Long-Running Tax Clash With U.S. Patent Holders Faces Turning Point (Image supported by ChatGPT)
SEOUL, Sept. 8 (Korea Bizwire) — A decades-long tax dispute over royalties paid by South Korean companies to U.S. patent holders is heading into a critical new phase, as the nation’s Supreme Court considers whether to alter its long-standing stance that has largely exempted American firms from local taxation.
At issue is whether royalties paid by companies such as Samsung Electronics and SK hynix for U.S.-registered patents are subject to withholding taxes in Korea.
While Seoul’s tax authorities have long argued that such payments constitute Korean-source income because the technologies are used in domestic manufacturing, the Supreme Court has repeatedly sided with U.S. firms, citing provisions of the Korea-U.S. tax treaty and the principle that patents are only enforceable in the countries where they are registered.
The latest case involves a U.S. patent company, identified only as “A,” which challenged the National Tax Service after being subjected to withholding.
Lower courts backed the company’s demand for a refund, but the case has now been elevated to the Supreme Court’s full bench, a move typically reserved for disputes with far-reaching legal or financial consequences.
The controversy stems from a divergence in treaty language. Most of Korea’s tax agreements grant taxing rights to the country where royalties are paid, but the U.S. treaty assigns them to the place of use.
The Supreme Court has interpreted “use” narrowly, ruling that unregistered U.S. patents cannot legally be used in Korea and therefore fall outside Korean taxing authority.
In response, lawmakers have revised corporate tax rules over the years to clarify that royalties on unregistered patents can still be taxed if the underlying technologies are deployed domestically.
More recent lower-court decisions have shown signs of shifting, with some recognizing the government’s taxing rights.
The Supreme Court (Image courtesy of Yonhap)
The stakes are high. Pending litigation over unregistered patent royalties could affect as much as 4 trillion won ($3 billion) in tax revenue. With the semiconductor sector facing booming demand driven by artificial intelligence, the sums involved are likely to rise further.
If the full bench overturns precedent, it could secure Korea’s taxing authority, stem what officials describe as a drain on national revenue, and set a new benchmark in cross-border intellectual property disputes.
“This question of withholding on unregistered patent royalties has been debated in academia for decades,” said Oh Yoon, director of the Korea International Tax Association and professor at Hanyang University Law School.
“Given recent legislative revisions affirming Korea’s taxing rights, it is unsurprising that the Supreme Court has decided the issue warrants review by its full bench.”
M. H. Lee (mhlee@koreabizwire.com)
