Supreme Court Ruling on Royalties for Unregistered Patents in Korea: A Comprehensive Analysis

1. Case Background

Supreme Court En Banc Decision (Sept. 18, 2025, Case No. 2021Du59908):Even if a patent is not registered in Korea, royalties paid for using the patent’s technology in Korea (e.g., for manufacturing or sales) are deemed Korean-source income subject to taxation.
This ruling overturns a precedent that had stood for more than 30 years, under which royalties for unregistered patents in Korea were considered non-taxable.
The National Tax Service (NTS) projected a short-term tax gain of 4 trillion KRW and potentially tens of trillions of KRW over the long term from this change.

The Court interpreted “use” of a patent, under the Korea–U.S. Tax Treaty, based on the actual place of technology application, not the country of registration.
In the SK Hynix case, the lower court had ruled in favor of the company (following old precedent), but the Supreme Court held that domestic manufacturing using patented technology constitutes “use” in Korea, making royalties taxable.
As a result, Korea effectively expanded its taxing rights over cross-border royalty payments.

Assumes companies will maintain their current operations.
Under this view, the ruling simply increases Korea’s taxing rights → higher tax revenues.

In reality, firms are likely to adjust to minimize tax burdens:
1. Shifting production overseas → manufacturing moves to the U.S. or third countries.
2. Expanding OEM structures → Korean entities reduced to contract manufacturers, while IP and royalty income concentrate abroad.
3. Transfer pricing strategies → only limited manufacturing profits remain in Korea; intangible-related profits flow to overseas headquarters.
Long-term outcome: risk of capital drain — loss of technology, taxable income, employment, and national wealth.

The Court: Not a policy-making body; its role is to apply and interpret law. The decision was based strictly on legal and treaty interpretation.
The Legislature: Must address dynamic effects (corporate behavioral changes, potential capital flight) through legislation.
- Possible measures include:
  - Strengthening R&D tax credits.
  - Incentivizing domestic management and development of intangibles.
  - Refining transfer pricing rules to prevent excessive profit shifting abroad.

The ruling provides the NTS with a clear legal basis for taxing royalties related to unregistered patents, yielding short-term fiscal gains.
However, in the dynamic context, it risks incentivizing firms to relocate production, restructure operations into OEM models, and transfer intangible-related profits abroad, leading to capital and wealth outflow.
Relying solely on static revenue projections reflects short-term fiscalism.
Ultimately, the responsibility lies with the legislature to design policies that balance tax revenue objectives with long-term economic competitiveness and national wealth preservation.