequently filed a refund claim with the Korean tax authorities, arguing that, because the payment was made for the use of patents unregistered in Korea, it should not be treated as Korean-source income under the Korea-US Tax Treaty.
• The Korean tax authorities rejected Company B’s refund claim, taking the position that the payment constituted Korean-source royalty income. Company B then filed a lawsuit seeking the cancellation of the tax authorities’ rejection of its refund claim.

Main issue of the case

The main issue in this case was whether the payment made by Company B to Company A constituted Korean-source royalty income under the Korea-US Tax Treaty. Specifically, the question was whether the actual use in Korea of technology protected by patents that are not registered in Korea could be considered “use” for purposes of determining Korean-source income under the treaty.

Background behind the en banc decision: Supreme Court’s previous position

Under the Korea-US Tax Treaty, the source of royalty income is determined by the place of use of the relevant intellectual property. However, the term “place of use” is not clearly defined in the treaty.

Since 1992, the Supreme Court has consistently interpreted “place of use” of a patent—based on the principle of territoriality—as referring to the exercise of rights conferred through registration within the scope of the patent’s exclusive effect. Based on this interpretation, the Court held that patents unregistered in Korea could not be exercised or infringed in Korea, and thus the “use” or “payment for use” of such patents in Korea could not be contemplated (Supreme Court decision 91Nu6887, dated 12 May 1992; Supreme Court decision 2005Du8641, dated 7 September 2007).

In an effort to overturn this interpretation, the Korean government amended the Corporate Income Tax Law in 2008 to broaden the definition of patent “use.” The revised law includes cases where manufacturing methods, technologies, or information contained in unregistered IP rights are actually implemented or used in Korea, thereby allowing royalties paid for such rights to be treated as Korean-source income. Based on this amendment, the Korean tax authorities continued to impose withholding tax on royalties paid to US corporations for patents unregistered in Korea, challenging the Supreme Court’s interpretation.

Despite this legislative change and the tax authorities’ continued imposition of withholding tax on royalties for unregistered patents, the Supreme Court maintained its territoriality-based interpretation for over three decades (Supreme Court decision 2012Du18356, dated 27 November 2014; Supreme Court decision 2016Du42883, dated 27 December 2018; Supreme Court decision 2019Du47100, dated 24 February 2022).

Supreme Court's en banc decision

In the en banc decision rendered on 18 September 2025, the Korean Supreme Court overturned its longstanding interpretation of the term “place of use” for patents under the Korea-US Tax Treaty, marking a significant shift in jurisprudence. The Court held that the actual use of patented technology in Korea, regardless of the patent’s domestic registration status, constitutes “use” for purposes of determining Korean-source income under both domestic law and the treaty. The Court’s reasoning is summarized as follows:

Interpretation of “use” under domestic law

Article 2(2) of the Korea-US Tax Treaty provides that “[a]ny other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined.” The Supreme Court ruled that, because the term “use” of a patent is not defined in the treaty, its meaning should be interpreted in accordance with the laws of the contracting state where the tax is being determined (i.e., Korea) unless the context of the treaty otherwise requires.

The relevant provisions of the Korean Corporate Income Tax Law provide that if a patent unregistered in Korea is used for manufacturing or sales activities within Korea, the patent is deemed to have been used in Korea, regardless of its registration status. In this context, “use” of a patent refers not to the exercise of the exclusive legal rights of the patent itself, but to the actual implementation or utilization of the manufacturing method, technology, or information protected by the patent. Accordingly, the Supreme Court held that if the patented technology is used domestically, royalty payments made in consideration of such use should be treated as Korean-source income.

The Court further emphasized that, even after a comprehensive review of the Korea-US Tax Treaty’s language, related agreements, negotiation records, the circumstances surrounding its conclusion, and various interpretations of “context” in tax treaties, there is insufficient basis to interpret the treaty as excluding the possibility of domestic use of unregistered patents or the payment of consideration for such use in Korea.

Logical flaws in the previous interpretation based on territoriality principle

The Court made clear that the territoriality principle, which had previously justified the interpretation of “use” of patents differently from other types of intellectual property when determining the source of royalty income, could no longer be applied. Territoriality governs the legal enforceability of patent rights, not the economic use of the patented technology. The use of patented technology outside the jurisdiction of registration does not constitute infringement of patent rights; however, this does not preclude the technology from having economic value or from being subject to payment outside that jurisdiction.

Moreover, under the principle of freedom of contract, Korean companies can validly enter into agreements to use patent technologies covered by patents unregistered in Korea and pay royalties for such foreign patents. Such agreements reflect legitimate business needs—such as avoiding infringement risks abroad, reducing relevant R&D costs, or enhancing competitiveness by creating business opportunities in both domestic and foreign markets.

For these reasons, the Supreme Court held that the previous interpretation of “use” based on the territoriality principle can no longer be upheld.

Dissenting opinion of the en banc decision

In the decision, the dissenting justices asserted that the term “patent” under the Korea-US Tax Treaty refers to the patent right itself, not the invention or technology protected by the patent. Since patent rights are created by law, their enforceability and scope of use must also be defined by law. Accordingly, under the principle of patent territoriality, the “use” of a patent can only occur within the jurisdiction where the patent is registered. From this perspective, the use of patent rights not registered in Korea, or the payment of royalties for such use, cannot be contemplated.

The dissenting justices further pointed out that, in most cases involving royalties for unregistered patents—including the present case—the license agreements were executed to resolve patent infringement disputes arising from Korean companies exporting products to the United States. Viewed in this context, the royalties were paid as consideration for the use of US patent rights in the United States, not for the domestic use of the underlying patented technology. Therefore, such payments should not be regarded as Korean-source income.

What to expect next

This decision, which overturns decades of precedent, is expected to have a profound impact on Korea’s tax landscape. The amount of tax currently under dispute on this issue alone is estimated to exceed KRW 4 trillion. As Korean companies continue to pay patent royalties beyond the fiscal years currently under review, the ruling is projected to generate tens of trillions of KRW in tax revenue over the long term.

Looking ahead, now that the Supreme Court has clearly shifted its interpretation of “place of use” in relation to patents to align with the definition under the Corporate Income Tax Law, greater emphasis will be placed on how royalty payments are allocated between domestic and foreign use of intellectual property in both current and future disputes.

Furthermore, with the en banc decision now paving the way for interpreting “place of use” under the Korea-US Tax Treaty in accordance with the Corporate Income Tax Law, it remains to be seen how this concept will be applied to other categories of intellectual property requiring registration, such as utility model rights, trademark rights, and design rights.

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Seonhye Kim, Senior Associate, Yeo Joon Yun, Advisor, and Jisoo Bae, Associate, have contributed to this legal update.