The
Republic of Korea has signed tax treaties (also known as double tax agreements
or DTAs) with a large number of nations across the world, to sidestep double
taxation, avoid tax fraud and boost international trade. After signing of the
first tax treaty in 1970, Korea went on to ink tax treaties with 93 countries till
present.
Further,
for the resolution of issues related to treaty shopping, Korea has made moves
to re-negotiate with various countries that have running tax treaties with
Korea. Its tax treaties with Malaysia (in 2011), Austria (in 2011), Switzerland
(in 2012), Poland (in 2012), India (in 2014), Vietnam (in 2014), Turkey (in
2015), and Czech Republic (in 2016), are examples of re-negotiations.
Furthermore, the content and format of the tax treaty have
undergone numerous changes comprising the latest signing of the multilateral
convention for implementation of tax treaty-related steps for the avoidance of BEPS.
This article summarizes the features of the tax treaty in Korea and
the present situation of the tax treaties that Korea has signed with the
different countries.
New
rules have been framed, that do not permit a tax treaty to be applicable, in
case of a doubt of treaty shopping. The Korean government is into treaties with
other nations for information exchange, which includes tax and finance
information.
Korea’s Corporate Taxes
Tax
Rates for International Firms
Local enterprises are taxed on their global earnings.
Non-resident enterprises with a permanent setup in Korea have to pay taxes only
on the income that they have derived in Korea. Non-resident companies that have
no permanent setup in Korea usually have to pay withholding tax on each independent
commodity of the Korean-derived income.
Tax
on Capital Gains
For residing businesses, capital gains are seen as
ordinary business income and they have to pay corporate tax at normal rates. In
the case of non-resident companies, taxes levied on Korean-derived capital
gains are 11% of sales or 22% of gains (the lower of the two). Usually, there
are no special taxes on profits from mergers.
Capital gains tax on the transfer of stocks is 22%. If
shares are transferred by most shareholders, capital gain of KRW 300 million or
less is taxed at 22% and capital gain more than KRW 300 million has 27.5% attached
to it (for SMEs, the 27.5% marginal tax rate takes effect from transfers actioned
on or after January 1, 2019).
In case of transfer or disposal in less than a year after
purchase by important shareholders (leaving aside small and mid-sized company
stock), 33% capital gains tax is applicable. For small and mid-size company
stock (except holdings of major shareholders), the capital gains tax is 11%.
These rates comprise a local income tax as against 10% of the personal income
tax unpaid.
The Korean government is also reviewing the enforcement
of tax on capital gains from cryptocurrency dealings.
Key
Permissible Deductions and Tax Reliefs
A Dividends-Received Deduction (DRD) applies to
dividends moved between resident firms. Eligible transactions that fulfil the
Tax Incentive Limitation Law can avail a variety of tax incentives, including
investment in high-tech firms or those situated in free trade zones.
The investing company gets a 3-year or a
5-year tax waiver a year after its taxable income’s generation. The business is
then eligible for a 50% tax exemption for two years after the beginning
duration of tax relief.
Exceptions apart, interest paid in the usual business
activities can be deducted provided that the associated loan is used in
commercial activities. A doubtful accounts reserve is permitted in the form of
a tax deduction at the greater of 1% on the tax book value of the receivables
at end-of-the-year, or the effective bad debt ratio (not applicable to
financial institutions).
Specific charities are deductible (as far as under 50%
of the entire taxable income). Entertainment costs exceeding KRW 10,000 on an
event basis via corporate credit card vouchers, cash receipts, or tax invoices
can be taxed.
Launch outlay, like incorporation expenditure,
founders’ salary and registration charges and taxes, are payable if the expenditures
registered for each article of incorporation and are actually paid.
Net operating losses can be deferred for 10 years till 60% of a financial year’s
taxable income (applicable to all businesses except SMEs). Big companies are
not permitted to carry back losses; Nevertheless, SMEs can carry back their
losses to the prior fiscal year.
Other
Corporate Taxes
A capital registration tax of 0.48% (or 1.44% for the
Seoul Metropolitan Area) is to be paid. A property tax of 0.15% to 0.5% (0.24%
to 0.6% with the education surcharge) is imposed on property and buildings for housing
and commercial use. A company having ownership of land worth more than KRW 600
million, is liable to pay a real estate tax, besides property tax.
All agreements regarding establishing, transfer and modification
of rights attract a stamp duty par value. An acquisition tax of 4.6% (including
surcharge) usually adds to the purchase of property, automobile and heavy machinery
(buying a house may enjoy a lower tax rate from 1.1% to 3.5%).
A registration fee between 0.02% and 5% applies on
registration of establishing, modification, or lapse of property rights or
other appellations and incorporation with the relevant agencies.
Tax Treaties in Korea
Tax treaties are global commitments controlled by international law;
like treaties, conferences, contracts and memoranda signed with other nations
in terms of taxes on incomes, capital gains and real estate.
The Korean Constitution gives tax treaties the same power as
domestic legislation in Korea. If there is a dispute between the tax treaty and
the domestic law, the tax treaty is prioritized over the domestic law.
Also, since tax treaties signify that the country’s taxation
authority accepts international transactions under a bilateral agreement, the
Korean government will not levy taxes only based on a tax treaty without the requirements
of the Korean tax law.
Tax Treaties with Other Countries
Double Taxation Avoidance Treaties
On
and since April 2019, Korea has treaties with the countries listed in the
following table:
Tax Information Exchange
Agreements(TIEAs)
Apart
from income tax treaties, for staying clear of double taxation, Korea has
finalized TIEAs with a lot of countries, inclusive of select tax shelters
and those with whom it has temporary agreements.
TIEA
covers Andorra, Bermuda, British Virgin Islands and the Cayman Islands, among
others. TIEAs has essential information to run and implement domestic tax legislations,
inclusive of particulars of taxpayer registration, enterprise ownership particulars,
companies’ books of accounts and financial records of a certain business deal
and individual or corporate financial transaction information.
Further,
Korea is among the 128 countries to participate in the Multilateral Convention
on Mutual Administrative Assistance in Tax Matters as of April 2019.
Social Security
(Summation) Treaties
Now,
Korea has existing social security treaties with Australia, Austria, Belgium,
Brazil, Bulgaria, Canada, Chile, China, the Czech Republic, Denmark,
Finland, France, Germany, Hungary, India, Ireland, Italy, Japan,
Mongolia, the Netherlands, Peru, Poland, Quebec, Romania, Slovakia, Spain,
Sweden, Switzerland, Turkey, the United Kingdom, the United States, and
Uzbekistan as of April 2019.
Social
security agreements are aimed at helping those who have contributed premiums to
the national pension plans of two separate jurisdictions. Through them, the
countries can avail the combined total periods of coverage in both countries
(i.e., totalisation). However, the agreement has to be evaluated for elaborate
regulations that might differ depending on the corresponding contract.
Conclusion
As the article says, it
is possible for non-residents to apply for a lower tax rate or a tax rebate, based on the tax
treaties.
However, since the tax
treaties and provisions under the Korean tax law are complicated and require
expertise, it is best to discuss their intricacies with tax and incorporation
specialists before applying for the discounted tax rate or tax relief provisions
under the respective tax treaty.
We can help you through all the steps of
understanding the tax treaty that works for you, depending on your country and
its tax equation with Korea. Contact us to help you open a company in Korea.
