Zero Tax Rate for non-residents and foreign corporations in Korea

Date: March 19, 2021

I. Introduction

Goods and services provided to a non-resident or foreign corporation in the territory of Korea are subject to taxation. However the Korean tax law allows them to be exempted from taxation applying zero tax rate on them where their transactions meet some requirements. The zero tax rate system violates the principle that taxes on goods and services must be imposed where they are consumed and also undermines tax fairness.

This paper sketches the requirements for the application of zero tax rate

 

II. Requirements for those who use and buy goods and services

1) Non-resident

Any individual who has his/her domicile or place of residence in the Republic of Korea for at least 183 days.

 

2) Foreign Corporation

An organization that has its headquarters ormain office in a foreign country in the form of a corporation.

 

III. Requirements for Goods and Services

1) Goods

Goods delivered to a domestic entrepreneur designated by a nonresident or foreign corporation for the entrepreneur's taxable business

 

Goods supplied to duty-free business operators don't qualify for zero rate tax. Therefore, 10 percent tax rate is applied tot he goods supplied to duty-free operators.

 

2) Services

① Professional, scientific and technical activities (excluding veterinary activities, activities of head offices for manufacturing, and activities of head offices for other industries)

② Leasing of intangible property rights

③ Communications services

④ Repair of containers; storage and warehousing within bonded areas; and the shipping agency services, marinetransportation brokerage business, and vessel management services under theMarine Transportation Act

⑤ News agency activities; motionpicture, video and television program production, sound recording and musicpublishing activities (excluding motion picture and video exhibition); softwaredevelopment; computer programming; system integration and management; dataprocessing; hosting, portals and other Internet information media serviceactivities; and other information service activities, which all belong to thecategory of publishing, video, broadcasting, communications and informationservices.

⑥ Brokerage of commodity

⑦ Business facilities managementand business support service activities (excluding landscape care and maintenanceservice activities, activities of travel agencies and tour operators, andtourist assistance activities)

⑧ Educational services (limited toeducational support activities)

⑨ Human health activities (limitedto cases of supplying clinical trial services)

⑩ Goods or services similar tothose provided for in items ① through ②, which are prescribed by Ordinance of the Ministry of Strategy andFinance.

 

★ However, for professionalactivities in ① and services in ⑦ are limited to where the relevant foreigncountry grants Korean residents or corporations the identical tax exemption.It means the relevant foreign country grants exemption from taxes equivalent tothe value-added tax or other similar taxes of the Republic of Korea or that therelevant foreign country has no provisions governing taxes equivalent to thevalue-added tax or other similar taxes of the Republic of Korea.

 

IV. Requirements for Price Payments – Foreigncurrency acquisition

 

Requirements vary with the existence of adomestic business of a non-resident or a foreign corporation.

 

1) Non-resident and foreign corporation

Any of the followinggoods or business services that are supplied in the territory of Korea to anonresident or foreign corporationhaving no domestic place of business

① The price of which is paid in Korean won at a foreign exchange bank

② The price of which is paid in foreign currencies from a non-residentor foreign corporations overseas and exchanged in Korean won.

③ Where an individual orcorporation which provides goods or services for a non-resident or foreigncorporation without domestic place of business offsets the price with the onethat the individual or corporation should receive from their counterpart.

④ Transactions that can berecognized as foreign currency acquisition

 

☞ ①refers to the case where the price from a non-resident or foreign corporationsoverseas is remitted to an account of foreign exchange bank in foreigncurrencies and then withdrawn in Korean won at the foreign exchange bank byselling the foreign currencies.

☞ ② refers to the case where theprice from a non-resident or foreign corporation overseas is remitted to thenon-resident's or foreign corporation's account and withdrawn in Korean won ata foreign exchange bank by selling the foreign currencies.

 

☞ ③ refers to the case where a provider excludes the price for his/herservice or goods from the one that they should receive from a non-resident orforeign corporation.

 

☞ ① and ② qualify for zero tax rate becausethey contribute to foreign currency acquisition. ③meets the requisition for zero tax rate application because it helps to controloutflow of foreign currencies.

 

2)Non-resident and foreign corporation with domestic place of business

Goods orbusiness services that are supplied in the territory of Korea under directcontract with a foreign nonresident or foreign corporation having a domesticplace of business: Provided, That this shall apply only where the price is paidby the relevant foreign nonresident or foreign corporation either in Korean wonat a foreign exchange bank

 

Even though goods or services are supplied under the direct contract witha foreign nonresident or foreign corporation if the actual beneficiary of thegoods and services are domestic place of business it does not qualify for thetax rate of zero percent.

 

3) Casesof price payment not qualifying for zero tax rate

Zero taxrate aims foreign currency acquisition. Therefore, where a transaction fails toverify foreign currency acquisition it is not subject to zero tax rate.

① Goods and services supplied to a nonresident without domestic placeof business and the price is received in Korean won

② Where the price is not withdrawn in Korean won and received inKorean currency or traveler's check

③ Where the price is received in Korean won through Korean wonsavings account for non-residents at a foreign exchange bank

 

 

 

Learn more about Korean tax system by visiting our website

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