South Korea

U.S. Companies Should Reassess Their Tax Strategies As cross-border licensing and settlement agreements become increasingly common and tax authorities intensify scrutiny of license fees, royalty payments, and other similar consideration (“Royalties”), understanding how Royalty payments are sourced for tax purposes is critical. This article highlights the Korean Supreme Court’s surprising decision recently issued, which redefines the sourcing rules for Royalties for registered patents under the Korea-U.S. tax treaty (“Treaty”), and outlines the potential implications for U.S. licensors receiving such Royalties from Korean payors/entities. Supreme Court Shifts Its Position on Sourcing of Royalties for Unregistered Patents in Korea On September 18, 2025, the Supreme Court (en banc) issued a landmark ruling (Supreme Court Decision 2021Du59908, September 18, 2025; hereinafter, the “Decision”) overturning long-standing case law on whether Royalties for patents not registered in Korea constitute Korean-source income under the Treaty. This Decision represents a significant departure from more than 3 decades of case law and may have major implications for U.S. licensors. From “Place of Patent Registration” to “Place of Use of Patent Technology” As a bit of background, the Decision arose out of a patent infringement dispute in the U.S. between a non-practicing entity (the “NPE”) holding patents related to semiconductor manufacturing and a Korean semiconductor manufacturer (the “Korean Company”). To resolve the dispute, the parties settled out of court, and the Korean Company and the NPE entered into a settlement and license agreement. The NPE agreed to drop the lawsuit in consideration of Royalties payments. The Korean Company, as the withholding agent, deducted 16.5% Royalties withholding tax (“WHT”) from the payment, pursuant to the Treaty. The NPE subsequently sought a refund of this WHT on the basis that the Royalties were not Korean-source income because none of the patents were registered in Korea. The tax authorities denied the refund, prompting the NPE to appeal to the Korean courts. At issue was the interpretation of “use” and how to determine the “place of use” under Article 6(3) of the Treaty. Under the Treaty, Royalty payments made by a Korean entity to a U.S. licensor are characterized as Korean-source income if the “use” occurs in Korea. Since 1992, the Supreme Court had consistently applied a “territorial approach” to patent rights, holding that patents not registered in Korea have no effect in Korea, and thus their “use” cannot occur in Korea under the Treaty (See, e.g., Supreme Court Decision 91Nu6887, May 12, 1992; Supreme Court Decision 2005Du8641, September 7, 2007; Supreme Court Decision 2012Du18356, November 27, 2014; Supreme Court Decision 2013Du9670, December 11, 2014; Supreme Court Decision 2016Du42883, December 27, 2018; Supreme Court Decision 2018Du36592, February 10, 2022; Supreme Court Decision 2019Du50946, February 10, 2022; Supreme Court Decision 2019Du47100, February 24, 2022) (collectively, the “Prior Precedents”). In this Decision, however, the Supreme Court (in a 10-3 decision) revisited and changed the interpretation of “use” to mean not the use of the patent right itself, but the use of the underlying technology protected by the patent. Accordingly, the Supreme Court held that even if a patent is not registered in Korea, Royalties paid for the patent technology used in manufacturing or sales activities in Korea constitute Korean-source income. Based on this reasoning, the Supreme Court expressly overturned the Prior Precedents. The Supreme Court remanded the case back to the Suwon High Court (the “Appellate Court”) for further review and proceedings consistent with this new legal principle, and it instructed the Appellate Court to review the place of use and determine the amount of Korean-source income, which should be subject to WHT. In light of the Decision, we expect that the primary disputes in the lower courts now will center on how to determine “use”—an issue on which the Decision unfortunately offered little concrete guidance—and on the appropriate methodology or allocation key to bifurcate the Royalty payments. However, the Decision also raises new questions, as it is not exactly clear on how to determine “use” when the place of patent registration is no longer solely determinative. For example, the Supreme Court indicated that if the underlying technology embodied in such patents is used by the Korean Company in manufacturing and sales in Korea, such income should be regarded as Korean-source income. But what if the underly technology were used in manufacturing in Korea, but the products were then sold in the U.S., where the patents are registered and thus have patent protections? How should the Royalty payments be apportioned? Observations and Possible Implications for U.S. Licensors How to determine place of “use” based on the Decision. We believe the Decision introduces more uncertainty by no longer treating the place of patent registration as dispositive under the Treaty. In cases involving actual licensing and use of patented technology, Royalty payments might be allocated based on methodology like manufacturing or sales location. However, applying this framework broadly becomes challenging when payments stem from U.S. patent litigation settlements. Korean companies often settle with U.S. NPEs to avoid litigation and injunctions that could block U.S. sales. These settlements typically do not involve actual use of licensed technology, making it hard to determine a “place of use.” From the taxpayer’s perspective, we believe such payments should all be characterized as U.S.-source income, as they relate to resolving patent infringement claims in the U.S. While the Korean tax authorities may attempt to argue that the underlying technology was “used” in Korea, courts would not be able to deny that the Royalty payments in such case should be primarily attributable to the Korean company’s (or its U.S. affiliate’s) sales in the U.S. Contract terms. Although the Decision does not formally place the burden of proving “place of use” on the U.S. licensor, in practice, such proof may be necessary to claim treaty benefits or a refund of WHT. Since relevant information may only be known by the Korean entity, we recommend that U.S. licensors include, in consideration for future tax withholding by the Korean entity, more robust provisions in future agreements prescribing that the Korean entity must provide substantive assistance and support to the U.S. licensor in seeking refund of WHT, including (to the extent commercially reasonable) detailed information on sales and use of products using the underlying technology. The alternative would be for U.S. licensor to insist on gross-up provisions for any Royalty WHT in the license agreements. Monitoring the case on Remand. In the Decision, the Supreme Court remanded the case back to the Appellate Court to determine place of use of patents and apportion the Royalty payments between Korean and foreign source-income. But if manufacturing facilities and sales are spread across multiple jurisdictions, it is unclear which metrics or methodology (e.g., gross sales, cost of goods manufactured, production volume, etc.) will be recognized by the Appellate Court, or even how to split lump-sum Royalty payments between manufacturing and sales. Therefore, close monitoring of these developments on remand will be essential to determine the next steps and future strategies for U.S. licensors seeking to claim refund of WHT. If you have any questions regarding this article, please contact below: Tom KWON ([email protected]) Jung Ho RYU ([email protected]) Steve Minhoo KIM ([email protected]) Philje CHO ([email protected]) Ye Jin OH ([email protected]) Kyu Bin KANG ([email protected]) For more information, please visit our website: www.leeko.com

Lee & Ko is truly excited to share a follow up on the financial industry related high profile criminal case in Korea, where Lee & Ko continued to successfully secure a not guilty judgment at the appellate court for our client, a global banking and financial services company. Key takeaways: This ruling is highly significant as it marks the first case prosecuted under the amended Financial Investment Services and Capital Markets Act of Korea (FISCMA), which included introductions to criminal penalties for illegal short-selling violations, setting an important precedent. The case involved novel legal issues, including the point of consummation of a short sales violation. As did the district court, the appellate court also accepted most of the legal arguments presented by Lee & Ko. The appellate court held that, as found by the 1st instance court, short sale (criminal) violations are consummated when a short sale contract is concluded, and that the lower court did not err on the issue of whether the constituent acts exist as alleged in the indictment, based on the reasons that were argued by Lee & Ko.  Initially, this case was handled by another leading Korean law firm during the Financial Supervisory Service’s investigation stage. The Financial Supervisory Service imposed a fine of approximately 7.5 billion Korean won and a criminal complaint was subsequently filed. Following the client’s decision to reconsider legal counsel representation, Lee & Ko was retained as lead counsel to handle the case, managing the client’s overall defense strategies from the remaining investigation stage and throughout the trial proceedings. From the client's perspective, this case was of utmost importance since a criminal conviction for violating the FISCMA would have significant implications from business and reputational perspectives. Additionally, given that a foreign financial institution was prosecuted, the case has drawn considerable attention both domestically and internationally. Lee & Ko deployed key members of the White Collar Defense Team, the International Litigation Team and the Financial Compliance Team, and leveraged its substantial knowledge of the capital markets regulations based on decades of practice experience in this area. Dozens of professionals from several practice groups collaborated on this matter and following consolidated and dedicated efforts, Lee & Ko was able to secure a successful defense for the client once again at the appellate court.  Criminal prosecutions could be extremely intimidating to a foreign institution that is not familiar with the legal regime in Korea. Lee & Ko demonstrated customized support and advice, engaged in establishing sophisticated strategies for the defense, utilized its prior experience to anticipate the direction of the criminal complaint and advised in both procedural and substantive aspects of the case to a foreign client unfamiliar with the Korean legal (criminal) system. Our team members include former judges, prosecutors and law clerks who are bilingual and fluent English speakers. This ruling, which carries significant weight as a appellate court decision, is expected to significantly affect the industry in general and similar proceedings involving short-selling issues. Having led this matter to continuously successful defense, especially in a case where the Financial Supervisory Service initially imposed a fine, Lee & Ko has added another monumental victory to its breadth of experience. If you have any questions regarding this case, please contact below: Hyunjoo OH ([email protected]) Capital Markets Group Yangseok JEON ([email protected]) Criminal Defense Group Kiri YI ([email protected]) International Litigation Group Joonah JANG ([email protected]) Capital Markets Disputes Group Yeonwoo LEE ([email protected]) International Litigation Group For more information, please visit our website: www.leeko.com

Yoon & Yang LLC (Yoon & Yang) announced that it has appointed veteran antitrust lawyer Keum Seok Oh as Partner and former Korea Fair Trade Commission (KFTC) Commissioner Yeong Ho Shin as Senior Advisor. The two each bring over 30 years of experience in competition law and regulatory policy. With these strategic appointments, Yoon & Yang further solidifies its position as an elite firm in antitrust and competition practice in Korea. Mr. Oh and Mr. Shin will also serve as Co-Heads of the firm’s ‘Corporate Risk & Regulatory Response Center’, leading efforts to proactively identify corporate risks and provide strategic guidance on regulatory compliance. Partner Keum Seok Oh is a leading competition/antitrust expert with over three decades of experience in major litigation and advisory matters. A graduate of Seoul National University School of Law, Mr. Oh served as a judge at the Seoul District Court and the Sokcho Branch of the Chuncheon District Court, and later as a Judicial Researcher at the Supreme Court of Korea. He entered into private practice in 2004 and consequently led the antitrust practice at Bae, Kim & Lee for more than 20 years where he built an exceptional track record of success in cases before the KFTC. Notably, Mr. Oh led Apple’s representation as an interested party in the landmark 2016 KFTC case which imposed the largest-ever fine on Qualcomm. He has also spearheaded high-profile cases involving Hyundai Mobis, LG Uplus, HSBC, Harim, NGK and other prominent domestic and international corporations. He has consistently been recognized by global legal directories, including Chambers Asia-Pacific, IFLR1000, and Lexology Index (formerly Who’s Who Legal) as a Leading Individual or Highly Regarded lawyer in competition law, affirming his global expertise and market influence. Former Commissioner Yeong Ho Shin is widely regarded as a top authority on antitrust enforcement and policy in Korea. During his 30-year tenure at the KFTC, he held key positions, including Director General for the Cartel Investigation Bureau, Director General for the Anti-Monopoly Investigation Bureau, Director General for the Competition Policy Bureau and Standing Commissioner. Mr. Shin oversaw major cases, including market dominance abuse investigations involving Naver and Google, large-scale cartel enforcement, and complex merger reviews, establishing a distinguished track record in competition law. Following his KFTC career, Mr. Shin has served as a professor at Chung-Ang University’s Department of Economics and Yonsei University’s Graduate School of Law, bringing together his background in academia and policy. Through his research and publications on competition policy and regulation, he continues to provide strategic insights to corporations and policymakers worldwide. Yoon & Yang’s Antitrust & Competition Group has been continuously recognized as an ‘Elite Firm’ in Korea by the Global Competition Review (GCR) for 17 years, confirming its reputation as a global leader in competition law. The group of over 50 experts includes former KFTC officials, prosecutors from the antitrust investigation division, and experienced competition law practitioners, supported by figures such as Honorary Managing Partner Hoil Yoon, the first Korean recipient of the GCR Lifetime Achievement Award, and former KFTC Secretary General Cholsoo Han. The addition of Partner Keum Seok Oh and Senior Advisor Yeong Ho Shin further strengthens Yoon & Yang’s capabilities across all areas of antitrust practice, including unfair trade practices, anticompetitive agreements, and mergers and acquisitions. Managing Partner Myung Soo Lee commented, “regulatory scrutiny on unfair practices and private benefits is expected to intensify. The addition of these two seasoned experts enables Yoon & Yang to provide clients with proactive and effective guidance on regulatory compliance and risk management.”   For more information, please contact: Mr. Jae Hyuk Yang Senior Marketing/Communications Manager Yoon & Yang LLC Tel: (82-2) 6003-7229 Email: [email protected]

Lee & Ko has once again secured Tier 1 ranking in the M&A category of the Asian Legal Business (ALB) M&A Rankings 2025. It has also captured No. 1 position among Korean law firms in both the Bloomberg M&A and Dealsite Capital Markets league tables, reaffirming its market-leading position in both M&A and capital markets advisory. In this year’s Dealsite Capital Markets league table, Lee & Ko achieved the top ranking for M&A legal advisory, outperforming Kim & Chang by an impressive KRW 174.2 billion. Particularly notable was the firm’s second quarter performance, where it overtook the long-time market leader Kim & Chang to become the undisputed No. 1, which industry observers describe as a dramatic reversal that saw the firm making the leap to a market leader. According to Bloomberg’s 2025 first-half M&A league table, based on deal value, Lee & Ko advised on 53 transactions with an aggregate value of USD 7.61 billion, capturing 16.5% market share and securing the top position. The firm’s accomplishments were further highlighted at the Korea Capital Markets thebell League Table Awards 2025 hosted by thebell, where it was honored with the “Best M&A Buyer” award for its role in high-profile acquisitions, including E1 Consortium’s acquisition of Pyeongtaek Energy Service. Asian Legal Business (ALB), a Thomson Reuters publication and a leading legal media platform in the Asia-Pacific region, compiles its rankings each year through extensive surveys and interviews with M&A practitioners across 12 Asian jurisdictions.