Korea: Royalties for use in Korea of U.S.-registered patents treated as Korean-source under U.S. treaty (Tax Tribunal decision)
Recent tax developments in Korea
The Tax Tribunal on April 18, 2025, held (Josim 2025Jung0213) that royalties paid by a Korean company to a U.S. company for the use of patents registered in the United States (but not in Korea) in Korea constituted Korean-source income under the Korea-U.S. income tax treaty.
The Tribunal based its conclusion on the application of Article 93(8) of the Korean Corporate Income Tax Law (CITL), which provides that patents registered overseas but used in Korea for manufacturing, sales, or similar purposes are deemed to be used in Korea, regardless of domestic registration status.
KPMG observation
Unlike the Tax Tribunal, the courts have consistently ruled that, under the Korea–U.S. treaty and the territoriality principle of patent law, royalties for the use of patents not registered in Korea cannot be treated as Korean-source income (e.g., Supreme Court Decision 2018Du36592, 2022.02.10).
Read a June 2025 report prepared by the KPMG member firm in Korea
Other recent tax developments in Korea include:
- Value added tax (VAT) zero-rating denied for services with core activities performed in Korea (Tax Tribunal decision Josim 2024Se2641).
- Calculating method for ownership percentage under Korea-Canada income tax treaty when a Canadian pension fund, as the beneficial owner of Korean-source capital gains, invests through investment vehicles (tax ruling Gijun-2024-Beopgyugukjo-0232)
- Withholding tax rate applicable to software license royalty paid by a Thai company (tax ruling (Seomyun-2024-Gookjesewon-3149)
- Whether a foreign company’s capital contribution of Korean shares at below fair market value (FMV) constitutes a deemed gift, thereby giving rise to “other income” under the CITL (Tax Tribunal decision Josim 2022Se7930)
- Whether employee benefit points under a flexible benefits plan constitute taxable salary income under the Korean Individual Income Tax Law (IITL) (Seoul Administrative Court decision 2022Guhap51956)
- Whether taxes paid by a foreign branch are included in actual foreign taxes paid under controlled foreign corporation (CFC) rules (tax ruling Seomyeon-2024-GukgyuGukjo-0250)