Corporate Tax 2019 Comparisons

Last Updated January 17, 2019

Contributed By Kim & Chang

Law and Practice


Kim & Chang has the largest tax practice of any law firm in South Korea, featuring over 100 attorneys and Certified Public Accountants, by far the largest transfer pricing and customs practice, and more than 50 former officers from the National Tax Service, Tax Tribunal, Tax and Customs Office of the Ministry of Strategy and Finance, and Korea Customs Service. As such, the firm is uniquely qualified to provide a full range of tax services, including tax planning, M&A, applications for tax exemptions, applications for tax rulings, transfer pricing studies, advance pricing agreements, advance customs valuation arrangements, tax health checks, tax audit defence, tax appeals/litigation, mutual agreement procedures and advice on all Korean tax issues affecting companies from incorporation to exit. Kim & Chang is well positioned to assist clients with the new base erosion and profit shifting-driven transfer pricing requirements and its tax practice includes four primary areas of focus: tax audits, tax appeals, transfer pricing and M&A/special projects.

The Korean Commercial Code (KCC) recognises the following five forms of legal entities:

  • Jusik Hoesa (joint stock company);
  • Yuhan Hoesa (limited company);
  • Yuhan Chegim Hoesa (limited liability company);
  • Hapmyung Hoesa (unlimited partnership company); and
  • Hapja Hoesa (limited partnership company).

The above entities have corporate forms, and therefore generally have separate legal status from their owners.  However, all members of the Hapmyung Hoesa have personal liability for the entity’s obligations, and at least one member of the Hapja Hoesa must have personal liability for the entity’s obligations. In addition, as corporate entities, all five of the above-listed entities are generally subject to entity-level taxation; however, the Hapmyung Hoesa and the Hapja Hoesa can elect to be treated as transparent for Korean tax purposes, and therefore become subject to the Korean partnership tax regime.

The Jusik Hoesa and the Yuhan Hoesa are the most commonly used corporate entities. While the Jusik Hoesa has historically been seen as more prestigious and has the ability to issue corporate bonds, it is subject to more corporate formalities, including the requirement for independent auditors and public disclosure of financial statements if a certain asset threshold is reached. The Yuhan Hoesa is subject to simpler rules, and therefore provides for easier management. The Yuhan Chegim Hoesa was introduced under the KCC in 2012, but to date has not been widely utilised by either domestic or foreign investors.

There are no inherently tax-transparent entities under Korean tax law. Rather, eligible entities can elect to be treated as tax-transparent under the Korean partnership taxation regime. As mentioned above, the Hapmyung Hoesa and the Hapja Hoesa, although treated as corporate entities for legal purposes, can elect to be treated as tax-transparent for Korean tax law purposes. 

In addition, certain johap (“joint businesses” formed and operated by contractual arrangement between the johap’s members) that are recognised under either the Korean Civil Code or the KCC, can also elect to be treated as transparent for Korean tax purposes. The johap is conceptually similar to a partnership with different levels of liability for its members under the different controlling statutes. The johap under the Korean Civil Code is similar to a general partnership, where all partners have unlimited liability. The Ikmyung Johap (anonymous or “silent” partnership) under the KCC has “silent” members who have limited liability but at least one (non-“silent”) member with unlimited liability. In 2012, the KCC provided for the Hapja Johap, which is most similar to a US limited partnership, with unlimited liability for at least one member but limited liability for all others. Unlike partnerships in other countries, however, the johap is not a separate legal entity that is distinct from its members, and therefore cannot enter into contracts in its own name.

Finally, special purpose vehicles (SPVs) that qualify under specific statutory regimes are also eligible to elect tax-transparent treatment for Korean tax purposes. For example, private equity and hedge funds often use SPVs that qualify as a Private Equity Fund under the Financial Investment Services and Capital Markets Act (FISCMA). A Private Equity Fund that qualifies under the FISCMA is generally treated as a “qualified fund” for Korean tax purposes, and thus is eligible to elect tax-transparent status.

These SPVs are generally formed under the relevant provisions of the KCC or Korean Civil Code, eg as a Yuhan Hoesa, but then acquire special status by meeting additional requirements under other statutory regimes, eg the FISCMA.

Under the Korean Corporate Tax Law (CTL), a corporation’s tax residency is based on either its place of incorporation or where the corporation has its main office or headquarters, or its place of effective management. Interpretational guidelines provided under the CTL set forth criteria that are similar to those issued by the OECD: the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of a corporation’s day-to-day business are made

Because the CTL requires that a person “be subject to (Korean) tax” to be treated as a Korean tax resident, entities that elect to be treated as tax-transparent would not qualify as a tax resident. Rather, with respect to tax-transparent entities, the tax residency of the members/partners of the entity would be determinative for Korean tax purposes.

The corporate income tax is calculated based on progressive rates, as set forth in the table below. It should be noted that in addition to the national corporate income tax, a local income tax that is generally 10% of the national tax rate is always applied to the tax base. 

Tax Base (KRW)

National Corporate Tax Rates

Local Income Tax Rates

Combined Tax Rates

Up to 200 million




>200 million to 20 billion




>20 billion to 300 billion




>300 billion




Income derived from businesses that are operated as sole proprietorships is subject to tax at the owner’s individual income tax rates. Like the corporate income tax structure, the individual income is also subject to both the national income tax and the local income tax.

Tax Base (KRW)

National Income Tax Rates

Local Income Tax Rates

Combined Income Tax Rates


Up to 12 million




>12 million up to 46 million




>46 million up to 88 million




>88 million up to 150 million




>150 million up to 300 million




>300 million up to 500 million




>500 million




The starting point for calculating a corporation’s tax base are the profit and loss accounts indicated in its income statement prepared under either the IFRS (required for listed companies as well as financial institutions, and discretionary for all other companies) or Korean GAAP. Tax adjustments are then made, as required by the CTL and the Special Tax Treatment Control Act (STTCA). The accounting and tax rules are generally similar, with some of the most common adjustments relating to depreciation or bad debt allowances, inventory allowances and the disallowance of entertainment expenses for tax purposes.

The Korean tax laws provide various tax incentives to encourage domestic companies to engage in research and development, technology development and job training. For example, investment tax credits are available for costs associated with the purchase of facilities and/or equipment used for qualifying R&D activities. In addition, tax credits are also available for current expenditures associated with such activities. The tax incentives are greater for companies that are considered small and medium-sized enterprises (SMEs).

Regarding patent-related incentives, the STTCA stipulates that income accruing from the transfer of a patent or technology meeting certain requirements that an SME obtained as a result of its own research and development, is entitled to a 50% tax reduction. This benefit is scheduled to expire at the end of 2018 but has historically always been extended.

In addition to the tax credits related to technology in general, additional tax incentives are available for qualifying Korean subsidiaries of foreign investors that engage in businesses related to “new growth driver industry technology”. These tax incentives, which are provided under the Foreign Investment Promotion Act and the STTCA, include corporate tax exemptions and reductions for a total of seven years, local tax (eg Acquisition Tax, Property Tax) reductions or exemptions, and/or exemptions to customs duties.

Korean subsidiaries of foreign multinationals that meet the requirements of the Foreign Investment Promotion Act and that engage in qualifying business/industry activities in designated Free Enterprise Zones, Free Investment Zones, Free Trade Zones, etc, may be eligible for tax exemptions, reductions in tax rates, etc, under the STTCA and the related regulations. In addition to the tax incentives, these qualifying companies may also receive cash grants and Industrial Site Support, eg rent abatements or subsidies, from local governments.

Value-added tax (VAT) is also exempt in the case of the supply of certain goods or services for purposes of promoting or supporting specific businesses or industries. For example, the supply of unprocessed foodstuffs such as agricultural products, supply of medical and health services, educational services, or financing and insurance services, etc, are exempt from VAT when additional requirements are met.

Generally, a company that incurs operating losses is permitted to carry forward the Net Operating Losses (NOLs) for up to ten years. However, losses generally cannot be carried back to offset income in prior years. Further, the NOL can offset only up to 60% of taxable income in the carry-over year. When the NOL cap was first introduced in 2016 the limit was 80% of taxable income, which was significantly reduced to 60% over the past two years.

SMEs, and companies that are under bankruptcy proceedings, are not subject to the 60% limitation, and therefore can fully offset the NOL carry-forward against taxable income. Furthermore, SMEs are permitted to carry back the NOL to the previous taxable year.

The CTL does not distinguish between capital gains/losses and ordinary business profits/losses of a corporation.  Accordingly, corporations are permitted to offset their capital gains against ordinary losses, or vice versa.

Companies can deduct interest expense subject to a few limitations. First, the thin capitalisation rules limit interest deductibility for domestic corporations whose debt-to-equity ratio exceeds 2:1 with respect to debt extended by a foreign controlling shareholder or by a third party based on a guarantee from a foreign controlling shareholder (6:1 in the case of financial institutions). In addition, there are other rules that limit interest deductibility based on the character of the underlying loans. For instance, interest on loans incurred to acquire or maintain non-business assets, including certain loans to related parties, is treated as non-deductible. The amount of non-deductible interest is based on an allocation formula; there is no tracing of the non-deductible interest to particular loans. 

In response to BEPS Action 4, a new limitation on interest deductibility was introduced in 2017 and will be enforced from 2019. Related party interest will be non-deductible to the extent in excess of the greater of (1) the amount of interest disallowed under the thin capitalisation rules and (2) net interest expense incurred with respect to related party loans that exceed 30% of taxable income plus interest, depreciation and amortisation.

Consolidation is permitted for 100% owned domestic companies that are either directly or indirectly owned by the same domestic parent. Technically, the election can be made only upon the approval of the commissioner of the relevant regional tax office. Once elected, consolidation is mandatory for all 100% owned subsidiaries within a chain of domestic ownership, and the election is irrevocable for five taxable years.

For companies, capital gains realised from the sale of capital assets are generally treated the same as ordinary business profits, and thus are subject to the graduated corporate income tax rates under the CTL. Capital gains realised from the sale of certain non-business-related real estate, however, are subject to an additional 10% tax on such gains.

The provision of goods or services is generally subject to a value-added tax (VAT) of 10%, and businesses are required to issue VAT invoices and file VAT returns within a strict timeframe. For businesses, the VAT is generally a pass-through tax, as they will receive an input VAT credit for VAT paid.

Transactions involving real estate, vehicles, mechanical equipment, golf memberships and other listed assets are subject to the Acquisition Tax at the tax rate of generally 4.6% (including surtax). A higher rate can apply if the acquisition takes place in the Seoul Metropolitan Area.

A purchaser that acquires more than 50% of an unlisted company’s shares is subject to the Deemed Acquisition Tax of 2.2% (including surtax) on the underlying assets of such company that would have been subject to the Acquisition Tax if acquired directly. In calculating whether the 50% ownership threshold is triggered, shares of the target company owned or acquired by related parties of the purchaser are also taken into account. 

Transfers of the shares of a company are subject to the Securities Transaction Tax of 0.3% of the transaction value for publicly traded shares and 0.5% of the transaction value (or fair market price, if higher) for unlisted shares.

Finally, the Registration and Licence Tax of 0.48% (including surtax) is imposed on the registered capital contributed to a corporation. The tax rate is tripled to 1.44% if the company is located within the Seoul Metropolitan Area.

Certain businesses related to the production or trading of luxury goods, alcohol or tobacco are subject to specific excise taxes. In addition, property taxes, at both the national and local levels, could add to the tax burden.

Although family-owned restaurants or convenience stores operating in non-corporate form comprise the majority of closely-held businesses in absolute numerical terms, most businesses operate in the corporate form.

Although corporate tax rates are generally lower than individual income tax rates, the double taxation of dividends may discourage individual professionals from operating in corporate form.

Nonetheless, most small business entities can retain earnings at the entity level without being subject to additional taxes. Certain large companies, on the other hand, are subject to additional tax on accumulated earnings.

There are no special rules relating to the taxation of accumulated earnings of closely-held corporations. However, there is a temporary provision, which will sunset at the end of 2017, that imposes a tax of 10% on the accumulated earnings of corporations with net assets of KRW50 billion or more. This temporary measure was intended to increase household income and stimulate domestic consumption by encouraging large companies to use their earnings to make new investments, increase payroll and/or distribute dividends.

Following the expiration of the temporary provision in the CTL, as explained above, a replacement measure, which focuses more on encouraging investment and collaborative cooperation, was introduced in amendments to the STTCA and implemented from 2018. The new measure increased the tax on the excess accumulated earnings to 20% and excluded dividend distributions from qualifying expenditures. This amendment is also a temporary measure, scheduled to expire at the end of 2020.

Dividends paid to individual shareholders are generally subject to a withholding tax of 15.4% (including local tax).  However, if the shareholder’s total financial income, including interest and dividends, exceeds KRW20 million per annum, the excess is subject to progressive individual income tax rates under the Personal Income Tax Law (PITL).  Dividend income subject to progressive rates is subject to a “gross-up” of the underlying corporate tax, but the resulting combined corporate and individual income tax rate for the dividends could be greater than the top individual tax rate because only a partial gross-up is applied, and the corresponding tax credit is limited to 11% of the dividend income.     

An individual shareholder who realises capital gains from the sale of shares in an unlisted SME is generally subject to a 10% capital gains tax rate (20%-25% for shareholders with a substantial ownership interest). Individual shareholders who derive capital gains from the sale of shares in unlisted companies that are not SMEs will generally be subject to a 20% capital gains tax rate (or 30% for large shareholders).

Gains realised by an individual from the sale or other disposition of shares in a listed company are generally not subject to taxation. However, a “majority shareholder” who holds 1% or more of the listed shares, or who owns shares (as of April 1, 2018) with a value in excess of KRW1.5 billion, is subject to capital gains tax (KRW1 billion from April 1, 2020, and KRW0.3 billion from April 1, 2021). The applicable tax rates are the same as above.

Gains realised by an individual from the sale of shares in an unlisted, real estate-rich company are subject to the progressive individual income tax rates under the PITL.

There is no notable difference in the taxation of dividends derived from listed or unlisted companies. Gains derived from the sale of listed shares are not subject to tax when sold through the securities market by a minority shareholder, whereas capital gains are otherwise subject to rates between 10% and 20%, depending on whether the seller is an SME or not and whether the sale is made over-the-counter. The sale of shares by a majority shareholder either through the securities market or over-the-counter is subject to a 30% capital gains tax rate.

Korean source interest, dividends and royalties that are not attributable to a permanent establishment in Korea are generally subject to a withholding tax of 22% (including local tax) at time of payment to the foreign person. The statutory rate of withholding may be reduced or eliminated under an applicable tax treaty.

Korea has an extensive network of tax treaties that confer beneficial treatment to qualified residents. The treaties differ in the benefits provided but foreign investors have primarily used the Netherlands, Belgium and Ireland to invest in shares of Korean companies. Historically, Malaysia had also been a favoured jurisdiction through which to hold Korean shares but recently Malta has been more favoured. Ireland has been, and continues to be, the jurisdiction of choice to make loans into Korea.

The National Tax Service (NTS) often challenges claims to treaty benefits by treaty country entities owned by non-treaty-country residents. The NTS applies the substance-over-form principle or the general anti-avoidance rule to argue that the treaty claimants are not the beneficial owners of the relevant income, and therefore, the treaty provisions do not apply.

The major transfer pricing issues faced by foreign investors operating through a Korean company include challenges to the arm’s length nature of (i) the interest paid on related party loans, (ii) royalties paid on licensing arrangements with related parties, and (iii) service fees paid with respect to intercompany management services or sales services.

The NTS challenges the use of related-party risk distribution arrangements, often by questioning whether the distributor indeed has limited risk.

The Korean transfer pricing rules generally follow the OECD Transfer Pricing Guidelines.

When transfer pricing claims are settled through domestic appeal procedures, the NTS’s claim may be upheld or dismissed in its entirety, in which case the taxpayer will either submit to the transfer pricing suggested by the NTS or keep applying its existing transfer pricing. If, however, a domestic tribunal or court decides that the transfer pricing needs to be re-examined, adjustments may be made to the original transfer pricing.

Domestic law states that the Mutual Agreement Procedure (MAP) may be commenced when (i) it is necessary to consult with the other State on the application and interpretation of the tax treaty, (ii) tax has been or is likely to be assessed by the tax authority of the other State, not in compliance with the provisions of the tax treaty, or (iii) a tax adjustment is required under the tax treaty. As such, MAP is only commenced when DTC exists between two countries. In practice, the MAP procedures tend to take a considerably long time, in some cases five to eight years.

Korean branches of foreign corporations are generally subject to the same tax provisions as Korean subsidiaries; they are subject to the same progressive rates of tax on their income. There are some differences, however. Dividends paid by a domestic subsidiary to a foreign parent are subject to withholding tax, whereas earnings distributed by a local branch to its overseas head office would be subject to a branch profits tax only if such tax were permitted under a relevant tax treaty. In addition, a Korean subsidiary is subject to the Liquidation Tax upon its liquidation, under which gains on assets are triggered and subject to tax. It should be noted, however, that although a branch is not subject to the Liquidation Tax upon its closure, any built-in gains would be subject to tax upon disposition of the subject assets.

Finally, whereas a Korean subsidiary could be eligible for tax incentives under the Foreign Investment Promotion Act and the STTCA, a Korean branch of a foreign company could not qualify for such benefits.

Capital gains realised from the sale of shares in a domestic company by foreign shareholders are generally subject to tax in Korea. The tax is the lesser of 11% of the transaction value or 22% of the net gain, which is generally collected through withholding tax by the purchaser.

Some of Korea’s tax treaties provide a capital gain exemption. 

In addition, under domestic law, an investor, including a foreign investor, could be exempt from capital gains taxation on the sale of shares of publicly traded companies if the shareholder did not own 25% or more of the total outstanding shares of the company at any time during the year in which the sale took place and the preceding five years.

Currently, Korea does not have an indirect capital gains tax. Accordingly, a foreign investor would not be subject to Korean tax on gains generated from the sale of the shares of a non-Korean holding company that owns, directly or indirectly, the shares of a Korean subsidiary. However, a challenge may be possible based on the substance-over-form principle, especially when the foreign company is a paper company holding only shares in the Korean company.

As mentioned above, Korea does not currently tax gains from the indirect transfers of Korean companies, and therefore the change of control of a non-Korean holding company would generally not trigger Korean capital gains taxation.

Korea adheres to the arm’s length principle and the OECD Transfer Pricing Guidelines. Accordingly, there are no special formulas used to calculate the income of foreign-owned Korean companies selling goods or providing services, and the books and records of the company will generally form the basis for the income calculation. In extraordinary circumstances where the Korean company has no books and records, formula-based taxation may be permitted.

The deductibility of management service fees is a common issue that often arises in audits. In theory, management fees are deductible if the Korean company can satisfy the following requirements:

  • Executing in advance a service contract setting forth the type of services to be provided and the terms and conditions of such services;
  • Demonstrating that it benefited from the services provided, either through a reduction of costs or additional profit;
  • Documenting that the services were in fact provided; and
  • Demonstrating that the management service fees satisfy the arm’s length standard.

As mentioned previously, loans from foreign controlling shareholders to Korean subsidiaries are subject to the thin capitalisation rules, under which a domestic company that has a debt-to-equity ratio of greater than 2:1 could be denied a deduction for the interest related to excess debt from the foreign controlling shareholder. In addition, all loans from foreign affiliates are subject to the arm’s length principle. Finally, a Korean company that extends a loan to a related party, domestic or foreign, will be disallowed a deduction for its interest expense, if any, that is allocable to the related party loan.

As also mentioned above, a new provision on interest deductibility introduced in 2017 would limit the deductibility of interest paid to foreign affiliates to the greater of (i) 30% of EBITDA or (2) the interest disallowed under the thin capitalisation rules.

Korean companies are taxed on their worldwide income, and therefore are subject to Korean tax on foreign source income. However, foreign taxes paid with respect to such foreign source income can be credited, subject to a per country limit, or taken as a deductible expense in calculating taxable income. Excess foreign tax credits subject to the per country limitation can be carried forward for five years.

Dividends received from foreign subsidiaries are subject to corporate income tax in Korea. However, a foreign tax credit is available for any direct taxes, ie withholding tax, paid with respect to the dividend by the Korean shareholder. In addition, an indirect tax credit is available for corporate income tax paid in the foreign country by the foreign subsidiary. The indirect foreign tax credit is available only for first tier subsidiaries in which the Korean parent held/holds 25% or more of the shares for at least six months before the dividend is distributed.

Intangibles developed by Korean companies may be used by or transferred to foreign affiliates as long as arm’s length consideration is given for such use or transfer. The proceeds received by the Korean company from the intangibles transaction will be subject to corporate income tax under the CTL as business profits.

Korea has a controlled foreign corporation (CFC) regime under which a Korean shareholder that holds 10% or more of a foreign subsidiary’s total issued shares could be currently subject to tax on its allocable portion of the foreign subsidiary’s undistributed income, which would be treated as a deemed dividend. The CFC regime will apply if the following requirements are met:

  • The foreign subsidiary is a related party to the Korean shareholder, as defined in the International Tax Coordination Law; and 
  • The foreign subsidiary is located in a jurisdiction in which its income is subject to an effective tax rate of 15% or less.

Certain exceptions apply to current taxation, however, for companies with retained earnings of less than a certain amount, holding companies or companies that are engaged in an active trade or business in the local jurisdiction.

The CFC rules do not apply to the earnings of the foreign branch of a Korean company. Rather, the branch’s items of income and expense would be directly included in calculating the current taxable income of the Korean company.

There are no rules relating to substance that apply specifically and solely to foreign affiliates of Korean companies.  Rather, Korean tax law generally applies the substance-over-form principle to both domestic and foreign corporations.  This principle is often used by the NTS to disallow treaty benefits to the immediate recipient of Korean source income, which is disregarded because of a lack of substance, and the Korean source income attributed directly to the parent of the foreign affiliate.

Capital gains arising from the sale of shares of a foreign subsidiary are taxed as ordinary income to the Korean shareholder. Foreign taxes paid by the Korean shareholder on such gain may be creditable in Korea, subject to the per country limitation. Alternatively, the foreign taxes may be taken as a deduction in calculating the Korean shareholder’s taxable income.

The substance-over-form rules are at the heart of Korea’s anti-avoidance rules. The substance-over-form principle is often used by the Korean tax authorities to recast or recharacterise a transaction, both in the domestic and in cross-border contexts.

In the international arena, the substance-over-form principle has been used to challenge the ability of a foreign recipient to obtain treaty benefits with respect to Korean source income, under the argument that the recipient was not the beneficial owner of the income. In addition, the substance-over-form principle has been applied to recast multi-step transactions or roundabout dealings as direct, straightforward transactions in accordance with the economic reality.

The NTS conducts two types of audits: the periodic audit and the non-periodic audit. Periodic audits are routinely occurring audits, which, because of a general five-year statute of limitations, are conducted every four to five years. These audits are initiated after the taxpayer is given a ten-calendar-day notice of the upcoming audit. The audits are conducted by either the relevant regional tax office or the district tax office, depending on the size and complexity of the taxpayer. Most audits are scheduled, at least initially, for approximately six to eight weeks, and much of the audited is conducted on the taxpayer’s premises, ie “field audit”. Depending on the complexity, the audits can be shortened, or sometimes extended.

Non-periodic audits can occur at any time and are usually triggered by suspicion of tax evasion or other wrongdoing. The non-periodic audits can, and often do, take place without any prior notice. Because of the suspicion of wrongdoing, non-periodic audits are generally conducted by the regional tax offices, which are larger and more specialised than the district tax offices.

At the conclusion of the audit, a pre-assessment notice is provided to the taxpayer, which sets forth the preliminary findings/assessment. The taxpayer is given 30 calendar days to request a Review of Adequacy of Tax Imposition (RATI) before a final tax assessment notice is issued, after which the taxpayer has up to 30 calendar days to pay the assessment. Although it is technically possible to appeal without first paying the assessed taxes, taxpayers generally pay the taxes prior to filing an appeal to avoid substantial interest penalties and possible attachment of its assets. In the case of an appeal through MAP, the taxpayer can request a suspension of the tax payment by providing adequate collateral. However, the taxpayer would be liable for interest penalties on any underpaid taxes when MAP is concluded.

The Korean government has been steadily implementing the 15 BEPS actions through amending related domestic tax laws and tax treaties since the 2015 Final Report was issued. As of 2018, Korea has completed implementing most of the actions in the action plan, including the four minimum standards (countering harmful tax practices, countering tax treaty abuse, transfer pricing documentation and country-by-country (CbC) reporting, and ensuring timely, effective and efficient resolution of MAP). 

For instance, with regard to BEPS Action 1 (Addressing the Tax Challenges of the Digital Economy), in 2015 Korea introduced a new provision in the Value-added Tax Law (VATL) that imposes VAT on foreign entrepreneurs providing electronic services through foreign app markets. In 2016, the ITCL was amended to increase the transparency of multinationals engaged in international transactions, as a result of which certain multinationals are required to submit CbC reports as well as documents related to transfer pricing, such as a master file or local file.

In 2017, new limitations on (i) deductibility of interest paid to related parties, and (ii) deductibility of interest related to Hybrid Financial Instrument transactions that are doubly tax exempt, were introduced in response to BEPS Action 4. Further, MAP procedures were improved for more effective dispute resolution. Korea also participated in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI) .

One of the suggestions in the 2018 Ministry of Strategy and Finance (MOSF) Proposed Tax Amendments involves the further expansion of the definition of Permanent Establishment in order to counter tax treaty abuse.

The Korean government has been actively participating in the BEPS project from the beginning of 2013. Korea seems to be of the opinion that the re-establishment of international tax-related standards should be based on international consensus; therefore consensual standards are readily implemented, whereas unilateral measures are more cautiously reviewed.

The Korean government believes that implementing the BEPS recommendations will help counter tax abuse by multinationals and strengthen source country taxation rights.

There has been a growing interest in international tax issues since the launch of the BEPS project. As senior government officials responsible for policy-making exhibit a continued interest in international tax issues, the National Assembly has also taken an interest in these issues. Many non-governmental organisations are raising concerns about tax planning by multinationals, as a result of which international tax issues are also frequently reported in the media.

The MOSF-proposed tax amendments implementing the BEPS actions are willingly supported by the public, the media and non-governmental organisations, and therefore generally pass without much opposition from the National Assembly. A few media or non-governmental organisations even insist on legislating laws that go further than the BEPS recommendations.

Thus far, Korea’s tax policy has focused on creating a business-friendly environment and an internationally competitive tax system; however, more recently there has been a growing trend towards pursuing equity and securing funding for social welfare. As a result, the competitive tax policy objective is becoming relatively less important. Korea recently increased corporate income tax rates and abolished long-standing tax benefits for foreign direct investment. Korea still retains some preferential measures towards inbound investment, whereas Korea is stricter in terms of outbound investments, with strong CFC rules in place.

Korea is not so often used for tax planning for reasons including the following: (i) Korea’s tax rates, which in general are not lower than other countries, (ii) Korea has a relatively transparent tax system, (iii) the substance-over-form principle is quite aggressively applied by the NTS, (iv) CFC rules are stricter than the BEPS standard, and (v) as mentioned above, recently benefits towards foreign direct investments have decreased considerably.

Korea has already legislatively dealt with hybrid financial instruments by stipulating limitations to the deductibility of interest coming from hybrid financial instruments. Further changes may come in the future, as Korea takes further measures to continually implement the BEPS action items.

Korea has a worldwide tax regime, not a territorial tax regime. Tax paid abroad on foreign source income is credited subject to a per country limit. The tax laws governing the limitation on interest deductibility were amended in 2017 to disallow a deduction on related-party interest exceeding 30% of EBITDA, starting from 2019.

This limitation is expected to be applied relatively strictly on inbound investments, which may negatively affect fund-raising and investment. On the other hand, considering the fact that the thin capitalisation rule was already in place before the amendment, and the new limitation on interest deductibility only applies to loans from related parties, the effect may not be dramatic.

Korea has adopted a worldwide tax regime and has had CFC rules in place since 1996. The Korean CFC rules only apply to CFCs established in low-tax jurisdictions and exclude CFCs that engage in substantial activities. For certain industries, including wholesale distribution, the rules are applied to the CFC regardless of actual substance, unless certain exemption conditions are met.

A sweeper CFC rule that taxes all retained earnings of CFCs as deemed dividends regardless of the activities actually conducted abroad could negatively affect outbound investment and competitiveness. No plan is currently in place to implement such a policy.

The NTS has already been countering treaty abuse using domestic anti-avoidance rules, such as the substance-over-form rules and scrutiny of beneficial ownership. The BEPS recommendations, such as LOB (Limitation of Benefit) or PPT (Principal Purpose Test), will likely lead to more aggressive scrutiny of cross-border tax planning and treaty shopping.

Because the suggested changes in the BEPS initiatives have not yet led to the immediate amendment of the relevant Korean tax laws, the proposed transfer pricing scheme has not brought about radical changes. However, they are expected to be steadily implemented based on the revised OECD Transfer Pricing Guidelines.

Considering the BEPS Guidance on transfer pricing that focuses on taxing the intragroup transfer of intangible assets, more intense transfer pricing taxation on intangible assets is expected. Assuming circumstances where comparable transactions seldom exist, transfer pricing methods that involve subjective elements, such as the profit split method, valuation method or ex-post outcome method, will be more widely applied by the tax authorities, which is expected to lead to disputes between the tax authorities and taxpayers.

Although the proposals for transparency seem to be effective to prevent tax evasion, such measures also create a substantial compliance burden for businesses. Country-by-country reports, in particular, may be problematic, as tax authorities may commence transfer pricing audits when they see lower profit margins at entities located in their jurisdiction. As such, the OECD should warn countries of the possibility of such abuse of information exchanges by the tax authorities and encourage tax administrations to base transfer pricing audits on global standards.

As mentioned above, Korea has already implemented the BEPS recommendations suggested in Action 1 by amending the VATL, whereas the recommendations related to goods exempt from customs duties has yet to be implemented, as this is connected to Korea’s free trade agreements.

The Korean government is still awaiting further international consensus on the direct tax front. A few progressive members of the National Assembly are pressing for measures to tax digital transactions.

Although the BEPS project was first initiated to eliminate the various loopholes in regulations that allowed tax evasion by multinationals, it has also helped establish clearer standards regarding core international tax issues, including transfer pricing and permanent establishments. The implementation of peer reviews in connection with the MAP process is expected to encourage the tax authorities in countries worldwide to more effectively relieve double taxation. 

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Kim & Chang has the largest tax practice of any law firm in South Korea, featuring over 100 attorneys and Certified Public Accountants, by far the largest transfer pricing and customs practice, and more than 50 former officers from the National Tax Service, Tax Tribunal, Tax and Customs Office of the Ministry of Strategy and Finance, and Korea Customs Service. As such, the firm is uniquely qualified to provide a full range of tax services, including tax planning, M&A, applications for tax exemptions, applications for tax rulings, transfer pricing studies, advance pricing agreements, advance customs valuation arrangements, tax health checks, tax audit defence, tax appeals/litigation, mutual agreement procedures and advice on all Korean tax issues affecting companies from incorporation to exit. Kim & Chang is well positioned to assist clients with the new base erosion and profit shifting-driven transfer pricing requirements and its tax practice includes four primary areas of focus: tax audits, tax appeals, transfer pricing and M&A/special projects.


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