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FDI InformationTax Treaties Taxation on foreign corporation in Korea
Date: November 27,2019
Taxation Process of foreign Corporations in Korea
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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. |
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Decide whether the income is taxable | |
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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. |
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Decide how to levy taxes
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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. |
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Decide applicable rates under separate taxation system |
Taxation based on existence of permanent establishment
1. With permanent establishment
For profits generated from the establishment domestic taxation system will be applied as a form of composite income tax for a nonresident individual and of corporate tax for a foreign corporation.
2. Without permanent establishment
For income from domestic sources any nonresident or foreign corporationis not liable for withholding tax because withholding agent pays the tax whenthe wages are paid. Where a withholding agent pays wages to a nonresident or foreigncorporation he or she should check whether the taxes on the wages should belevied based on domestic taxation system or tax treaties. When the two conflicts, tax treaties override domestic taxation system which carry lower reduced tax rates.
Taxation not based on international taxtreaties
Where income from domestic sources occurred to any nonresident andcorporation 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 nonresidents and foreign corporations.
Korean tax law stipulates withholding tax rates for nonresidents and foreign corporations are as it follows:
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Interest income |
20 percent of the payment |
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Dividend income |
20 percent of the payment |
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Ship rental income & business income from domestic sources |
2 percent of the payment |
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Personal service income |
20 percent of the payment |
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Capital gains |
Less amount between the 10 percent of sale proceeds and 20 percent of gains on transfer |
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Royalty income |
20 percent of the payment |
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Income from transfer of securities |
Less amount between the 10 percent of sale proceeds and 20 percent of gains on transfer |
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Miscellaneous income |
20 percent of the payment |
Taxation based on international taxtreaties
As of June, 2018 South Korea has entered into tax treaties with 93countries, pursuing to offer tax benefits to member states of the treaty. Inmost cases international tax treaties override domestic tax laws in many cases.Under the treaties reduced tax rates, limited tax rates, are applied. Limitedtax rate means the maximum tax rate at which a resident or corporation of theother contracting country may be taxed under international tax treaties. Everycountry has different tax treaties each other but overall the treaties stipulate that interest income, dividend income, royalties, and personalservice income should be levied between 10 to 15 percent.
☜ Examples of tax rates on international treaties
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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 |
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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 |
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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 |
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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 the subject to taxation from the contracting country |
Learn more about Korean tax system by visiting our website:
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