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Restrictive Tax Rates for non-residents and foreign corporations on domestic source income
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2019-12-04
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Restrictive Tax Rates for non-residents and foreign corporations on domestic source income

Date: December 4, 2019

 

I. Introduction

With influx of foreign corporations into Korea the restrictive tax rating system is in place in an effort to prevent tax evasionof foreign companies for domestic source income. This system has significance inthat it allows taxation both in countries of residence and origin but restricted the right of taxation of source country to minimize risks of double taxation.

 

II. Restrictive Tax Rates

1. Application of restrictive tax rate

 

1) Submission of an restricted tax rate application

Where a foreign corporation or non-resident to which domestic source income actually reverts intends to apply for therestrictive tax rates it shall submit an application of restrictive tax ratesto a person liable for withholding before getting paid the income.

Where the relevant domestic source income ispaid through a foreign investment scheme, the foreign investment scheme shall receive an application of restrictive tax rates from the relevant realbeneficiary and submit a report on the foreign investment scheme to the person liable for withholding, along with the relevant statement.

It may be omitted to present another request for the application of restrictive tax rates or another report on a foreign investment scheme for three years from the date when request for the application of restrictive tax rates or another report on a foreign investment scheme is presented. Provided there is any change in the contents thereof a report on the change shall be presented before income is initially paid after the change occurs.

 

2) Application of restrictive tax rates to those who are liable for withholding

The person liable for withholding shall applyrestrictive tax rates after confirming the real beneficiary’s country of residency and checking tax bracket. When it is deemed to be needed supplement the details of the application could be requested and when the real beneficiary does not answer the request restrictive tax rates may not be applied.

 

2. Exclusionof restrictive tax rate application

Where a non-resident or foreign corporationf alls under the following cases it shall be taxed based on domestic tax law not on restrictive tax rate.

 

1) Where it is impossible to identify the real beneficiary

  • Wherea request for application of restrictive tax rates or report on the foreign investment scheme is not submitted.

  • Failure to comply with the request to supplement the details stated on the submit ted request for application of restrictive tax rates or report on the foreigninvestment scheme.

  • Where it is impossible to identify who the real beneficiary is with the request for application of restrictive tax rates or the report on the foreign investmentscheme. (Overseas public-offering collective investment scheme excl.)

 

2) Where the application of restrictive tax rates on tax treaty is excluded

  • Where the tax treaty between the country of residency of the real beneficiary and Korea has special provisions which stipulate the exclusion of restrictive taxrates and if a case falls into this provision.

 

3) Withholding tax rate under the Korean tax law

Withholding tax rate on domestic source income of non-residents and foreign corporations


Domestic source income

 

Income tax rate

Total tax rate

(Local tax incl.)

Interest & trust income

(from debenture)

20%

(14%)

22%

(15.4%)

Dividend income

Personal service income

Royalty income

Other income

 

20%

 

22%

Capital gains

from securities & real-estate assets

 

10% or 20%

 

11% or 22%

Rental income

(ships, airplanes)

Business income

2%

2.2%

 

 

3. Special Provisions on Application of Tax Rates to Interest, Dividends, and Royalties

  1. For domestic source income of a non-resident and foreign corporation the tax treatyoverrides domestic tax law.

  2. For the domestic source income generated from interests, dividends, and intellectual property rates lower tax rates which vary by country and income amount butstay between 5% and 15% on average are applied between the one on the tax treaty or one of the following cases.


  • Where the restrictive tax rate on the tax treaty does not include local tax:

    apply domestic withholding tax rate

    the list of countries which does not include local tax in their restrictive taxrates (as of December 2017):

  1. The republic of South Africa

  2. U.S.

  3. Venezuela

  4. Estonia

  5. Iran

  6. India

  7. Columbia

  8. the Philippines

     

  • Where the restrictive tax rate on the tax treaty includes local tax:

    apply domestic withholding tax rate with additional 10% of the withholding tax added

 

4. Request for reassessment and document archive

 

1) Request for reassessment

Where a realbeneficiary to which the restrictive tax rate has not been applied intends tohave restrictive tax rate applied, the real beneficiary or the person liablefor withholding may file a request for correction within the five-yearperiod beginning on the last day of the month in which taxes are withheld.Upon receipt of a request for correction the head of a tax office shall correctthe tax base or tax amount or notify the petitioner that there is no reason tocorrect it, within six months of the receipt of the request.

 

Where a request for correction is filed documents verifying that he or she is the real beneficiary of the domestic source income shall be submitted with the a request for application of restrictive tax rates and a resident certificate issued by the authorities of the country of residence of the relevant real beneficiary

 

When it is deemed to be needed supplement the details of the application could be requested by the head of a tax office within 30 days upon receipt of the request for correction.

 

2) Data archive and submission

The person who is liable for withholding and a foreign investment scheme should keep the documents related to a request for restrictive tax application and a notification form of foreign investment scheme for five-year period from the next date of the payment period of withholding tax.

However, the documents shall be submitted within 20 days upon the request of submission fromthe head of a tax office having jurisdiction over the place of tax payment.

 

5. Applying for Non-Taxation or TaxExemption for Foreign Corporations under Tax Treaties

If a real beneficiary intends to have such income untaxed or exempted from taxes in accordance withthe tax treaty, it shall present an application for non-taxation or taxexemption to the person who pays the domestic source income and the incomepayer shall file the application with the head of the tax office having jurisdiction over the place of the tax payment until the 9th day ofthe following month to which the date of payment of such income belongs.

Provided that the application for non-taxation and tax exemption for domestic source income is filed, the obligation of statement of payment is exempted.

 

Contracting countries with 0% restricted tax rateson tax treaties with Korea

Interest income

Dividend income

Royalty income

 

Ireland

Hungary

 

Mexico

(limited to corporations that hold more than 10% of share)

Malta

U.A.E

Ireland

Croatia

Hungary

 

 

Learn more about Korean tax system by visiting our website:

 

 


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