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Taxation of Branch Tax for Foreign Corporation
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2015-09-15
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Taxation of Branch Tax for Foreign Corporation

1. Definition of Branch Tax

In order to pursue the equity in taxation between the business entity type of an incorporated subsidiary and a branch of foreign corporation, the branch profit tax is designed to be imposed additionally on the ‘adjusted taxable income' of the Branch of the foreign corporation after the corporate income tax is imposed.

 

2. Taxation by Type of Business Entity of Foreign Corporation

   (please refer the chart enclosed)

 

3. Taxable Income for Branch Tax

Any domestic place of business of a foreign corporation is required to pay tax amount calculated by applying the tax rate to the taxable income (the amount of remittance prescribed by Presidential Decree when a remittance of profits are taxable) as stipulated in paragraph (2) of Article 96 in Corporate Tax Act in Korea under the tax treaty concluded between Korea and the country where the headquarters or main office of such foreign business corporation is located.

 

Currently, the number of country with which the tax treaty is concluded with Korea for imposing the Branch Tax is 10, and all other countries are regarded as not being applicable for the Branch Tax. 

 

4. Calculation of Branch Tax

(1) Calculation Structure of Branch Tax

(please refer the chart enclosed)

 

(2) Calculation of Taxable Income for Branch Tax

The amount of taxable income is the amount computed by subtracting corporate tax, pro rata local income tax and amount which is deemed to be reinvested in the business by the relevant domestic place of business (hereinafter referred to as ‘amount deemed reinvested') from the amount of income of the relevant domestic place of business for each business year.

The amount deemed to be reinvested means all of the amount falling under any of the following subparagraphs, and where the amount of capital funds as of the first day of the relevant business year is in excess of the amount of capital funds as of the last day of the relevant business year, the amount in excess (hereinafter referred to as "capital funds reduction amount") shall be added to the income amount for the relevant business year. In such cases, the sum amount shall not be in excess of the untaxed accumulated reserve income (limited to the case where such income is not a negative number) as of the last day of the immediately previous business year.

   The amount of capital funds as of the last day of the relevant business year in excess of the amount of capital funds as of the first day of the relevant business year (hereinafter referred to as the "capital funds increase amount")

   The amount calculated by removing negative sign from the untaxed accumulated reserve income (limited to the case where such income is a negative number): Provided, That such amount shall be limited to the amount calculated by subtracting the amount in Article 96 (2) 1, 2 and 4 of the Act and the capital funds increase amount from the income amounts of each business year of a domestic place of business.

Ÿ This regulation shall apply from the first report to be filed for the business year which includes the date, March 31, 2011.

 

※ Calculation Structure of Taxable Income for Branch Tax (in summary)

a: Opening Capital Funds < Closing Capital Funds ‘Amount Deemed Reinvested' subtracted 

(please refer the chart enclosed)

 

b: Opening Capital Funds > Closing Capital Funds ‘Capital Funds Reduction Amount' added

(please refer the chart enclosed)

 

   When a branch in Korea of foreign corporation is dissolved, the amount equivalent to capital as of the last day of the business year shall be deemed "zero", and the amount equivalent to profits will be deemed to be remitted in full on the last day of the fictitious business year, in calculating the income amount subject to taxation of the fictitious business year,


5. Tax Rate for Branch Tax

When tax rates are separately stipulated by the tax treaty concluded between Korea and the country of residence of the relevant foreign corporation, the treaty shall be complied with despite the Branch Tax rate is 20% as per the subparagraph 3 of Article 98 in Corporate Tax Act.


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Please refer the enclosed for more information.


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Selim Tax-Account Firm.

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