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On June 26, 2026, ten members of Korea’s National Assembly, led by Representative Lee Kang-il of the Democratic Party of Korea, proposed a bill that, if enacted, would establish a statutory basis for imposing a digital services tax (DST) on certain foreign corporations providing digital services to users in Korea. If enacted, the bill would amend the International Tax Coordination Law (ITCL) to require an in-scope foreign corporations to pay an amount equal to 2% of its relevant Korean digital services revenue as corporate income tax. The bill would also introduce two supporting measures: it would require certain large online platform businesses to publicly disclose detailed information regarding their foreign related-party transactions, and would recharacterize certain excessive payments to foreign related parties as non-deductible deemed dividends. This newsletter focuses principally on the digital services tax, which represents the proposal's most significant departure from Korea's existing approach. The bill is currently pending before the Finance and Economic Planning Committee of Korea’s National Assembly. As a member-sponsored bill, it remains at an early stage of the legislative process and may be substantially revised or may not ultimately be enacted. Nevertheless, in view of the current implementation of Digital Services Taxes in some European countries including France and Italy, the proposal is a notable legislative development that warrants close attention from multinational digital businesses. 1. Key Provisions of the Bill     1) A 2% corporate income tax on Korean digital services revenue         The proposed Article 34-3 of the ITCL would apply where a foreign corporation (i) conducts an online platform or other business prescribed by Presidential Decree; (ii) provides online advertising or other prescribed digital services through an information and communications network to users in Korea; and (iii) earns revenue exceeding a threshold to be prescribed by Presidential Decree. An in-scope foreign corporation would be required to pay corporate income tax equal to 2% of the relevant revenue. The calculation of the revenue, the method for calculating the tax, and the filing and payment procedures would likewise be delegated to Presidential Decree.         The proposal is therefore incomplete in several crucial respects. In particular, the bill does not yet specify: the global or Korean revenue thresholds; the full range of covered digital services; the criteria for determining whether a user is located in Korea; the sourcing rules for Korean digital services revenue; or whether any relief would be available where the same income is already subject to Korean corporate income tax.         These matters, which would largely determine the scope and practical effect of the proposed tax, are expected to be addressed through subsequent Presidential Decree should the bill proceed.     2) Enhanced disclosure obligations for large online platforms         An online platform or other prescribed business would be required to publicly disclose information regarding transactions with foreign related parties where (i) its revenue for the preceding fiscal year is at least KRW 1 trillion and (ii) the amount of its foreign related-party transactions exceeds a threshold prescribed by Presidential Decree. The required disclosures would include the identity and location of the related party, the nature and amount of the transactions, the pricing basis, the detailed scope of the services received, comparable third-party prices and the transfer pricing method applied.         Failure to disclose the relevant information, or the submission of false information, could result in an administrative fine equal to 2% of the undisclosed or falsely disclosed transaction amount. 2. Why the Proposal Is Significant     The principal significance of the bill lies not merely in its 2% rate, but in the legal form in which the tax would be introduced. The proposal would insert a specific DST provision into the ITCL and expressly require the relevant foreign corporation to pay the charge as corporate income tax. This distinguishes the bill from Korea’s previous formally introduced legislative measures concerning foreign digital businesses, which generally focused on (i) expanding the VAT regime applicable to cross-border electronic services or (ii) requiring foreign corporations to provide the Korean tax authorities with information regarding their Korean business activities and revenue. Accordingly, the bill appears to represent Korea’s first formally introduced legislative proposal to impose a revenue-based DST in the form of corporate income tax.     The corporate income tax label may have been selected to position the charge within Korea’s existing direct-tax framework. However, the statutory label would not necessarily resolve questions concerning the tax’s treatment under Korea’s tax treaties or under foreign tax credit systems. Because the charge would be calculated on gross revenue and could apply without a permanent establishment or other traditional taxable presence in Korea, questions may arise as to whether it constitutes a covered tax for treaty purposes or a creditable income tax in the foreign corporation’s residence jurisdiction. 3. Korea’s Previous Approach to Digital Economy Taxation     Lately, Korea has generally sought to protect its tax base through the application and expansion of existing tax rules rather than through a separate gross-revenue tax. In tax audits and disputes involving multinational digital businesses, recurring issues have included whether a foreign enterprise maintains a permanent establishment in Korea; whether payments characterized as service fees should instead be treated as royalties; whether a Korean entity has received arm’s-length compensation for its functions, assets and risks, including functions considered under the development, enhancement, maintenance, protection and exploitation (DEMPE) framework; and whether the legal characterization of a transaction is consistent with its economic substance. This approach has enabled the Korean tax authorities to pursue digital economy related tax cases within the existing corporate income tax, transfer pricing, royalty and permanent establishment framework, but it has required highly fact-intensive analyses and has frequently raised difficult questions under Korea’s tax treaties, mostly leading to ultimate failures at the court.     Korea’s earlier legislative initiatives concerning the digital economy did not seek to impose a direct tax on the income or revenue of foreign digital businesses. Instead, they focused primarily on establishing a domestic nexus and expanding the scope of VAT on cross-border digital services. Here are some of the examples:     ■ In September 2018, lawmakers proposed amending the Act on Promotion of Information and Communications Network Utilization and Information Protection (the Network Act) to require certain large IT companies to install servers in Korea, which would have provided a domestic basis for taxation. The proposal was subsequently withdrawn.     ■ A bill introduced in November 2018 sought to amend the VAT Act to expand the definition of taxable electronic services supplied by foreign businesses to include online advertising, cloud-computing services, and sharing-economy services, as well as certain business-to-business transactions. The substance of that proposal was incorporated into an alternative bill, and the expanded rules took effect in July 2019.     ■ Another bill introduced in November 2018, also amending the VAT Act, proposed a broader list of covered services, including remote education, electronic publications, and remote website and computer-system installation, maintenance, and management services, but lapsed at the end of the National Assembly’s term.     ■ A proposal introduced in March 2019, which would have amended the VAT Act to extend the electronic-services regime to business-to-business transactions more generally, likewise lapsed.     These initiatives expanded Korea’s ability to tax cross-border digital transactions, but they did so principally through VAT imposed on consumption. They did not establish a direct tax on the Korean-source income or revenue of foreign digital businesses.     Viewed in this historical context, the current bill represents a material escalation. It seeks to establish a direct, market-based tax calculated by reference to revenue from Korean users, without regard to the existence of a traditional physical presence in Korea and without requiring the tax authorities first to prevail in a fact-intensive transfer pricing or permanent establishment dispute. Importantly, the bill would not replace Korea’s traditional tools; an affected group could face both the 2% DST and separate transfer pricing or withholding tax adjustments relating to its Korean operations. 4. International Context     The proposal arises against the backdrop of continuing uncertainty surrounding Pillar One of the OECD/G20 Inclusive Framework. Amount A of Pillar One was designed to reallocate a portion of the profits of the world’s largest and most profitable multinational groups to market jurisdictions, while the accompanying multilateral framework contemplated the removal of existing DSTs and a commitment not to introduce new measures of a similar nature. The absence of a fully implemented multilateral solution has nevertheless led a number of jurisdictions to retain or consider unilateral digital taxes.     In the rationale accompanying the proposal, the sponsoring lawmakers point to the continuing international debate over digital taxation as a response to perceived tax avoidance by large global IT companies. They also refer to overseas precedents, including the Canadian model 1, under which a specified percentage of revenue derived from digital services, such as digital advertising, is subject to a DST. Against this backdrop, the proposal is intended to establish a tax framework suited to the digital-platform economy and provide an explicit statutory basis for Korea to impose a DST. 5. Outlook     The bill remains at a preliminary stage, and many of its critical design features have been delegated to a future Presidential Decree. Its ultimate scope and prospects for enactment therefore remain uncertain. As a member-sponsored bill, the proposal must still clear committee review in the Finance and Economic Planning Committee and the Legislation and Judiciary Committee, followed by approval at a plenary session, before it can be promulgated. Even if enacted, subordinate legislation would still be required to implement numerous details delegated to Presidential Decree. Member-sponsored tax bills of this kind are frequently revised or consolidated into a committee alternative at the subcommittee stage, or lapse at the end of the National Assembly's term. Near-term enactment therefore appears unlikely, and in view of the government’s authority in tax legislative initiative, any eventual legislation may well emerge through the government's annual tax reform process rather than this bill in its present form.     Moreover, any unilateral DST would need to be considered against the risk of potential trade retaliation from the United States. President Trump recently warned that any country imposing a DST targeting U.S. companies could face a 100% tariff on goods exported to the United States, underscoring the broader political and trade considerations that could affect the proposal’s progress. 2 Indeed, even Canada, which the sponsoring lawmakers cite as a model for the proposal, rescinded its own DST in June 2025, halting collection on the eve of its first payment deadline in order to advance broader trade negotiations with the United States.     Nevertheless, the proposal needs to be monitored. Whereas previous legislative measures primarily expanded the scope of VAT or sought additional information from foreign digital businesses, the current bill would, if enacted, establish a substantive taxing right over revenue derived from the Korean digital-services market and expressly characterize the resulting charge as corporate income tax. Multinational digital businesses should therefore view the proposal not merely as another compliance initiative, but as a potential change in the basis on which Korea asserts taxing rights over participation in its digital market. Lee & Ko’s Tax Group has extensive experience advising on tax legislation and proposed statutory amendments, as well as international tax and digital-economy taxation matters. Notably, when DSTs, diverted profits taxes, equalization levies, and similar measures were under active international discussion in 2018, Lee & Ko advised in connection with the preparation and review of draft legislation. Please feel free to contact us should you require assistance with any tax-related matter, including the issues discussed in this newsletter. [See footnotes below] 1) It is noteworthy, however, that Canada subsequently announced on June 29, 2025, that it would rescind its DST and halt the collection scheduled for June 30, 2025, in order to advance broader trade negotiations with the United States. Department of Finance Canada, Canada Rescinds Digital Services Tax to Advance Broader Trade Negotiations with the United States (June 29, 2025). 2) See Financial Times, Donald Trump Warns of 100% Tariff on Countries Implementing Digital Services Tax (June 26, 2026). President Trump stated that the threatened tariff would apply notwithstanding existing or future trade agreements

On 29 January 2026, the Korean National Assembly passed amendments to the Attorney-at-Law Act that formally recognize attorney-client privilege, or ACP, as a statutory right. The reform grants attorneys and clients the right to withhold confidential legal communications, and certain related materials, from disclosure to third parties. The new regime is expected to have meaningful implications for tax audits, investigations, and administrative and judicial appeals, particularly by strengthening resistance to overly broad collection efforts and limiting downstream reliance on privileged materials. The amendment was promulgated on 19 February 2026 and is scheduled to take effect one year after promulgation. The addendum also suggests that the new ACP provision can apply to communications or materials created prior to the effective date, raising the possibility of its retroactive application. 1. Prior Legal Landscape     Historically, Korean law imposed on attorneys a duty of confidentiality concerning client communications. That duty, however, did not operate as a procedural shield in the way privilege does in many jurisdictions. While attorneys argued that legal advice should be immune from seizure under the constitutional right to counsel, the lack of a formal statute meant that the protection was inconsistent and determined only on a case-by-case basis. Consequently, taxpayers effectively had no legal grounds to refuse document disclosure during tax audits, and confidential communications were routinely seized in enforcement actions.     This legal landscape began to shift as the judiciary recognized the constitutional necessity of protecting attorney-client communications. Notably, Lee & Ko secured the first Supreme Court decision (Supreme Court Decision 2024-Mo-730, dated February 20, 2026) recognizing the illegality of seizing legal advice and communications between an attorney and a client. The lower court's ruling in this case (Seoul Southern District Court Decision 2023-Bo-4, dated February 23, 2024) was incorporated into the "Statement of Reasons" for the newly passed amendment, serving as a significant judicial catalyst for the legislative reform.     The newly enacted law addresses this previous gap by transforming from an ethical confidential obligation framework to an enforceable right against third-party disclosure. 2. Key Provisions and Our Interpretation     The amended law adds a new Article 26-2 following the existing confidentiality provision in Article 26. The new article grants attorneys and their clients, including prospective clients, two core rights:     1) A non-disclosure right over attorney-client communications exchanged for purposes of providing or receiving legal services, and     2) A non-disclosure right over documents and materials (including electronic records) prepared in connection with litigation, investigations (audits), or other inquiries relating to matters for which counsel was engaged.     Unlike the work-product doctrine recognized in other jurisdictions in the context of discovery, which extends not only to attorneys but also to documents or materials prepared in anticipation of litigation by other representatives or advisors, the newly enacted ACP law in Korea limits this protection to documents or materials prepared by attorneys. In this respect, the newly enacted ACP provision may be viewed as placing particular emphasis on protecting the client's right to receive legal assistance from counsel. 3. Exceptions to the ACP     The statute provides that ACP will be waived or not apply in certain circumstances, including:     ■ where the client expressly consents,     ■ where substantial public interest concerns override confidentiality (for example, if legal advice is used to facilitate unlawful conduct, or counsel is involved in illegal activity),     ■ where disclosure is necessary for counsel to assert or defend rights in a dispute with the client, or     ■ where another statute expressly provides otherwise. 4. Implications for Tax Audits and Appeals in Korea     The codification of ACP is poised to materially affect Korean tax enforcement practice.     Historically, during tax audits and dawn raids in Korea, authorities routinely collected emails, internal memoranda, and external legal opinions without meaningful limitation. These materials were frequently incorporated into assessment notices and later relied upon in administrative and judicial proceedings.     In practice, Korean tax authorities conducting special tax audits have also exercised the power to temporarily seize books and records from the taxpayer's premises. Although such temporary seizure (so-called "deposit" or provisional custody of documents) formally requires the taxpayer's consent under Korean tax audit procedures, refusal in practice often results in a markedly more adversarial and pressured audit environment. As a result, taxpayers frequently feel compelled to provide consent, effectively under practical duress, for lack of a viable alternative. In this environment, tax authorities have historically obtained broad access to documentary materials, including internal communications and legal analyses.     Under the new regime, however, taxpayers may be positioned to assert privilege objections against the seizure or compelled production of protected materials. Under circumstances where tax authorities seek access to legal communications during on-site inspections or document seizures, the codification of ACP may therefore serve as an important procedural safeguard for taxpayers' rights, particularly in the context of intrusive special audits.     Although the Korean statutory framework does not yet provide explicit procedural mechanisms comparable to those developed in other jurisdictions, the amended law may function in a manner broadly analogous to privilege logs and claw-back procedures in U.S. discovery, allowing taxpayers to identify and withhold privileged materials or to seek the return of privileged documents that were inadvertently obtained by the authorities. 5. Unanswered Questions     Despite its structural significance, the amended law leaves several operational issues unresolved.     The statute does not provide detailed guidance regarding the scope of protected materials, the procedural mechanisms for asserting ACP during audits or investigations, or the remedies available in the event of a violation. In particular, it remains unclear what formal steps taxpayers and counsel must take to ensure that documents are recognized and treated as privileged.     For example, the amended law does not specify:     ■ whether documents must be expressly labeled or marked as "privileged" or "confidential" to qualify for protection;     ■ whether a privilege log or similar disclosure protocol will be required when resisting production;     ■ whether authorities must segregate or seal potentially privileged materials during searches or electronic data imaging; and     ■ whether an independent review mechanism, such as judicial or in camera inspection, will be available to resolve privilege disputes before enforcement measures are imposed.     From a more practical perspective, during a tax audit in Korea, authorities typically mass-collect virtually all text-based documents—such as emails and memoranda—based on file extensions. That is, rather than assessing the relevance of individual files before copying, they systematically collect all files matching certain extensions (e.g., .doc, .pdf, or .xls) regardless of content. This blanket data collection approach raises a significant practical challenge: how to prevent documents protected under ACP from being collected in the first place.     At present, as detailed implementing regulations or guidelines have not yet been released, it would be advisable to (i) clearly indicate on communications with attorneys and documents prepared by attorneys that they are protected under ACP, for example by marking them with the phrase "Protected by Attorney-Client Privilege," (ii) manage such materials separately from other documents so that, in the event of a tax audit, it can be clearly asserted that they should not be copied or collected, and (iii) ensure that legal counsel is present during the tax audit to prevent officials from photocopying or otherwise collecting such materials.     Accordingly, practitioners and taxpayers should expect further legislative refinement and judicial interpretation to clarify the privilege's practical boundaries. 6. Concluding Assessment     The statutory recognition of ACP marks a significant evolution in Korean procedural law. By affording enforceable protection to confidential legal communications and litigation-related materials, the newly enacted law strengthens taxpayers' defense rights and enhances procedural fairness in investigative and judicial contexts.     Functionally, the reform aligns Korea more closely with common law jurisdictions, particularly the United States, where ACP and the work-product doctrine form the backbone of adversarial litigation strategy.     The ultimate scope and strength of the Korean ACP regime, however, will depend on how courts interpret its boundaries and how enforcement authorities adapt their investigative practices in response. The Tax Group at Lee & Ko possesses extensive experience and expertise in both domestic and international tax matters. Please feel free to contact us should you require assistance with any tax-related matters, including those discussed in this newsletter.  

Korea plans major investments and reforms to deploy AI throughout its tax administration system, improving audit efficiency while simultaneously bolstering delinquency controls and elevating the intensity of compliance enforcement. On November 3, the newly appointed National Tax Service (NTS) Commissioner, Mr. Kwang-Hyun Lim, held his first nationwide meeting with regional tax office heads and announced the new Operational Plan for National Tax Administration (New Plan). At the heart of the New Plan lies two pillars: (1) a fundamental overhaul of tax audit procedures aimed at substantially reducing on-site investigations, and (2) the AI-driven Transformation of Tax Administration intended to modernize and streamline taxpayer services. Taken together, we believe these initiatives mark a decisive shift in Korea’s tax administration paradigm: from procedure-heavy, manual practices toward a data-centric and AI-enabled administrative model. This newsletter outlines how the NTS’s latest policy initiatives may affect the audit environment for taxpayers, particularly foreign-invested companies in Korea. 1. Recent Developments in the NTS     1) Appointment of a Politically Experienced Commissioner         In a rare and politically significant move, President Jae Myung Lee’s Administration has appointed sitting National Assembly member Kwang-Hyun Lim as the new Commissioner of the NTS. Commissioner Lim previously served as Commissioner of the Seoul Regional Tax Office and Deputy Commissioner of the NTS, giving him the unusual combination of deep administrative experience and direct legislative exposure through his work on the National Assembly’s Strategy and Finance Committee. The appointment of a lawmaker to head the NTS is unprecedented and signals the administration’s intent to drive strong policy momentum under the new Commissioner.     2) Major Personnel Overhaul and Consolidation of Leadership         Within a month of taking office, Commissioner Lim replaced approximately 70% of managerial posts within the Investigation Bureau, one of the NTS’s core departments. This sweeping reorganization effectively brought an end to the leadership vacuum that had persisted during the pre-appointment transition following the snap presidential election in June 2025, and firmly reestablished the Commissioner’s authority over the NTS’s core investigative functions. 2. Key Policy Initiatives of the New Commissioner     1) Background         Korea has long been recognized in Asia for its manual labor-intensive and time-consuming tax audit practices. A persistent challenge has been the tug-of-war between the NTS, which seeks to obtain as much information as possible, and taxpayers, who often push back against requests for documents that they believe fall outside the audit’s legitimate scope or are irrelevant. The new Commissioner’s initiative is aimed squarely at addressing these entrenched inefficiencies and modernizing the country’s audit framework.     2) Declaration of ‘AI-driven Transformation of Tax Administration’         The NTS announced that the centerpiece of its reform agenda is a full-scale AI transformation. The government intends to streamline and modernize audit procedures by deploying AI tools designed to improve both efficiency and accuracy. Specifically, AI will be utilized to provide tax expert-level guidance to taxpayers and to shift tax-evasion detection and delinquency management from a manual-driven process to an AI-driven system.         The plan aims to enhance the existing AI-based Integrated Audit Analysis System (analytics), enabling the NTS to identify high-risk and high-recovery audit targets with significantly greater precision. According to the NTS’s published roadmap, the agency will initiate its Information Strategy Plan (ISP) in 2025, secure GPUs and adopt generative-AI models, and fully deploy its AI-driven administrative services by 2028.     3) Reduction of On-Site Audits         Complementing its AI transformation agenda, the NTS has announced a significant reduction in on-site audits, which have long been criticized for placing excessive burdens on taxpayers. Under the new policy:         ■ Regular tax audits will primarily be conducted at NTS offices, rather than at taxpayers’ business premises; and         ■ On-site visits will be permitted only in limited cases, such as when (i) taxpayers themselves prefer an on-site approach for confidentiality or convenience, or (ii) when audit progress is hindered by non-submission or delayed submission of documents.         Commissioner Lim has underscored that the NTS intends to curtail the burdensome and expensive practice of prolonged on-site investigations that disrupt normal business activities, signaling a decisive shift toward a more streamlined and taxpayer-oriented audit framework.  3. Expected Changes in the Audit Environment     1) Intent to Improve Audit Efficiency         The new Commissioner’s policy signals a clear commitment to modernizing Korea’s traditionally burdensome audit practices. However, the degree to which these reforms will take hold remains to be seen, as meaningful change in a large administrative bureaucracy often proves difficult to implement in practice in Korea.     2) Compliance Risks for Foreign-Invested Companies         The shift toward AI-based audits should not be interpreted as signaling a more lenient environment for foreign-invested or foreign-owned companies. To the contrary, delays or failure to provide data necessary for AI-driven analysis may expose taxpayers to the newly introduced Enforcement Penalty, underscoring that the shift is toward greater procedural rigor rather than reduced scrutiny.         Previously, refusal to submit data was subject to a one-time fine of up to KRW 50 million. Under the new framework, penalties may now (i) be imposed on a recurring basis until the required information is submitted and (ii) be scaled according to the taxpayer’s revenue size. These changes present heightened compliance risk during the course of tax audit, particularly for multinational companies with complex overseas documentation, underscoring the importance of strategic coordination and effective representation by professional advisors.     3) AI-Based Risk Identification         AI-driven audits are expected to leverage prior audit cases to pre-identify potential risk areas for each taxpayer. While this approach enables the NTS to conduct audits that are more targeted and analytically precise, it also increases the likelihood that issues previously overlooked due to time or resource constraints will now come under scrutiny. Taxpayers should therefore anticipate a broader and more penetrating scope of review and prepare for significantly expanded documentation obligations.     4) Shift from Negotiated Settlements to Legalistic Enforcement         As AI reduces subjective discretion among individual auditors, case outcomes are expected to rely more heavily on legal regulations and administrative authorities, including advance rulings, precedents, and court cases. Over time, Korea’s audit practice may shift toward greater data-driven objectivity and heightened legal consistency, reducing the scope for negotiated or discretionary settlements. Lee & Ko’s Tax Group has extensive experience and market-leading expertise in handling complex tax audits and disputes. Our dedicated Tax Audit Team, which includes former senior NTS officials, seasoned tax accountants, and experienced tax attorneys, provides strategic and legally grounded representation tailored to each case. As the NTS moves toward an AI-driven and data-based audit environment, Lee & Ko is well positioned to help clients anticipate risks and respond effectively to evolving enforcement practices. Please feel free to contact us if you would like to discuss how these developments may affect your business.

Domestic residents or corporations that establish or operate foreign trusts are now required to file a report detailing such trusts within six months from the end of the month in which the fiscal year ends (i.e., for individual taxpayers, by June 30, 2026). The Korean tax authorities have gradually developed a sophisticated framework for managing offshore tax bases by imposing reporting obligations on residents and domestic corporations in relation to foreign financial accounts, foreign subsidiaries, and foreign real estate. Until recently, however, there had been criticism that the authorities lacked effective means to obtain information on foreign trusts. In response, new provisions establishing a reporting obligation for foreign trusts were enacted on December 31, 2023, following the examples set by other jurisdictions such as the United States, Canada, and the EU. These provisions took effect on January 1, 2025. This newsletter outlines the key aspects of the newly introduced foreign trust reporting obligation and related practical considerations. 1. Overview of the Reporting Obligation for Foreign Trusts     Under Article 58(3) of the International Tax Coordination Law (ITCL), a domestic resident or a domestic corporation (Domestic Settlor) that establishes a trust governed by foreign law and similar in nature to a trust under the Trust Act (Foreign Trust) must submit a report detailing the key terms of the trust and the value of the assets held in the trust within six months from the end of the month in which the fiscal year ends. In other words, a Domestic Settlor establishing a Foreign Trust is generally required to file a "Statement of Foreign Trust" (Form No. 51-2) by June 30 of the following year.     This reporting obligation serves as a systematic mechanism designed to enable the tax authorities to obtain information on Foreign Trusts and, further, to use such information as part of the tax base through the exchange of tax information with other jurisdictions. In addition to the existing reporting obligations on foreign financial accounts, foreign subsidiaries, and foreign real estate, the newly introduced Foreign Trusts reporting imposes an additional compliance burden on taxpayers. 2. Requirements for Filing     Where a Foreign Trust is effectively controlled by a Domestic Settlor, the details of the trust must be reported for the taxable year (or fiscal year) that includes the period from the date of establishment to the date of termination of the trust. For other types of trusts, the report must cover the taxable year or fiscal year in which the trust was established. In this regard, two specific scenarios should be taken into consideration.     1) New Establishment or Transfer of Assets: When a Domestic Settlor newly establishes a Foreign Trust or transfers assets to an existing Foreign Trust, the Domestic Settlor must submit a report within six months from the end of the month in which the relevant taxable year ends.     2) Continuing Control or Influence: Even for a pre-existing trust, if the Domestic Settlor continues to exercise substantive control or influence over the trust assets (e.g., in the case of a U.S. Grantor Trust), a reporting obligation arises on an annual basis. For example, even if a Foreign Trust was established before January 1, 2025, the reporting obligation will still apply if the trust remains in existence after 2025 and the Domestic Settlor continues to exercise substantive control over the trust assets. In this regard, "substantive control or influence" refers to situations where the Domestic Settlor effectively exercises substantial control over the foreign trust assets, such as by retaining (i) the right to revoke the trust, (ii) the power to designate or change beneficiaries, or (iii) the right to receive residual assets upon termination. 3. Required Information to be Reported     A Domestic Settlor subject to this reporting obligation must include in the Statement of Foreign Trust information such as the country of trust establishment, trust period, details of the parties to the trust (settlor, trustee, and beneficiaries), types and values of trust assets, and other relevant information.     The value of trust assets is determined based on fair market value (FMV), with the valuation date depending on the specific circumstances:     1) the date of trust establishment (or transfer date) if the Domestic Settlor no longer has control thereafter;     2) the fiscal year-end if the Domestic Settlor retains control; or     3) the trust termination date if the Domestic Settlor had control until termination.     The method for determining the FMV varies depending on the type of trust assets:     ■ Cash, listed shares, listed bonds, collective investment securities, and insurance products: Market value as of the valuation date;     ■ Crypto assets: Market value as of the valuation date. If the asset is not traded in the trust’s jurisdiction, the FMV may be determined using     the price from one of the foreign or domestic markets where it is traded, as selected by the Domestic Settlor;     ■ Other assets: The price generally established through arm’s-length transactions among unrelated parties;     ■ If FMV cannot be reasonably determined under the above methods, the acquisition cost shall be deemed the FMV. 4. Penalty for Non-Compliance and Request for Source of Funds     Failure to submit, or submission of a false Statement of Foreign Trust within the prescribed deadline, may result in an administrative penalty up to 10% of the value of the trust assets (capped at KRW 100 million). Furthermore, the tax authorities may request an explanation regarding the source of funds used to establish a Foreign Trust within the past 10 years, and such explanation must be furnished within 90 days. However, the penalty may be waived if there is a justifiable reason, such as circumstances making submission impossible or unnecessary within the deadline. 5. Implications and Recommended Actions     The newly introduced reporting obligation for Foreign Trusts, which takes effect in 2025, is expected to become another form of taxpayer compliance requirement related to offshore assets, alongside the existing obligations to report overseas financial accounts, foreign subsidiaries, and overseas real estate. While this obligation does not entail any direct tax payment and is fulfilled through reporting and documentation, failure to comply (or incomplete compliance) may result in an administrative penalty. Residents and domestic corporations establishing new Foreign Trusts on or after January 1, 2025, must ensure compliance with this reporting obligation. Moreover, even pre-existing Foreign Trusts may still trigger the obligation if certain conditions are met. Accordingly, residents and domestic corporations managing assets through overseas trusts should review their offshore asset holdings and ensure that all relevant filings and submissions are completed by the first half of 2026 to avoid any omission or non-compliance. Lee & Ko’s Tax Group has extensive experience in addressing both procedural and substantive international tax regulatory developments and related risks. We provide comprehensive advisory services to clients holding foreign trusts and offshore assets, including reviews of existing structures, assessments of whether reporting obligations apply, and analyses of potential legal risks. We encourage taxpayers to take this opportunity to review their foreign trust structures and related filing history in advance and, where necessary, take appropriate measures to prevent avoidable penalties or legal disputes.  

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 newsletter 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. 1. 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. 2. 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 underlying 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? 3. 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 cases 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. licensors 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. Lee & Ko’s Tax Group has extensive experience and top-tier expertise in this area. In addition, Lee & Ko also has a dedicated Intellectual Property team with deep expertise in patent matters, which enables us to provide comprehensive advice at the intersection of tax and intellectual property. We will continue to work to secure favorable interpretations for taxpayers at the remand stage. Please feel free to contact us if you would like to discuss this matter further.

Effective September 15, a new provision of the Framework Act on National Taxes(FANT) will authorize the Korean tax authorities(NTS) to impose an enforcement penalty on taxpayers who, without justifiable cause, do not provide requested information and documents during an audit (New Enforcement Penalty Provision). This newsletter provides a brief overview of the New Enforcement Penalty Provision, its key features, and practical considerations for taxpayers in light of its implementation. 1. Legislative Background     Generally, annual changes to the Korean tax law and regulations proceed in the following order: first, the proposed changes to the tax law (Tax Law Amendment(s)) are announced around July each year; second, the Tax Law Amendments are deliberated and passed at the end of December; and third, the related presidential decrees and enforcement rules (collectively, the Regulations) related to the Tax Law Amendments are published around February or March of the following year. Initially, the Tax Law Amendment published in July 2024 did not include the New Enforcement Penalty Provision. However, during the October 2024 National Assembly deliberations, it was suggested that the existing fine regime alone was insufficient to secure appropriate information and documents in tax audits of multinational enterprises, leading to subsequent policy debates. Consequently, in addition to the Tax Law Amendment proposal, the New Enforcement Penalty Provision was introduced through an amendment to the FANT on February 27, 2025. Furthermore, the new provisions of the Presidential Decree of the FANT, which set forth matters concerning the New Enforcement Penalty Provision, were promulgated on June 2, 2025. 2. Differences between New Enforcement Penalty and Existing Fine Provisions     Under the New Enforcement Penalty Provision, for tax audits commencing on or after September 1, 2025, if a taxpayer fails, without justifiable reason, to submit requested information and documents required under the tax law, an enforcement penalty may be imposed following deliberation by the Enforcement Penalty Deliberation Committee. When notifying a taxpayer that the penalty may apply, the head of the regional tax office must grant a period of at least 30 days from the date of notification (**Grace Period**) during which the taxpayer may provide the requested information and documents. If the materials are not submitted within 30 days from the day after the Grace Period ends, the enforcement penalty may be imposed every 30 days, calculated at 0.1% to 0.2% of the taxpayer's averaged daily revenue, which is a very significant penalty since there is no cap on the maximum penalty.     The penalty period runs from the day after the Grace Period until the day before the taxpayer submits all requested information and documents or, if the tax audit ends before submission, until the day before the audit ends. Any period during which the audit is suspended is excluded from the penalty period. In other words, until all requested materials are submitted or the tax audit is concluded, the enforcement penalty may continue to accumulate. However, the enforcement penalty and a fine cannot be imposed concurrently for the same reason.     The New Enforcement Penalty Provision differs from the existing fine provision for failure to submit materials in that it doesn't have an upper limit on the amount imposed, whereas the existing fine provision had a cap of KRW 50 million. In addition, while the existing fine could, according to court precedents, be imposed only once in the same tax audit, the newly introduced enforcement penalty may be imposed repeatedly every 30 days. Furthermore, the New Enforcement Penalty Provision also differs from the existing fine provision in that the enforcement penalty is imposed following deliberation by the newly established Enforcement Penalty Deliberation Committee, and any challenge must be made through administrative litigation. These points are discussed separately in the following sections. 3. Enforcement Penalty Deliberation Committee     The new enforcement penalty may be imposed only after deliberation by this committee. In addition, the head of the tax office may, taking into account the degree of effort made to submit the requested materials and the reasons for non-submission, reduce the amount of the enforcement penalty by up to one-half or grant an exemption, following deliberation by the Enforcement Penalty Deliberation Committee.     The Enforcement Penalty Deliberation Committee will be established within the regional tax office, and the head of the regional tax office serves as its chairperson. The members will consist of (i) up to six officials of the regional tax office designated by the head of the regional tax office, and (ii) up to thirteen external experts appointed by the head of the regional tax office (hereinafter, **External Members**). For each meeting, the chairperson will designate six members (including at least four External Members) to convene the meeting of the Enforcement Penalty Deliberation Committee.     It appears that there is not yet any explicit legislation regarding whether taxpayers will be granted an opportunity to present their views before the Enforcement Penalty Deliberation Committee. However, since taxpayers are guaranteed the opportunity to present their views in other committees convened during the course of a tax audit (e.g., the Review for Adequacy of Tax Imposition Committee and the Transfer Pricing Review Committee), it is possible. Therefore, it will be necessary to monitor whether subsequent legislation grants taxpayers the right to present their views. 4. Appeals Against the Enforcement Penalty     To contest the imposition of a fine, a taxpayer must file a written objection with the taxing authority, and as a result, the fine disposition loses its effect, with no need to pay the fine until the court’s decision becomes final. In contrast, to contest the new enforcement penalty disposition, the taxpayer must challenge it through administrative litigation, and since whether an appeal is filed does not affect the validity of the disposition, the general rule will be that the enforcement penalty must be paid while disputing it (similar to contesting a tax assessment by paying the assessed amount and litigating). 5. Scope of Requested Information and Documents Submissions     In a tax audit, requests for material submissions are based on the NTS’s statutory power to question and inspect. However, the relevant provisions of the tax law only state that “books, records, and other items” may be ordered to be submitted, without specifying their concrete scope or limits. In practice, tax auditors often request an extensive range of materials. While, in principle, such requests should be limited to materials necessary to determine the tax base and tax liability, it is not uncommon for requests to extend to internal documents, such as internal audit records and profit and loss statement of related parties, beyond ordinary accounting books. In particular, in tax audits of Korean subsidiaries of multinational enterprises, there are cases where the NTS requested submission of accounting records of the headquarters, which the subsidiary does not possess, or contracts containing trade secrets, leading to conflicts between taxpayers and the NTS.     The New Enforcement Penalty Provision also defines the triggering condition as a failure to fulfill the submission obligation “without justifiable reason,” without further elaboration on the scope of materials covered. This vagueness makes it difficult to assess when the penalty under New Enforcement Penalty Provisions will apply and raises the risk of arbitrary imposition. As a result, the ambiguities inherent in the current fine penalty provision remain unresolved under the New Enforcement Penalty Provisions.     Going forward, once the New Enforcement Penalty Provision takes effect, refinement of the system will be necessary. Specifically, criteria should be reinforced for recognizing what constitutes a “justifiable reason,” as well as guidelines for determining when a taxpayer’s submissions are deemed sufficient. In addition, based on judicial determinations regarding the types of materials and situations in which submission may not be reasonably possible, we expect the New Enforcement Penalty Provisions will be imposed only where a taxpayer deliberately withholds materials that are so critical that their absence would materially impede the tax audit. 6. Takeaways     As discussed above, the New Enforcement Penalty Provision is expected to have its details supplemented and refined after it takes effect from September 15, 2025. In particular, the Presidential Decree to the FANT grants the Commissioner of the NTS the authority to prescribe, by public notice, matters necessary for the imposition and collection of the new enforcement penalty that are not otherwise specified in the Regulations. Taxpayers should keep a careful watch on forthcoming notices and monitor how the penalty will be enforced in practice, as well as how appeals will be resolved.     In addition, for taxpayers expecting a tax audit in the near future, it will be prudent to conduct a pre-tax audit review/health check not only to assess overall tax risks, but also to distinguish in advance between materials that can and cannot be submitted, and, where submission is possible, to consider the practical preparation time required in order to respond efficiently to the New Enforcement Penalty Provisions. In particular, for multinational enterprises, it is important to review in advance and establish response strategies regarding whether the new enforcement penalty may be imposed on documents that the Korean subsidiary is not required to maintain under the tax law, materials of foreign affiliates that are not possessed or managed, or materials whose collection and organization would require a significant amount of time. The Tax Group at Lee & Ko has extensive experience assisting clients with regulatory developments and managing related risks. Our services cover the full spectrum, including tax audit defense, pre-audit reviews, and tax litigation. We encourage you to use this opportunity to evaluate your current compliance status and, where necessary, take proactive measures to minimize exposure to penalties and potential legal disputes.