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.
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.
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.
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.
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 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.
On and since April 2019, Korea has treaties with the countries listed in the following table:
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.
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.
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.
In the aftermath of the Asian financial crisis in 1997, South Korea committed to liberalizing its economy and promoted foreign direct investment (FDI) to open its market to foreign investors. FDI allows foreign investors to acquire and own stocks or shares of Korean companies. According to UNCTAD's 2020 World Investment Report, South Korea’s FDI stocks increased from US$ 135 billion in 2010 to US$ 238.5 billion in 2019. Other forms of FDI include a contribution to Non-Profit Organizations (NPO) and offering long-term loans to domestic companies. Acquisition of stocks or shares of a domestic company guarantees your participation in technology transfer and the management of the company you invested in. As a foreign investor, your investment in South Korea will be facilitated and legally supported by the Foreign Investment Promotion Act. You can also rely on the Rules on Foreign Investment to guide your business operations or Consolidated Public Notice to protect your investment. The South Korean government has cultivated a conducive environment for doing business, with robust measures and policies to help you make the most out of your investment and business capabilities. These measures have enticed investors from across the world and increased inbound investment steadily in the past 15 years. Now is the perfect time to invest in South Korea. Why Invest in South Korea? South Korea is appealing for foreign direct investment for many reasons. The Korean Government has been reducing tax incentives and increasing cash grants. In January 2019, the government increased cash incentives for foreign companies to around $46 million (50 billion KRW) to entice investors. Cash grants now drive the government’s comprehensive incentive program for foreign investors, which include industrial site support, financial support for staff training, and many more. Companies that invest in the IT sector and related industries qualify for generous cash grants provided by the central and local governments of Korea on a matching fund basis. From January 2020, the number of eligible technologies was expanded to 2,990 in 33 fields, which now includes high-tech products like IoT emotional diagnosis and biometric authentication payment. But South Korea has more to offer foreign investors than FDI cash incentives. Investors are also attracted by the country’s rapid economic development, specialization in ICT, and strong industrial base, high-potential emerging sectors, and expanding market. Factors to Consider Before You Invest in South Korea In 2009, financial, insurance, and other services made up 64% of inbound investments, compared with 35% invested in manufacturing. Investment opportunities have diversified over the years to include trade, hospitality, real estate, ICT, transportation, and many more. Industries like semi-conductors, auto manufacture, logistics, displays, and environmental products and services are attracting more investors. Under the Foreign Investment Promotion Act, foreign investors can set up a company, foreign branch, or liaison office. Even you'll need to invest in opening a branch in South Korea; it will not fall under FDI since it is not locally incorporated. A liaison office conducts functions like market research and R&D but cannot undertake profit-generating business in South Korea. To set up a local corporation, you’ll need to invest a minimum of around US$ 100,000 (100 million KRW) and does not have a maximum limit. On the other hand, establishing a domestic branch of a foreign company in Korea does not have any limits. Before setting up a business in South Korea, you have to consider how the implications of identification. The act recognizes foreign investors and foreign-invested companies as separate entities and requires independent accounting and settlement. The Foreign Exchange Transactions Act identifies a branch and headquarters as a single entity, which requires consolidated accounting and settlement. The foreign-invested company pays taxes based on domestic and overseas income, while taxes for the branch and liaison office considers income from domestic sources only. How to Establish a Company in South Korea Since the early 2000s, the government has focused on simplifying the FDI process and established a one-stop services platform to help foreign investors and multinationals invest in South Korea. The FDI procedure starts with foreign investment notification, which is conducted by your foreign exchange bank or accredited agencies like Pearson & Partners. Then, you remit your investment via customs or exchange bank before proceeding to the registration of incorporation at the court registry office. You will be notified once your business registration and incorporation process is completed. Then, you transfer your paid-in capital to a corporate account and wait for a notification confirming the establishment of your foreign-invested company. How to Set Up a Stock Company in South Korea The Commercial Act of South Korea recognizes five forms of companies, and three types of business forms are available to foreign companies, including the stock company. Each of these business forms has distinct registration requirements, minimum investment limit, and differ in terms of scope. The procedure for establishing a company may differ slightly depending on the degree of commitment or how much you invest in South Korea. There are two ways of setting up a stock company in South Korea. You can use either promotion or subscriptive incorporation, but both procedures involve registration of incorporation that takes about two weeks to complete. Registration tax is charged for both promotion and subscriptive incorporation, which costs around 0.4% of the capital you’ll be investing. You will also have to pay 20% of the registration tax for local education tax. If you invest in stock companies established in overconcentration control areas, the total costs accrued from both taxes can increase by up three times more. Other charges include registration application fee to get revenue stamp of the Supreme Court and notarization fee. The most important step in this procedure is filing your business registration, which should be completed within 20 days from the day your stock company opens its doors for business. To avoid issues down the line, hire an expert in South Korea’s FDI like Pearson & Partners to help you establish a company. South Korea is ranked 5th globally in the Doing Business 2020 ranking by the World Bank. It has laid a solid foundation across all sectors that will guarantee its position as a global business hub for many years to come. You can rely on Pearson & Partners to help you become part of South Korea’s inspiring journey and join the long list of the success stories of the FDI. Contact us today to start your journey.read more
Seoul, the capital city of South Korea, belongs to the league of Asia Pacific’s highly sustainable workplace markets, along with being a cultural hub of the region. Korean cuisine, cinema and pop music have an immense influence all over Asia, transforming the city into a tourist resort of global appeal, while Seoul’s rank as a business hub, depends on the might of its financial services sector and the power of Korean chaebols (corporations) makes it a well-liked investment terminus. Close to 10 million people have their homes in Seoul, but the bigger built-up area houses 25 million, which is close to 50 per cent of the population of South Korea. The city’s key sectors are finance, manufacturing and retail. The internet speed provided within the country is among the worlds fastest and public WiFis can be easily reached. The city proudly carries three primary office districts: the CBDGwanghwamun, the Yeouido Business District (YBD) and the Gangnam Business District (GBD). These CBDs are the country’s heart and soul and longest-serving business districts and also the major shopping areas of Seoul. They take account for a diverse range of businesses. Though research statistics show a CBD vacancy rate of 16.7%, however, it has exhibited a significant rise in rents since the past few months. Gwanghwamun – Rise through the Ranks as Seoul’s Premium Business District Gwanghwamun, in the heart of Seoul, rules the topmost position in the listing of the country’s business districts, on the parameters of annual sales and sales volume per individual. Business districts can be ranked on the basis of the statistical data of geography, population, sales, type of business and consumer’s trends of consumption, as well as information on a map. According to a report, places around Gwanghwamun Station registered the highest sales of 5.8 trillion won ($4.6 billion) in a single year, around approximately eight times hike as against the 2013 review. The area’s separate sales were reported at 3.9 million won. After blending with the sale figures of adjoining areas like City Hall Station and Jonggak Station, the overall sales figure in the area would exceed 12.7 trillion won. The swift upsurge of sales near the Gwanghwamun region can be ascribed to the clustered population who went out in public through the whole-month duration torchlight procession and other end-of-the-year events conducted at Gwanghwamun Square. On the other hand, Apgujeong Station in the swanky Gangnam district was placed at 19th position, a sensational drop from number three, five years ago. Areas near Gangnam Station that registered its best volume of sales in 2013, were positioned at 13th. Apart from key business districts in Seoul; Nam-gu in Ulsan, Jung-gu in Busan, places adjoining Seohyun Station in Seongnam and Beomgye Station in Anyang, Gyeonggi Province showed up in the top 20 list. Yeouido This YBD is present on a tiny island of the Han River, has been in the limelight for its financial residents – the Korea Stock Exchange lives there along with media firms. Lately, it has turned into a hub for foreign-owned businesses, majority of them have shifted to Seoul IFC development; having a combination trio of office high-rises, a hotel and a shopping arcade. Built by AIG, presently it belongs to Brookfield. The office market in the YBD is still getting used to Seoul IFC’s working premises and Q1 vacancy was 24.4%. Yeouido sprawls across 8.4 square kilometers of island sculpted by the Han River in western Seoul. The island gets its fame as the big economic district of Seoul, a registered address for several investment enterprises and banks. Additionally, the island holds the National Assembly where the regulations and political decisions of paramount importance to Korea are conceptualized and framed, the governing agencies of the Korean financial sector just like Financial Supervisory Service, Korea Financial Investment Association and the exemplary buildings like IFC SEOUL and 63. Yeouido has grown up and matured as a financial district from the last 70's when the KRX (Korea Stock Exchange) shifted base to Yeouido from CBD. Because the district identity looks similar to a financial and banking nuclear center of the city that is geographically placed on an island with a park, YBD is usually known as the Wall Street of Korea. Gangnam Gangnam is stationed in Seoul, south of the Han River, which splits through the city. It is among the several bridges of the city that bridges Gangnam with the adjoining areas to the north of the Han and also city centers. GBD (Gangnam Business District) used to be a farming area running in the reverse gear until 40 years ago. Nevertheless, this area has made its footprint as the educational, commercial and focal point in Korea and is armed to the teeth with administrative buildings on Gangnam-daero and Teheran-ro, centered on the Gangnam Station area. Every kid who loves to dance is familiar with ‘Gangnam Style’, - YouTube has more than 3 billion official views of this video. However, a considerably smaller number of people are aware that Gangnam belongs to Seoul in the capacity of a major office district. Gangnam houses several hi-tech and media agencies and another name for it is the Beverly Hills of Seoul. It is a highly robust office market, owing to limited resources and available positions of only 5.1%. GBD is at number two, on the scales of biggest business districts in Seoul, with reference to the entire leasing area of grade A & B office buildings. Conclusion Seoul has numerous universal districts. The evolution in the number of foreign nationals is most likely to hit the roof with schemes for foreign investment sectors throughout the town. When global firms make an entry into the Korean market, one of the initial choices to decide where in Seoul to set up their office. Now we have an overview of the three major business districts that are high-density areas, dotted with office buildings. Seoul’s Metropolis area comprises 400 logistics centers of area 10,000 sqm or more, with 25% of overall retail online sales. With these statistics, exceeding expectations for the sector is an understatement. Contact us for clarity and in-depth knowledge of the best place for your new company to operate.read more
Who can apply for D-7 visa?D-7 visa is issued to “dispatched foreign professional/supervisor/employee of a firm that is engaged in the business activities in Korea.”Eligibility and requirements Foreign professionals at a Korean branch office sent from the foreign company Foreign professionals at the domestic headquarters of a Korean company that has advanced into the overseas market. - Worked at a foreign company/organization and sent to the foreign company’s affiliate/subsidiary company, branch, or other offices in Korea as an “indispensable professional specialist.“ - The applicant is waived for the one-year work experience, 1) If planning to work in key industries or in national projects or, 2) the employer company has inducted $500,000 or more of business operational fund into its Korean office. - Worked at an overseas branch office of a listed Korean corporation or public organization for at least one year and was dispatched to the main office in Korea. - However, if the Korean headquarter has invested less than $500,000 into its overseas branch/local office, one is not eligible to apply for the D-7 visa. How long is it valid?When granted a D-7 visa, the maximum length of stay is 2 years, but it can be extended upon application. Dispatch orders should be issued by the company headquarters, even if the employee is dispatched from a branch. The dispatch order should state the dispatch period.Are you applying for your visa in Korea? Contact our Korea visa expert Team in Pearson & Partners.read more