Interpretation of the Royalty Provision of the South Korea-United States Tax Treaty: From South Korea`s Perspective

Abstract

The purpose of this article is to provide interpretative guidance to readers outside of South Korea for the royalty provisions of the South Korea-U.S. tax treaty from South Korea`s perspective. This article reviews the royalty provisions of the tax laws and the South Korea-U.S. tax treaty and the issue of characterization. To clarify the meaning of royalties, this article analyzes the differences between royalties and other income. Characterization issues arising from the transfer of computer software are also considered. The South Korea-U.S. tax treaty adopts the place of use rule. The Korean domestic tax laws prescribe both the place of use rule and the place of payment rule, as well as impose taxation on unregistered intangible property. This article reviews and analyzes the history of the source provision and the Korean Supreme Court decisions that pertain thereto. From South Korea`s perspective, if a patent is registered only in the United States or elsewhere, not in South Korea, consideration for the use of such a patent does not fall within the South Korean source royalties under the South Korea-U.S. tax treaty, even though the provision of the domestic Korean tax law provides otherwise.