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International Tax - Korea (South)

posted 1 year ago


Tom Kwon



Tom Kwon
Lee & Ko

Established in 1977, Lee & Ko is one of the largest and most reputable full-service law firms in Korea. Lee & Ko has 8 major practice groups with over 40 specialised teams. With over 800 professionals, we offer one-stop solutions, providing our clients with responsive, effective and practical solutions to their legal issues.

The Tax & Customs Group consists of over 120 leading attorneys, former judges, former government and tax officials, CPAs, CTAs and other advisory, compliance and customs professionals. The areas of practice include: tax disputes/litigation; corporate and M&A transactions; tax planning and structuring; tax audit; international tax and transfer pricing; customs; and tax compliance.

The International Tax Practice, of which I am Co-head of, serves foreign clients with respect to their inbound investments and transactions in Korea in all aspects of Korean tax, including advisory, due diligence, tax audit, appeals and tax litigation. We can provide tax services in English, Chinese, Japanese and other languages.

The International Tax Practice also serves Korean clients with respect to their outbound cross-border tax matters related to investments and transactions in other jurisdictions.

We are ranked “Top Tier”, “Band 1” or “Outstanding” by prestigious international law firm and tax practice ranking organisations.

A sample of the cases I have recently worked on for my Clients are as follows:

• Seek full refund of withholding tax on royalty payments related to non-Korean patents for U.S. licensors under the Korea/U.S. tax treaty.
• Advise foreign investors with respect to investment in Korean real property.
• Represent foreign engineering/construction firm with Korean tax audit and obtain relevant tax rulings in favour of taxpayer.
• Represent a Korean financial institution in claiming refund from the U.S. IRS.

I am the Co-head of Lee & Ko’s International Tax Practice. I practice primarily in international tax and corporate tax, including inbound and outbound acquisition structuring, financing, reorganisation, and cross-border transactions from Korean tax perspective. My practice also involves advising clients on tax controversies and disputes as well as matters involving investor’s protection. Prior to joining Lee & Ko, I was a Director in Deloitte Korea’s M&A Tax Team.

I am a member of the International Bar Association, the International Fiscal Association Korea, the Inter-Pacific Bar Association and the American Chamber of Commerce in Korea.

I also serve on the board of a Korean asset management company as external advisor.

I was also the lead writer and editor for the Korean section of the IBFD Permanent Establishment database from 2009 to 2016.

We have represented a number of U.S. licensors (e.g., software companies, NPEs, etc.) to claim full (100%) refund of royalties withholding tax.

According to a recent Supreme Court decision (a case in which we represented the taxpayer), the Korean tax authority does not have jurisdiction to impose withholding tax on royalty payments paid by a Korean licensee to a U.S. licensor in consideration for the use of non-Korean patents under the Korea/U.S. tax treaty. Based on this Supreme Court case (as well as other prior precedents), U.S. licensors have been appealing in the court to claim full refund of tax withheld and paid to the Korean tax authority.

Separately, we have also represented foreign companies selling industrial software products in Korea. The Korean tax authorities have attempted to impose withholding tax based on the position that consideration for the use of industrial software is subject to royalties withholding tax. We have successfully defended foreign taxpayers against such challenges.

A Korean domestic company is subject to corporate income tax (CIT) on its worldwide income. A domestic company is defined as a company having its head office or effective place of management in Korea. A foreign company with a branch or permanent establishment (PE) in Korea is subject to CIT only on its Korean-source income. In contrast, a foreign company without a branch or PE in Korea is generally taxed through a final withholding tax (WHT) mechanism on each separate item of Korean-source income (typically paid in Korea).

Very broadly, the tax base for CIT purposes is the net income after deducting applicable and attributable business related costs/expenses.

Effective January 1, 2023, the CIT rates are as follows. Please note the CIT rates change frequently.

• KRW200 million or less: 9% (9.9% including local tax).
• More than KRW200 million but less than KRW 20 billion: 19% (20.9% including local tax).
• More than KRW20 billion but less than KRW300 billion: 21% (23.1% including local tax).
• Exceeding KRW300 billion: 24% (26.4% including local tax).

CIT is a national tax imposed by the National Tax Service (NTS). Local tax refers to income tax imposed by local governments in Korea, and equals 10% of the national tax amount.

Annual CIT returns are due within 3 months after the end of each fiscal year (i.e., end of March in case of calendar year-end taxpayer). Interim returns for the first 6 months of the tax year also need to be filed within 2 months after the interim period.

The Korean tax laws can be confusing and seem overly complex to our clients from Western countries and other developed countries. Our clients appreciate our clear explanation of the tax law, advice and recommendations in easy-to-understand English.

Furthermore, the Korean tax authorities have an international reputation for being overly aggressive and confrontational. Our clients rely on us to guide them through the sometimes difficult tax audit/investigation process.

For foreign investors, nothing in Korean taxation has been more controversial or contentious than the concept of “beneficial ownership” as applied to foreign companies claiming tax treaty benefits. This is particularly true with respect to foreign fund vehicles that exit from Korean participations through a share sale. The reason is that while the Korean domestic tax law imposes a capital gain tax (CGT) on sale of Korean assets by a foreign investor, most Korean tax treaties exempt this CGT.

There is a long history of disputes between foreign taxpayers and the Korean tax authority on whether a foreign seller can be respected as the beneficial owner that can claim exemption from CGT under the relevant tax treaty.

The Korean government recently enacted a number of revisions to the CIT Law to clarify when a foreign entity can (and cannot) claim tax treaty benefits as the beneficial owner, specifically in case the foreign entity is a fund vehicle. But these new rules have not been tested sufficiently as of yet.

Being one of the largest and most reputable full-service law firms in Korea, Lee & Ko has close and excellent working relationships with many of the largest law firms and tax firms around the world.

We are also a member of Lex Mundi, among other law and tax professional services networks.

OECD Pillar One rules, which focuses on rules for taxing excess profits of MNEs, with a formula for allocating a certain portion of these profits to each jurisdiction, is still under discussion, although the main building blocks are now in place. The OECD has a target deadline of mid-2023 to conclude the legal texts for Pillar One, though this deadline may be ambitious.

Lee & Ko has been entrusted by the Korean government to draft the domestic rules and regulations with respect to Pillar One. In that regard, we have been working closely with the Korean Ministry of Economy and Finance to draft the Pillar One rules for domestic implementation.

In contrast, OECD Pillar Two rules, which involves a new global minimum corporate income tax rate of 15%, have been enacted in domestic legislation. In this sense, Korea is ahead of the global trend. Korea’s Pillar Two rules are codified into the Korean domestic law called the “Law for the Coordination of International Tax Affairs,” and is supposed to take effect from 1 January 2024. They closely follow the OECD Model Rules, containing an “Income Inclusion Rule” and “Supplementary Rules for Income Inclusion” (known as the UTPR in the OECD Model Pillar Two rules).

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International Tax - Korea (South)

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