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FDI InformationTax Guide for Foreign CompaniesForeign Company Tax Guide Taxation on domesticincome of non-resident and foreign corporation
Date: December 18, 2020
I. Introduction
This is to provide desc
Definition of Non-resident and Foreign Corporation
The term "resident" means anyindividual 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 anycorporation which is established and has headquarters overseas. It includesdomestic branches and liaison offices of foreign corporations. However, where aforeigner and foreign corporation establishes a corporation in Korea it isregarded the same as a domestic corporation.
III. Taxation on a Corporation Established by a Non-resident
The income generated from a domestic place ofbusiness of a corporation established by a non-resident is subject to domestictax laws including income tax and corporation tax and international taxtreaties. However, international tax treaties override domestic tax laws.
☞ The Existence of PermanentEstablishment
(1) With permanent establishment
For profits generated from the establishmentdomestic taxation system will be applied as a form of composite income tax andcorporate tax for a non-resident individual and foreign corporation,respectively. Branch offices and liaison offices are regarded as permanentestablishment.
(2) Without permanent establishment
For income from domestic sources anynonresident or foreign corporation is not liable for withholding tax because thewithholding agent pays the tax when the wages are paid. When the withholdingagent pays withholding tax he/she should consider whether Korea has rights toimpose 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 inKorea less than 183 days. Some tax treaties grant Korea rights to impose taxesonly 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 permanentestablishment 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 placewhere supervision is conducted in relation thereto, which continues to existexceeding six months; any of the following places where services are providedby employees
☞ A domestic place ofbusiness includes branches, offices, or business offices, shops and other fixedsales places; workshops, factories, or storages, places used for building,sites for construction, assembly or installation works, or places used forperforming supervisory activities related thereto, for more than six months, aplace where services are provided for at least six months in total during a12-month period in which such services continue to be provided, a place whereservices are provided for not more than six months in total during a 12-monthperiod in which such services continue to be provided, and similar services arecontinuously and repeatedly provided for at least two years, ines, quarries, orplaces for exploiting and gathering marine natural resources and other naturalresources.
☞ The Application of Tax Rate on International Tax Treaties
(1) With international tax treaties
Where income from domestic sources occurred toany nonresident and corporation with no fixed establishment withholding taxeswill be levied based on the provisions of income tax law and corporate tax lawrespectively. In this case, withholding tax agent will pay the tax based onwithholding tax rates for non-residents and foreign corporations.
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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 |
(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 taxlaws 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 internationaltax treaties. Every country has different tax treaties each other but overallthe treaties stipulate that interest income, dividend income, royalties, andpersonal service income should be levied between 10 to 15 percent.
☞Tax rates on tax treaty
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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 |
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Hongkong |
l Interest income: 10% l Dividend income: 25% (Beneficial owners excluding partners should own at least 25% of shares in person) l Royalty income: 10% owned by beneficial owners l Personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country
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UK & Canada |
l Interest income: 10% l Dividend income: 5% when more than 25% of shares are owned, others 15% l Royalty income: 2% for equipment, others 10%. l Personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country |
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France |
l Interest income: 10% (sales on credit excluded) l Dividend income: 10% when more than 10% of shares are owned, others 15% l Royalty income: 10% l Personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country |
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Spain |
l Interest income: 10% (sales on credit excluded) l Dividend income: 10% when more than 25% of shares are owned by a corporation, others 15% l Royalty income: 10% l Personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country |
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Australia |
l Interest income: 15% l Dividend income: 15% l Royalty income: 5% l Personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country |
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Chili |
l Interest income: 5%, others 15% (Bank, insurance company, going-public bond, securities, sales on credit of equipment) 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: 5% for the use of industrial, commercial or scientific equipment, others 10% l Dependent personal services: in case of offering services for more than 183 days, it is the subject to taxation from the contracting country |
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Uzbekistan |
l Interest income: 5% l Dividend income: 25% (union is excluded), others 10% l Royalty income: 2% for the use of equipment, others 10% l 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 Corporationsin 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 |
☞ 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:
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Personal service income |
Royalty income
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Withholding tax rate |
20% |
20% 20%(under tax treaty) |
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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 |
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Tax treaty |
taxation on source at the place of origin |
Limited tax rate |
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Personal service income |
Royalty income |
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Intangible value |
Labor, function and technique with physical service |
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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 |
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Compensation for created value |
Compensation for service offered |
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Service provider should be responsible for the service provided |
Service providers do not bear any responsibility for the service provided |
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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.
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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
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- 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 |
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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 |
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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 |
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| 이전글 | The ceiling of entertainment expenses of a corporation in 2020 | ||||
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| 다음글 | Capital gains tax for nonresidents | ||||
