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Foreign Company Tax Guide

home FDI InformationForeign Company Tax GuideWithholding Tax on Foreign Enterprise

Withholding Tax on Foreign Enterprise

  • Taxation on domestic income of non-resident and foreign corporation
    1. 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.
    2. 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 of Korea. It includes people with foreign nationality and permanent residency in overseas 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.
    3. Taxation on a Corporation Established by a Non-resident
     The term "resident" means any individual who has his/her domicile or place of residence in the Republic of Korea. It includes people with foreign nationality and permanent residency in overseas 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.
    < Taxation on a Corporation Established by a Non-resident >
    • (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 does not 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 establishment decides tax rates for the domestic income of a non-resident. Domestic permanent establishment includes:

       Branch, office or place of business; a store or other fixed sales places; a place of work, factory or warehouse; a place of construction, 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 into tax treaties with 93 countries, pursuing to offer tax benefits to member states of 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 or corporation 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, and personal service income should be levied between 10 to 15 percent.
      U.S. ● Local income tax should be additionally imposed
      ● Interest income: 12%
      ● Dividend income: 10% for holding more than 10% of shares, 15% for other cases
      ● Royalty income: 10% for films with copyright, 15% for other cases
      ● 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 ● Interest income: 10%
      ● Dividend income: 5% for holding more than 25% of shares, 10% for other cases
      ● Royalty income: 10%
      ● Personal services: offering services for a period or periods not exceeding in the aggregate 183 days, it is taxable in a contracting state
      Japan ● Interest income: 10%
      ● Dividend income: 5% for holding more than 25% of shares, 10% for other cases
      ● Royalty income: 10%
      ● Personal services: offering services for a period or periods not exceeding in the aggregate 183 days, it is taxable in a contracting state
      Vietnam ● Interest income: 10%
      ● Dividend income: 10%
      ● Royalty income: 5% of the royalties for patent right, license for drawing, confidential process, industrial, commercial, academic experience or equipment. 10% for other cases
      ● Independent personal services: independent services without fixed base are taxable in a contracting state
      ● Dependent personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country
    < Taxation Process of foreign Corporations in 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 tax rate on royalty income. However, in terms of personal service income, they don’t stipulate tax rates but have provisions about whether taxation on source at the place of origin is allowed. The differences between royalty income and personal service income are as follows:
      Personal service income Royalty income
    Withholding tax rate 20% 20%
    20%(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
    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.  
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