Korean Tax Newsletter (April, 2014)

Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.

Korea-Japan to agree on international tax cooperation

Commissioner of Korean National Tax Service (“NTS”) attended the 23rd Korea-Japan NTS conference held in Tokyo on April 2, 2014. They had a discussion and exchanged experiences/comments on global tax administration trends, reporting of offshore financial accounts and international tax cooperation. Commissioner of Korean NTS also asked for proactive support and cooperation of Sugata development research task force, which was established to study specific action plans and development plans for strengthening international tax cooperation including the probe against the offshore tax evasion. The Commissioners of both countries agreed to share ideas and experiences for advanced tax administration systems.

Tax deduction for offshore donation

National Assembly is pushing forward with the plan for tax deduction with respect to offshore donation made by a domestic company. Currently, the offshore donation shall not be included in deductible expenses except for certain cases. Therefore, a donation made to foreign entities such as an international development aid by a domestic company is not generally deductible. If the tax law is revised to allow the tax deduction, it may result in promoting the overseas donation.

Opinion on taxation of derivative financial instruments

On April 22, 2014, the Tax Reform Committee of National Assembly presented opinion that it is proper to impose capital gains tax on gains of derivative financial instruments. Up to now, the derivatives transactions are not taxed and the government has been contemplating on how to levy taxes on the derivative transactions. Taxation of derivative financial instruments is still under discussion, but it is viewed that National Assembly may take capital gains taxation approach.

Korea Tax News

Application of tax treaty on the payment of dividend to overseas beneficial owner (Josim 2013 Jeon 4974, 2014.04.03)

The Tax Tribunal (“TT”) made a decision on beneficial owner of dividend income and the application of reduced tax rate under the Korea-French tax treaty.

Based on the facts of this case, the Korean company was established as a joint-venture between Korean company (50%) and an overseas holding company (50%), which is located in UK and owned by another foreign company in France. When the Korean company paid dividend to its UK shareholder, it has withheld taxes on dividends by applying the 5% reduced tax rate under the Korea-UK tax treaty on the basis that the UK holding company was the beneficial owner of the dividends. However, the tax authority asserted that the Korea-France tax treaty should be applied as the UK holding company is nothing but a conduit which should be disregarded, and the beneficial owner of dividend income is the French company where by the Korea-France tax treaty should be applied.

Considering the facts that major decisions for Korean company’s business were made by the French company and the Korean company was operated/managed by the French company in substance, the TT concluded that the tax authority’s assessment to the Korean company in application of the Korea-France tax treaty is appropriate.

In addition, according to the Korea-France tax treaty, the withholding tax rate on dividend income is reduced to 10% if the recipient is a company which holds directly at least 10% in the company paying the dividends, or 15% in all other cases. In this case, the TT concluded that the French company holds 50% in the Korean company indirectly and as such the withholding tax rate on the dividend income should be 15%.

Tax-deduction of stock option costs of overseas parent company (Seomyun Bupkyukwa -236, 2014.03.18)

The Ministry of Strategy and Finance (“MOSF”) issued a tax ruling on the stock option costs paid to overseas parent company.

According to the Corporate Income Tax (“CIT”) law, the stock option costs reimbursed by a domestic subsidiary to its oversea parent company in relation to the stock option granted by its overseas parent company to the employees of the domestic subsidiary, is tax-deductible when certain conditions are satisfied. One of these conditions is that the overseas parent company is required to own at least 90% of the domestic subsidiary directly or indirectly.

In this ruling case, this condition was not met at the time when the stock option was granted. But, later on, the oversea parent company owned at least 90% of the domestic subsidiary.

According to this ruling issued by the tax authority, the stock option costs are not regarded to satisfy the deduction condition if overseas parent company owns at least 90% of a domestic subsidiary after the option is granted.

Updates of Tax Rulings and Cases
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