"Foreign Patents Used Domestically Are Subject to Taxation"

The Supreme Court has ruled that even if a foreign patent is not registered in Korea, it is still subject to taxation if it is used in the manufacturing process within the country. On December 4, 2025, the Supreme Court's Special Division 2 (Presiding Justice: Oh Kyungmi) overturned the lower court's decision, which had canceled a tax assessment, and remanded the case to the Suwon High Court in a lawsuit filed by the U.S. company Optodot Corporation (hereafter "Optodot") against the head of the Giheung Tax Office regarding the rejection of a corporate (withholding) tax correction (Case No. 2021Du60298).

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[Facts]

In July 2017, Optodot entered into a license agreement with Samsung SDI for 20 patents, 19 of which were foreign patents. Samsung SDI used these patents to design and manufacture batteries and other products in Korea. As compensation for using the patents, Samsung SDI paid Optodot approximately 2.95 million dollars in the 2017 fiscal year and withheld corporate tax at the source. In October 2019, Optodot requested a refund of the withholding tax, arguing that royalties for foreign patents should not be considered domestic source income. However, the head of the Giheung Tax Office rejected this request. In March 2020, Optodot filed a lawsuit seeking to overturn the rejection by the Giheung Tax Office.

[Lower Court Rulings]

The court of first instance ruled in favor of the plaintiff, stating, "According to the interpretation of the Korea-U.S. Tax Treaty, if a U.S. corporation registers a patent only abroad, the income received in connection with it cannot be regarded as domestic source income."

The appellate court upheld the first-instance decision, stating, "The Korea-U.S. Tax Treaty is based on the principle of territoriality, meaning that a patent is effective only in the country where it is registered."

[Supreme Court Ruling]

The Supreme Court overturned and remanded the case, stating that the lower courts misunderstood the legal principles regarding whether royalties from foreign patents constitute domestic source income under the Korea-U.S. Tax Treaty. The Supreme Court stated, "The term 'use' in the Korea-U.S. Tax Treaty should be interpreted in accordance with the laws of Korea, the contracting state where the tax is determined." It further explained, "Under the Corporate Tax Act, 'use' refers not to the patent itself, but to the use of the manufacturing methods, technologies, or information covered by the patent." The Court concluded, "If patented technology not registered in Korea is used within Korea, the payment for its use constitutes domestic source income." The Court also noted, "The lower courts erred by determining that the royalties did not constitute domestic source income without examining whether the patented technology was actually used in Korea. This failure to conduct the necessary fact-finding affected the outcome of the decision."

Lee Sangwoo, The Law Times Reporter

※This article is based on content supplied by Law Times.