Korea: Royalties received for use of domestically unregistered patents subject to withholding tax under U.S. treaty
Tax Tribunal decision
Tax Tribunal decision
The Tax Tribunal on May 30, 2024, held (2024 Joong 0439) that royalties received by the taxpayer from Korean companies for the use of domestically unregistered patents were subject to withholding tax under the U.S.-Korea income tax treaty.
Summary
The taxpayer, a U.S. company specialized in developing semiconductor and intellectual property (IP) rights with respect to enhancing data center connectivity and improving memory bottlenecks, granted licenses for the use of patents owned by the taxpayer to Korean companies. The companies paid royalties to the taxpayer for the use of the patents and withheld corporate income tax at a rate of 15% under the U.S.-Korea income tax treaty.
The taxpayer filed a refund claim for the withheld taxes, arguing that the royalties were not Korea-sourced under the treaty because they were not registered in Korea.
The Tax Tribunal held that under Article 6(3) of the treaty, income from royalties is sourced based on where the property is used or where the right to use is granted. Article 93(9) of the Corporate Income Tax Act, as amended by Law No. 9267 on December 26, 2008, explicitly states that if a patent right is registered overseas and used for manufacturing or sales in Korea, the patents are considered used in Korea regardless of domestic registration status.
Read a July 2024 report prepared by the KPMG member firm in Korea
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