Korea: Royalties subject to withholding under Korea-U.S. treaty (tax tribunal decision)

A tax tribunal decision concerning royalties subject to withholding under Korea-U.S. treaty

Tax tribunal decision concerning royalties subject to withholding under Korea-U.S. treaty

The tax tribunal held (Decision 2022 Joong 7160 of 31 December 2022) that royalties received by the taxpayer were Korea-sourced and thus subject to withholding of corporate income tax under the Korea-U.S. income tax treaty.


The taxpayer argued that royalties it received under a license of patents were not Korea-sourced income subject to withholding of corporate income tax under Article 14, Clause 1 of the Korea-U.S. income tax treaty, because the patents were not registered in Korea.

Article 6, Clause 3 of the Korea-U.S. treaty states that “[r]oyalties shall be treated as income from sources within one of the Contracting States only if paid for the use of, or the right to use, such property within that Contracting State.” Source of income is thus determined by place of use, but the precise criteria for establishing place of use is not provided in the treaty.

Because the treaty did not provide specific criteria, the tribunal looked to local Korea tax law. Based on Corporate Tax Act Article 93, Clause 8 (amended before 19 December 2017) which states that “[i]f the relevant patent right, etc. has been registered overseas and is used in manufacturing or sales in Korea, it is deemed to have been used in Korea regardless of whether it was registered in Korea or not,” the tribunal found that royalties paid for the use of patents unregistered in Korea may still be considered Korea-sourced income under the treaty.

Read a January 2023 report [PDF 947 KB] prepared by the KPMG member firm in Korea


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