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Taxation on domestic income of non-resident and foreign corporation
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2020-01-10
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Taxation on domestic income of non-resident and foreign corporation

Date: January 10, 2020


I. Introduction

This is to provide descriptions about taxation on income generated from domestic place of business in Korea by a foreigner or foreign invested company.

 

II. Definition of Non-resident and Foreign Corporation

The term "resident" means any individual who has his/her domicile or place of residence in the Republic ofKorea. It includes people with foreign nationality and permanent residency inoverseas countries.

 

The term “foreign corporation” means any corporation which is established and has headquarters overseas. It includes domestic branches and liaison offices of foreign corporations. However, where a foreigner and foreign corporation establishes a corporation in Korea it is regarded the same as a domestic corporation.

 

III. Taxation on a Corporation Established by a Non-resident

The income generated from a domestic place of business of a corporation established by a non-resident is subject to domestic tax laws including income tax and corporation tax and in ternational taxtreaties. However, international tax treaties override domestic tax laws.

 

The Existence of PermanentEstablishment

(1) With permanent establishment

For profits generated from the establishment domestic taxation system will be applied as a form of composite income tax and corporate tax for a non-resident individual and foreign corporation,respectively. Branch offices and liaison offices are regarded as permanent establishment.

 

(2) Without permanent establishment

For income from domestic sources any nonresident or foreign corporation is not liable for withholding tax because the withholding agent pays the tax when the wages are paid. When the withholding agent pays withholding tax he/she should consider whether Korea has rights to impose taxes on the income on the international tax treaties. Mostly Korea doesnot have right to impose taxes on the income of a non-resident who stays in Korea less than 183 days. Some tax treaties grant Korea rights to impose taxes only when income that exceeds a certain amount (USD 3,000 for the US).

 

(3) What is permanent establishment?

The existence of permanent establishmentdecides tax rates for the domestic income of a non-resident. Domestic permanent establishment includes:

Branch, office or place of business; a store orother fixed sales places; a place of work, factory or warehouse; a place ofconstruction, site of construction, assembly or installation work, or a place where supervision is conducted in relation thereto, which continues to exist exceeding six months; any of the following places where services are provided by employees

 

The Application of Tax Rate on International Tax Treaties

(1) With international tax treaties

Where income from domestic sources occurred to any nonresident and corporation with no fixed establishment withholding taxes will be levied based on the provisions of income tax law and corporate tax law respectively. In this case, withholding tax agent will pay the tax based on withholding tax rates for non-residents and foreign corporations. 

 

 

Interest income

20 percent of the payment

Dividend income

20 percent of the payment

Ship rental income & business income from domestic sources

2 percent of the payment

Personal service income

20 percent of the payment

Capital gains

Less amount between the 10 percent of sale proceeds and 20 percent of gains on transfer

Royalty income

20 percent of the payment

Income from transfer of securities

Less amount between the 10 percent of sale proceeds and 20 percent of gains on transfer

Miscellaneous income

20 percent of the payment

 

(2) With international tax treaties

As of June, 2018 South Korea has entered intotax treaties with 93 countries, pursuing to offer tax benefits to member statesof the treaty. In most cases international tax treaties override domestic tax laws in many cases. Under the treaties reduced tax rates, limited tax rates,are applied. Limited tax rate means the maximum tax rate at which a resident orcorporation of the other contracting country may be taxed under international tax treaties. Every country has different tax treaties each other but overall the treaties stipulate that interest income, dividend income, royalties, andpersonal service income should be levied between 10 to 15 percent.

 

U.S.

l  Local income tax should be additionally imposed

l  Interest income: 12%

l  Dividend income: 10% for holding more than 10% of shares, 15% for other cases

l  Royalty income: 10% for films with copyright, 15% for other cases

l  Personal services: offering services for a period or periods not exceeding in the aggregate 183 days, earning profits exceeding $3,000 it is taxable in a contracting state

China

l  Interest income: 10%

l  Dividend income: 5% for holding more than 25% of shares, 10% for other cases

l  Royalty income: 10%

l  Personal services: offering services for a period or periods not exceeding in the aggregate 183 days, it is taxable in a contracting state

Japan

l  Interest income: 10%

l  Dividend income: 5% for holding more than 25% of shares, 10% for other cases

l  Royalty income: 10%

l  Personal services: offering services for a period or periods not exceeding in the aggregate 183 days, it is taxable in a contracting state

Vietnam

l  Interest income: 10%

l  Dividend income: 10%

l  Royalty income: 5% of the royalties for patent right, license for drawing, confidential process, industrial, commercial, academic experience or equipment. 10% for other cases

l  Independent personal services: independent services without fixed base are taxable in a contracting state

l  Dependent personal services: in case of offering services for more than 183 days, it is subject to taxation from the contracting country

 

 

Taxation Process of foreign Corporationsin Korea.



Process 1

 

Where income of a foreign corporate occurs it should be decided whether the income is taxable under the Korean tax law. If it is international tax treaties also should be considered as the next step. However the income is not the subject to income tax if it is not taxable under the Koran tax law nor international tax treaties.

 

Decide whether  the income is taxable

Process 2

 

In case of taxable income the source of income should be considered. Where the income was generated from domestic place of business the income is the subject to composite income tax. Provided that the income did not come from domestic place of business the income is the subject to withholding tax under separate taxation. However, capital gains are not the case for this.

 

 

Decide how to levy taxes

 

 

Process 3

 

Where domestic tax rates are lower than those of international tax treaties tax should be levied based on domestic tax rates. In the case of the opposite, tax rates of international tax treaty should be applied.

Decide applicable rates under separate taxation system




 


 

Royalty Income and Personal Service Income

Most international treaties put limits on taxrate on royalty income. However, in terms of personal service income, they don’tstipulate tax rates but have provisions about whether taxation on source at theplace of origin is allowed. The differences between royalty income and personalservice income are as follows:

 

Personal service income

Royalty income

 

Withholding tax rate

20%

20%

limited tax rate

(under tax treaty)

Where to levy tax

Taxation on source at the place where the personal service is performed

Taxation on source at the place where the royalty is used or offered

Tax treaty

taxation on source at the place of origin

Limited tax rate

 

Personal service income

Royalty income

Intangible value

Labor, function and technique with physical service

Taxation on source at the place where the personal service is performed

Taxation on source at the place where the royalty is used or offered

Compensation for created value

Compensation for service offered

Service provider should be responsible for the service provided

Service providers do not bear any responsibility for the service provided

Actual income is paid which is calculated by putting the expenses incurred on the process of offering the service in the pertinent business year and aggregated profits together.

 

Income is calculated based on the frequency and period of usage and also on profits generated on the process of using the royalty.

 

Income far exceeds the expenses incurred to create values and total profits generated by royalties

 

 

- specialized service offered by professionals like designers

- drawings designed by professional designers with using one’s expertise

- any rights to use, offer and copy design drawings designed for unspecified persons

- Information or know-how on industrial knowledge

Actual expense incurred on the process of offering human resources and materials

Expenses inevitably entailed on the process of offering expertise such as knowledge or know-how related to patent right

Where personal service and royalties are clearly separable and personal service is not incidental to royalties the service is subject to personal service income

Where personal service is incidental to the royalties and the fees for personal service is minimal the service is subject to royalty income

Design drawing which belongs to devices is regarded as personal service.

 

 


 

 

 

 

Learn more about Korean tax system by visiting our website:


 

 


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