Under the Korean Commercial Code (KCC), the following types of legal entities are recognised in Korea.

• Jusik Hoesa – a corporation incorporated by one or more promoters, with each shareholder’s liability limited to the amount of contributed capital. This is the type of entity most commonly used in Korea.
• Yuhan Hoesa – a corporation incorporated by one or more members, with each member’s liability limited to the amount of contributed capital.
• Yuhan Chegim Hoesa – a corporation incorporated by one or more members, with each member’s liability limited to the amount of contributed capital. A Yuhan Chegim Hoesa provides more flexibility and self-control than a Yuhan Hoesa.
• Hapmyong Hoesa – a corporation incorporated jointly by more than two members who are responsible for corporate obligations if the assets of the corporation are not sufficient to fully satisfy such obligations.
• Hapja Hoesa – a corporation composed of one or more partners with unlimited liability and one or more partners with limited liability.

All of the above entities are generally taxed as separate legal entities. However, Hapmyong Hoesa and Hapja Hoesa can elect to be treated as transparent for Korean tax purposes, thereby becoming subject to the Korean partnership tax regime.

In Korea, entities that are not a corporation and have an agreed method of distributing profits between members (ie, association, foundation, Johap under the Korean Civil Code, and Hapja Johap or Ikmyong Johap under the KCC) are tax-transparent entities. A Johap is similar to a partnership in concept. Trusts formed by a contractual arrangement are generally treated as tax-transparent entities.

In addition, Hapmyong Hoesa and Hapja Hoesa – which are incorporated entities – may choose to be treated as partnerships that are transparent for tax purposes. Under Korean tax law, partnerships are exempt from tax at the partnership level, but each partner is subject to tax on earned income distributed from the partnership.

According to the Korean Corporate Income Tax Law, a corporation that has its head office or principal office in Korea is a resident corporation. A corporation with a place of effective management in Korea is also treated as a resident corporation.

The place of effective management refers to the place where the key management and commercial decisions that are necessary for the conduct of the entity’s business are made in substance. The determination of the place of effective management is based on all relevant facts and circumstances.

The applicable corporate income tax (CIT) rates are as follows:

• taxable income under KRW200 million – 9% (rate including local income tax: 9.9%);
• taxable income of KRW200 million to KRW20 billion – 19% (20.9%);
• taxable income of KRW20 billion to KRW300 billion – 21% (23.1%); and
• taxable income over KRW300 billion – 24% (26.4%).

In addition, the income of businesses owned by individuals directly (sole proprietorships) is taxed at the owner’s personal income tax (PIT) rates, as follows:

• taxable income under KRW14 million: 6% (rate including local income tax: 6.6%);
• taxable income of KRW14 million to KRW50 million – 15% (16.5%);
• taxable income of KRW50 million to KRW88 million – 24% (26.4%);
• taxable income of KRW88 million to KRW150 million – 35% (38.5%);
• taxable income of KRW150 million to KRW300 million – 38% (41.8%);
• taxable income of KRW300 million to KRW500 million – 40% (44%);
• taxable income of KRW500 million to KRW1 billion – 42% (46.2%); and
• taxable income over KRW1 billion – 45% (49.5%).

In determining taxable income for CIT purposes, expenses (including interest expenses, depreciation and general administrative expenses, such as rental expenses) that are reasonably connected with a company’s business can be deducted from the company’s taxable revenue.

Taxable income is based on the accounting profits, and adjustments are made for tax purposes, as required by the Korean Corporate Income Tax Law.

The Special Tax Treatment Control Law provides various tax incentives to stimulate R&D activities. Tax credits are available for qualifying R&D expenditures used in the development of research and manpower. In addition, until the end of 2026, a 50% CIT credit is provided for income resulting from the transfer of patents and eligible technology by SMEs. A 10% tax credit (up to the value of acquired technology) is also provided to qualifying domestic companies merging or acquiring technology-innovative SMEs.

In accordance with the BEPS initiatives, most of the direct tax incentives and benefits previously available for foreign direct investment were abolished by the Korean government under the 2019 tax reform. However, the existing local tax and indirect tax incentives are maintained for qualifying foreign investors. Foreign investors are entitled to an exemption from acquisition tax and property tax on property acquired and owned for up to 15 years, and to an exemption from customs duties, VAT and individual consumption tax on imported capital goods.

Under Korean tax law, tax losses can be carried forward for 15 years, although annual utilisation is capped at 80% of annual taxable income (with an exception granted for SMEs and distressed companies).

Interest expense deductions are subject to the following limitations:

• the thin capitalisation rule – interest exceeding the 2:1 (debt to equity) threshold will not be deductible and will be treated as a dividend; and
• the 30% interest limitation rule – if the ratio of net interest paid to a foreign related party by a Korean company to adjusted net income (ie, earnings before interest, taxes, depreciation and amortisation) exceeds 30%, the excess interest will not be deductible.

Consolidation is available for a domestic parent company and its directly or indirectly wholly owned domestic subsidiaries. For fiscal years commencing on or after 1 January 2024, the shareholding requirement is eased to 90%. A taxpayer may elect the consolidated tax filing regime upon approval from the tax authority, but such election cannot be revoked for five years.

Capital gains are generally taxed at the same CIT rate as ordinary taxable income. However, capital gains from the sale of non-business purpose real estate are subject to additional capital gains tax, at the rate of 10%.

Value-added tax (VAT) is imposed on the supply of goods and services. The applicable VAT rate is generally 10%, but zero-rated VAT is available for exported goods and services rendered outside Korea and for certain services provided to a non-resident in a foreign currency. If a company carries on a VAT-able business in Korea, it must register its business under the VAT Act, file a quarterly VAT return and pay all VAT collected from its customers during the relevant quarter, minus any VAT credit to which it is entitled (input VAT).

Customs duties are generally imposed on imported goods. Importation means the delivery of goods into Korea to be consumed or used in Korea.

Acquisition tax is imposed on the purchase price of real estate, motor vehicles, construction equipment, golf memberships, etc. The acquisition tax rate varies depending on the type of assets, ranging from 0.96% to 4.6%.

Where an investor acquires shares in a company and becomes a controlling shareholder of such company (ie, the investor and its related parties collectively own, in the aggregate, more than 50% of the shares of the company) as a result of the share acquisition, such investor is deemed to have acquired the real estate, etc, held by the company and is generally subject to deemed acquisition tax of 2.2% (including surtax).

Securities transaction tax is imposed on the transfer of shares. The securities transaction tax rate for publicly traded shares is 0.18% (the tax rate will be reduced to 0.15% from 2025 onwards), and the tax rate for unlisted shares is 0.35%.

A special excise tax is levied on the production or trading of certain luxury items, alcohol and tobacco. In addition, property tax (a local tax) is charged on the statutory value of land, buildings, houses, vessels and aircraft, while comprehensive real estate holding tax (a national tax) is charged on the aggregate published value of land, buildings and houses exceeding a certain threshold.

Accumulated earnings tax (AET) is applicable to Korean corporations that are designated as large conglomerates under the Monopoly Regulation and Fair Trade Act. The AET imposes additional income tax at the rate of 22% (inclusive of local income tax) on corporate earnings that are not utilised for prescribed purposes (eg, designated investments, employee salaries, employee welfare funds). The AET regime is effective for fiscal years including 31 December 2025.

The majority of closely held businesses, such as convenience stores and hair salons, operate in non-corporate form, but most businesses operate in corporate form.

In general, CIT rates are lower than individual income tax rates. However, many individual professionals and businesses choose not to incorporate, so as to avoid subjecting earnings already taxed at the corporate level to double taxation when dividends are paid.

See 2.9 Incorporate Businesses and Notable Taxes.

Dividends paid to an individual shareholder are subject to a withholding tax of 15.4% (inclusive of local income tax). However, if an individual shareholder’s total financial income (interest income + dividends) exceeds KRW20 million per year, the excess is taxed at regular PIT rates.

Capital gains arising from the sale of shares in an unlisted SME are subject to 11% capital gains tax (22% for unlisted non-SME shares), inclusive of local income tax. Individual shareholders who have a substantial ownership interest and realise capital gains from the sale of shares in an unlisted company are subject to 22% capital gains tax for taxable income up to KRW300 million and 27.5% for taxable income over KRW300 million (a 33% flat rate applies to unlisted non-SME shares held by major shareholders for less than one year before their sale).

Dividends paid from a publicly traded corporation to an individual shareholder are taxed in the same manner as those paid from an unlisted company to an individual shareholder.

Capital gains arising from the sale of listed shares are not subject to tax when sold by a minority shareholder through the securities market. However, when the sale takes place over the counter, the capital gains are subject to a 22% tax (11% in the case of listed shares in an SME), inclusive of local income tax. When the total stake of a shareholder in a listed company, together with any related parties (majority shareholder), exceeds 1% of the total shares, or if the total market value of the stock held by the shareholder is KRW1 billion or more, such shareholder will be taxed on the capital gain at 22% for taxable income up to KRW300 million and at 27.5% for taxable income over KRW300 million, regardless of whether the shares were sold through the securities market or over the counter (a 33% flat rate applies to non-SME shares held for less than one year before their sale).

In general, interest, dividends and royalties paid to a non-resident company or individual are subject to 22% withholding tax (inclusive of local tax). The rate may be reduced under applicable tax treaties.

The Korean tax authority takes a conservative position in relation to the application of reduced treaty rates, which can differ depending on the beneficial owner of the Korean source income.

In addition, it is worth noting that the Korean tax authority is determined to collect withholding tax on royalties paid to US companies. In respect of royalty withholding tax for US companies, the Korean Supreme Court has held in various cases that royalties received by a US resident for the use of a patent that is not registered in Korea is not Korean source income under the Korea-US Tax Treaty, and therefore should not be subject to income tax in Korea. Even though the Korea-US Tax Treaty generally overrides the domestic tax laws, the Korean tax authority has made considerable efforts to impose withholding tax on such royalties through tax law amendment. After the most recent tax law amendment relating to royalties, it needs to be closely monitored whether the Korean courts will continue to hold that royalties received by a US company for the use of a patent that is not registered in Korea should not be taxed in Korea, or if they will change their position.

As of January 2024, Korea has concluded double tax agreements with 94 countries. Foreign investors have primarily used the Netherlands, Belgium and Ireland to make investments into Korea through intermediate holding companies.

The Korean tax authority tends to challenge the use of treaty countries by non-treaty country residents by aggressively applying the substance-over-form principle to argue that entities established in favourable treaty countries are not the beneficial owners of the relevant Korean source income. A “beneficial owner” is a person who bears legal or economic risk related to Korean source income and who, in substance, holds ownership rights over such income, including disposal rights.

The Korean tax authority closely monitors companies whose profitability suddenly drops or whose profits fluctuate over a number of years. The Korean tax authority is likely to scrutinise companies that have had significant business restructuring, as well as those paying substantial royalties or management service fees to foreign companies and companies with financial transactions with overseas related parties.

The Korean tax authority challenges the use of limited risk distribution arrangements from a transfer pricing (TP) perspective.

Korea is a member of the OECD and generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines). However, the OECD Guidelines do not have the force of law, while the Law for the Co-ordination of International Tax Affairs (which governs TP) does. Accordingly, the Korean tax authority might not accept a taxpayer’s arguments if they are based solely on the OECD Guidelines.

The Korean tax authority actively challenges taxpayers’ TP policy. If the tax authority obtains new TP information for a particular year, and that information affects not only the TP issues for that particular year but also those for previous years, it is common for the tax authority to expand the scope of its TP review to fiscal years for which the statute of limitations has not yet expired.

Mutual agreement procedures (MAPs) can resolve international transfer pricing disputes between Korea and countries that have concluded a tax treaty with Korea. The National Tax Service (NTS), which is in charge of the Korean MAP process, negotiates MAP cases with the other competent authorities. According to MAP statistics released by the OECD, as of 1 January 2022 there were 133 open MAP cases relating to Korean transfer pricing, and 47 cases that closed during 2022. 34 new MAP cases commenced during 2022, and 120 open MAP cases remained as of 31 December 2022. As shown by the increasing number of MAP cases, there has been a gradual increase in the number of taxpayers resolving their TP issues through MAP. It typically takes two to three years from the date the initial application is accepted to complete the MAP process.

The Korean government acknowledges that MAP is an effective dispute resolution process for double taxation issues, and is generally open to the use of the MAP process.

Taxpayers can resort to a MAP under the relevant tax treaty in order to resolve double taxation arising from a TP adjustment. A MAP can generally be requested within three years of the date when the taxpayer becomes aware of the adjustment.

A MAP is often initiated in the jurisdiction that is expected to claim a tax refund. Competent authority (CA) negotiations will commence on the date the relevant CA sends a letter to the other CA accepting the request for a MAP. The CAs will then discuss issues through the exchange of position papers and via CA meetings throughout the year.

If the MAP is concluded, the initial TP adjustment should be reduced or cancelled based on the MAP agreement. Compensating adjustments are allowed.

In general, Korean branches of foreign corporations are taxed in the same manner as Korean subsidiaries of foreign corporations, with a few notable differences. While dividends paid by a Korean subsidiary to a foreign parent are subject to withholding tax, earnings remitted by a Korean branch to its overseas head office are subject to branch profits tax only when the Korean branch is required to pay branch profits tax under the relevant tax treaty. A Korean branch is allowed to deduct head office expenses allocated to it, whereas a management service agreement would be required to charge similar costs to a subsidiary. In addition, while a Korean subsidiary could qualify for tax benefits under the Foreign Investment Promotion Act and the Special Tax Treatment Control Law, a Korean branch is not eligible for such benefits.

Capital gains derived by non-residents on the sale of shares in Korean corporations are either exempt from Korean tax under an applicable tax treaty or subject to withholding tax at 11% (including local income tax) of the sale proceeds or 22% (including local income tax) of the capital gains, whichever is lower. The purchaser is obliged to collect and pay the tax.

Capital gains arising from the sale of listed shares are not subject to capital gains tax to the extent the non-resident shareholder did not hold 25% or more of the total outstanding shares at any time during the year when the sale took place or in the preceding five years.

Since Korea does not have an indirect capital gains tax, gains arising from the sale of shares of a foreign company that directly or indirectly owns shares of a Korean company are not subject to tax (indirect share transfer). However, the Korean tax authority may attempt to impose tax on gains arising from an indirect share transfer by applying the substance-over-form principle.

No special formulas are used to determine the income of foreign-owned local affiliates selling goods or providing services; the OECD Guidelines would apply.

The Korean tax authority often challenges the deductibility of management service fees. In order to deduct the fees, the following conditions must be satisfied (under the Law for the Co-ordination of International Tax Affairs):

• an agreement should be entered into by the service provider prior to the provision of the service;
• the domestic company should benefit from the service provided by its foreign related party through additional profit or reduced expenses;
• the provision of the service should be verified through supporting documentation; and
• no related party should be performing the same type of service as the one received by the domestic company, and no third party should be providing the same type of service as the one received by the domestic company to a related party of the domestic company; however, an exception applies to cases where the same type of service is temporarily received due to a reasonable cause, such as business restructuring or streamlining management decision processes.

Where a Korean company borrows from its foreign controlling shareholder and the debt-to-equity ratio exceeds 2:1, interest exceeding such threshold will not be deductible and will be treated as a dividend (thin capitalisation rule).

Also, in line with the OECD’s recommendation on the limitation of interest expense deductions, Korea introduced a new rule that treats interest deductions as non-deductible to the extent net interest paid to foreign related parties exceeds 30% of adjusted net income (for this purpose, adjusted net income equals earnings before interest, taxes, depreciation and amortisation). Net interest expense refers to the total amount of interest paid on funds borrowed by a Korean company from all foreign related parties minus the total amount of interest income received by the Korean company from foreign related parties. If the resulting value is negative, the net interest expense will be deemed to be zero.

In addition, loans from foreign affiliates should be at arm’s length. Currently, the default interest rate (deemed arm’s length interest rate) for loans from a foreign affiliate to a Korean company is the market interest rate for the relevant currency (such as the Secured Overnight Financing Rate for US dollars and the Euro Short-Term Rate for euros) plus a 1.5% spread, and the default interest rate for loans from a Korean company to its foreign affiliate is 4.6%. If a separate TP analysis is conducted, the arm’s length rate can be determined based on such analysis.

As Korean companies are taxed on their worldwide income, their foreign source income is also subject to tax in Korea. However, taxes imposed by foreign governments on foreign income are creditable up to the amount of income tax to be paid in Korea. Any excess foreign tax credit can be carried forward ten years.

This question is not applicable in South Korea.

The Korean government introduced a participation exemption for dividends from foreign subsidiaries through the 2022 tax law amendment. Under the participation exemption rule, if a Korean company receives dividends from a foreign subsidiary, a dividend received deduction applies to 95% of the dividends and only the remaining 5% of such dividends are treated as taxable income, to the extent the Korean company has directly held at least 10% of the shares in the foreign subsidiary for at least six months as of the dividend date. However, this does not apply to dividends received from CFCs and hybrid financial products, which are subject to the foreign tax credit system instead.

Intangibles developed by Korean corporations can be used by or transferred to foreign affiliates. However, arm’s length consideration should be received for the transfer, and such consideration would be included in taxable income for CIT purposes.

Korea has CFC rules designed to prevent Korean corporations avoiding tax on income retained by foreign subsidiaries. The CFC rules apply when a Korean corporation directly or indirectly owns at least 10% of the shares of a company established in a low-tax jurisdiction. For this purpose, a country is considered to be a low-tax jurisdiction if the foreign subsidiary has an average effective income tax rate of 16.8% or less for the past three years. When applicable, Korea’s CFC regime deems the CFC to have paid a dividend to the Korean parent equal to the earnings of the foreign subsidiary. This dividend is included in the parent corporation’s taxable income.

A foreign corporation that is incorporated in a low-tax jurisdiction and actively engages in business is not subject to the CFC rules. Furthermore, the CFC rules do not apply to a foreign branch of a Korean corporation.

Under Korean tax law, the substance-over-form principle applies to both domestic and foreign corporations, and there is no rule relating to substance that applies solely to foreign affiliates. The Korean tax authority tends to use this principle to disregard the immediate foreign recipient of the Korean source income and attribute such income directly to the parent company.

Capital gains arising from the sale of shares in a foreign affiliate are taxed as ordinary income to the Korean shareholder. Foreign taxes paid by the Korean shareholder on such capital gains are allowed as a credit (up to the amount of Korean income taxes paid).

Korean tax law contains substance-over-form rules, which are used by the Korean tax authority to recharacterise transactions and look-through entities residing in favourable tax jurisdictions that are not deemed to be the beneficial owner of the Korean source income.

The NTS conducts periodic and non-periodic audits. Periodic audits typically take place every four or five years and are usually completed within two months, unless extended. Advance notice should be provided 15 days prior to the commencement of a periodic audit.

Non-periodic audits do not require prior notice and can be conducted at any time. According to the NTS, taxpayers are selected for non-periodic audits in the following circumstances:

• where the taxpayer fails to fulfil its tax compliance obligations under the relevant tax law;
• where the taxpayer is suspected of entering into false transactions, such as transactions without valid documentation or disguised/fictitious transactions;
• where detailed information on the taxpayer’s tax evasion is reported; or
• where the NTS has evidence of omissions or errors in the tax return.

Upon completion of a tax audit, written notice of the audit results is provided. In the event of any objections, the taxpayer can request a Review of Adequacy of Tax Imposition (RATI) within 30 days of the receipt of such notice (before the final tax assessment is issued).

Korea has adopted most of the 15 BEPS action plans recommended by the OECD through amending relevant domestic laws and treaties, as follows:

• BEPS Action 1 (digital economy) – in 2015, Korea introduced a new provision in the VAT Law that imposes VAT on applications provided in offshore open markets, and in 2019 it expanded the scope of the extraterritorial VAT regime for electronically supplied services;
• BEPS Action 2 (hybrid mismatch arrangements) – the Korean government introduced rules to neutralise the effect of hybrid mismatch arrangements in 2018;
• BEPS Action 3 (CFC rules) – Korea expanded the scope of CFCs in 2017;
• BEPS Action 4 (interest deductions) – Korea introduced a new interest deduction limitation rule in 2018;
• BEPS Action 5 (harmful tax practices) – in 2019, the Korean government abolished the CIT exemption previously available to foreign-invested companies;
• BEPS Action 6 (treaty abuse) – Korea adopted relevant provisions when entering into or amending tax treaties, and participated in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI);
• BEPS Action 7 (permanent establishment status) – Korea broadened its definition of permanent establishments in 2019;
• BEPS Actions 8 to 10 (transfer pricing) – in 2019, Korea amended TP rules relating to the substance-over-form principle and intangibles;
• BEPS Action 11 (BEPS data analysis) and BEPS Action 12 (disclosure of aggressive tax planning) – the Korean government is considering legislative changes;
• BEPS Action 13 (transfer pricing documentation) – in 2016 and 2017, Korea revised the Korean TP regulations to require certain multinational companies that engage in cross-border related-party transactions to file a Master File, a Local File and a Country-by-Country Report;
• BEPS Action 14 (dispute resolution) – in 2017, Korea allowed non-residents and foreign companies that do not have a place of business in Korea to request a MAP in Korea; and
• BEPS Action 15 (MLI) – Korea signed the MLI in 2017, which took effect in September 2020.

The Korean government has implemented a tax reform to boost economic growth through adopting the OECD BEPS measures. For instance, in alignment with the OECD recommendations, Korea strengthened anti-avoidance measures on BEPS Action 7 to prevent abusive business structures that might erode Korea’s tax base.

Korea announced a tax law amendment proposal in July 2022, which included the introduction of Pillar Two provisions that are generally in line with the OECD Guidelines. The National Assembly approved the tax law amendment proposal in December 2022, and the Pillar Two provisions become effective for fiscal years commencing on or after 1 January 2024. In addition, the Korean government issued a Presidential Decree on 29 December 2023, and a draft Ministerial Order on 27 February 2024. The Korean Pillar Two legislation is generally consistent with the OECD Model Rules, Commentary and Administrative Guidance.

Pillar One is likely to affect only two or three Korean multinational enterprises, given the higher profitability threshold, but Pillar Two is expected to affect many Korean multinational enterprises that satisfy the EUR750 million revenue threshold.

Since the launch of the OECD’s BEPS Project, the Korean government has increased efforts to comply with the BEPS standards. In addition, many non-governmental organisations have raised concerns over various schemes used by multinational companies to avoid paying taxes in Korea even when substantial revenue is realised in Korea.

Korea previously had tax incentives aimed at attracting foreign direct investment. However, in December 2017 the EU concluded that it was unfair that these tax incentives applied only to foreign investors, and placed Korea on its blacklist of non-co-operative jurisdictions. Korea revised its tax law to eliminate the disputed preferential tax exemptions, reflecting the Korean government’s efforts to comply with BEPS standards.

Korea has relatively high CIT rates compared to other OECD countries. However, Korea’s new government, which took office in 2022, has been pursuing policies to lower CIT rates and expand tax incentives for national strategic technology sectors in order to improve Korea’s corporate competitiveness. As a result of the 2022 tax law amendment, the CIT rates for all tax brackets will be reduced by 1.1% (inclusive of local income tax) from 2023. In addition, the government expanded the scale of employment-related tax support by introducing an integrated employment tax credit system and unifying the employment-related tax support system, and also expanded the tax incentives for investment in national strategic technology (semiconductor/battery/vaccine) facilities.

Other incentives are still provided to eligible foreign direct investments, such as cash grants or exemptions from acquisition tax, property tax and customs duties, as explained in 2.3 Other Special Incentives.

Korea introduced a BEPS-driven rule that limits interest deductions for hybrid financial instruments. This rule has been effective since 1 January 2018, and applies to interest on cross-border hybrid financial instruments between Korean corporations (or Korean branches of foreign corporations) and foreign related parties.

Korea has a worldwide tax regime rather than a territorial tax regime. However, as explained in 6.3 Taxation on Dividends From Foreign Subsidiaries, Korea introduced a participation exemption for dividends paid by qualified foreign subsidiaries to Korean companies.

This question is not applicable in South Korea.

The Korean tax authority handles treaty abuse by applying domestic anti-avoidance rules, such as the substance-over-form principle. Korea has also adopted the LOB (Limitation of Benefits) and PPT (Principal Purpose Test) provisions, which are aimed at ensuring a minimum level of protection against treaty shopping; therefore, additional scrutiny of cross-border tax planning arrangements is expected.

The 2019 tax reform introduced a new rule for determining arm’s length pricing in cross-border transactions involving intangibles, which also addresses appropriate remuneration for functions performed (ie, the development, enhancement, maintenance, protection and exploitation of intangibles). The comparable uncontrolled price (CUP) method, the profit split method and the valuation method (discounted future cash flows) became effective on 12 February 2019 and take precedence over other TP methods; companies performing functions and assuming relevant risks regarding the development, enhancement, maintenance, protection and exploitation of intangibles should receive appropriate remuneration for the contributions they have made.

In light of this tax reform, additional scrutiny is expected on the transfer pricing of intangible assets.

According to the OECD's CbC Reporting Compilation of Peer Review Reports (Phase 1), Korea has indicated that measures are in place to ensure the appropriate use of information in all six areas identified in the OECD Guidance on the appropriate use of information contained in CbC reports. In other words, Korea uses CbC reports to assess high-level transfer pricing risks and other BEPS-related risks.

As of June 2022, Korea exchanges CbC reports with 86 countries. Korea does not make information received from other jurisdictions available to the public. Since CbC reports provide substantial information to the tax authority that could be used to assess whether companies have BEPS-related issues, these reports may trigger aggressive tax audits and tax assessments.

Korea has already amended the VAT Law by introducing an extraterritorial VAT regime for electronically supplied services. Under this regime, a foreign entrepreneur who supplies certain electronic services in Korea bears the obligation to report and pay VAT. For this purpose, “electronic services” includes the supply of electronic goods, such as:

• game/audio/video files or software;
• advertising posting services;
• cloud computing services;
• intermediary services enabling the lease/use/consumption of commodities or facilities in Korea; and
• the supply of goods or services in Korea.

According to the Ministry of Economy and Finance, the Korean government has proactively adopted OECD BEPS recommendations and will follow the OECD’s long-term plan on digital taxation. With respect to whether Korea will adopt an interim unilateral measure like the UK’s digital services tax, the Korean government clearly indicated that a prudent approach should be taken by analysing any impact on related industries and tax revenue.

As discussed in 9.2 Government Attitudes, the Korean tax law provisions relating to Pillar Two became effective for fiscal years commencing on or after 1 January 2024, but the implementation of the UTPR (Undertaxed Payment Rule) was deferred to 1 January 2025.

Korea has not introduced any general provisions dealing with the taxation of offshore IP that is deployed in Korea. However, where a tax treaty that Korea has concluded determines the source of royalties based on the location of the use of such royalties, certain IP (eg, patents) that is registered outside Korea but deployed in Korea can be subject to Korean tax.