Yes. The Korean Supreme Court held that a foreign patent not registered in Korea is subject to taxation if used in a domestic manufacturing process in Korea. The Supreme Court of Korea overturned the lower court’s holding in a lawsuit filed by a U.S. company against a Korean tax office and remanded the case to the Suwon High Court. The case sheds light on the need for carefully drafted agreements with a No Tax Deduction Clause that mandates that all local taxes are the sole responsibility of the licensee/user, enabling a predictable determination of the actual amount of the license fee being paid.
Facts
1. In July 2017, a U.S. company, Optodot, signed a licensing agreement granting Samsung SDI the use of 20 patents (19 foreign patents).
2. Samsung SDI withheld tax from payments owed to Optodot.
3. Optodot sought a refund of withholding taxes, arguing that overseas patent royalties could not be considered domestically sourced income, thus, are not subject to taxes in Korea.
4. A local Tax Office denied the request, and Optodot filed a lawsuit to overturn the Tax Office’s refusal.
6. The court of first instance ruled in favor of the U.S. company, and the appellate court upheld the decision, noting that the “Korea-U.S. tax treaty is premised on the territorial principle, which states that the effect of the patent is limited to the country where the patent is registered.”
Korean Supreme Court
The Korean Supreme Court overturned the lower court rulings and remanded the case, stating that the lower courts misunderstood the legal principle regarding whether overseas patent royalties constitute domestically sourced income under the Korea-U.S. tax treaty. The Supreme Court stated that “the term ‘use’ in the Korea-U.S. tax treaty should be interpreted according to the laws of Korea, the contracting country where taxes are determined. . . and according to the Corporate Tax Act, ‘use’ does not refer to the patent itself, but rather to the use of the manufacturing method, technology, or information that is the subject of the patent.” Thus, “if a patented technology not registered domestically is used domestically, the consideration for such use constitutes domestically sourced income. . . the lower court failed to examine whether the patented technology was actually used domestically and immediately concluded that it did not constitute domestically sourced income.”
IPG Legal offers comprehensive tax advisory and tax litigation services tailored to foreign investors, multinational companies, and high-net-worth individuals doing business in Korea. The firm advises on Korean corporate income tax, inheritance tax, withholding tax, VAT, transfer pricing, permanent establishment risks, and tax structuring for inbound and outbound investments, working closely with accounting firms and international counsel where needed. IPG Legal also has significant experience representing clients in tax audits, assessments, objections, and appeals before the National Tax Service and Korean courts, combining deep knowledge of Korean tax law with a practical understanding of cross-border transactions, treaty interpretation, and regulatory enforcement.
by Sean Hayes
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