On September 18, 2025, the Korea Supreme Court issued a full-bench decision (Case No. 2021Du59908) holding that royalties paid for the use in Korea of foreign-registered patents that are not registered in Korea (so-called “domestically unregistered patents”) may qualify as Korean-sourced income (domestic source income). This judgment marks a reversal of the long-standing interpretation of the Korea-U.S. Income Tax Convention (Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income).

In 2013, a Korean corporation entered into a license agreement with a U.S. company for approximately 40 patents registered in the U.S., and in the 2014 fiscal year paid around USD 1.6 million as a royalty and paid with-holding corporate tax accordingly. The Korean-company later claimed that the royalty payment related to Korean-unregistered patents and thus did not constitute Korean-sourced income, sought a refund of the with-holding corporate tax, but the Korean tax authority denied the claim – and the dispute proceeded to litigation.

Until now, the Korea Supreme Court had consistently held, based on the principle of territoriality of patent rights (“patent rights operate only in the country of registration”), that the “use” of a patent meant practicing of the patent in the country in which it is registered, and thus a patent not registered in Korea could not be treated as used in Korea for tax-source purposes.

However, the Korea Supreme Court held that Article 14(4)(a) of the Korea-U.S. Convention defines “royalties” for the “use of, or the right to use, patents” and that because the Convention does not define the term “use,” Article 2(2) of the Convention requires interpreting “use” under the domestic tax law of the Contracting State in which tax is being determined (i.e., Korea).

Under former Article 93, subparagraph 8, proviso of the Corporate Tax Act, it is provided that “even if a patent is registered abroad but not registered in Korea, it shall be deemed to have been used in Korea if it is used for manufacturing, sales, etc. within Korea.” The Korea Supreme Court interpreted the term “use” in this context to mean the use of the patented technology that is the subject of the patent, rather than the exercise of the patent’s exclusive rights themselves.

Accordingly, if the patented technology of a domestically unregistered patent is actually used in Korea, the royalty payment constitutes Korean-sourced income – even though the patent is not registered in Korea. The Korea Supreme Court thus changed the prior rulings that denied Korean source status for royalty payments under domestically unregistered patents.

This full-bench decision signals that Korean companies paying royalties to foreign patent holders for technology used in Korea should treat such payments as possibly subject to Korean with-holding corporate tax, irrespective of whether the patent is registered in Korea. Consequently, when concluding license agreements, careful attention must now be given to distinguishing between domestic and foreign uses of technology, specifying geographic scope of use, and structuring royalty payments accordingly.