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Korean Tax Newsletter (July, 2014)

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

Agreement of new tax treaty

(1) Korea-Hong Kong Tax Treaty

On July 8, 2014, the Korea-Hong Kong tax treaty was officially signed by both countries. The main features of the treaty are as follows:

Withholding Tax Withholding Tax Rates
Dividends 10% (with ownership of at least 25%) / 15%
Interest 10%
Royalties 10%


In addition, capital gains sourced from Korea from disposal of shares will be taxed in Korea. The treaty contains provisions on exchange of information, which would allow competent authorities of the two countries to exchange financial information for the purpose of preventing tax evasion.

In order for the tax treaty to be effective, it must go through ratification procedures. According to an officer of Korea’s Ministry of Foreign Affairs, the signed treaty will be in the National Assembly in September of 2014.

(2) Korea-Columbia Tax Treaty

On July 15, 2014, the Korea-Columbia tax treaty entered into force with the following provisions:

Withholding Tax Withholding Tax Rates
Dividends 5% (with ownership of at least 20%) / 10%
Interest 10%
Royalties 10%


Capital gains sourced from Korea from disposal of shares will be taxed in Korea. The treaty contains provision on exchange of information. This will allow competent authorities of both countries to exchange financial information for the purpose of preventing tax evasion.

The treaty would be effective as follows:

  • a) In respect of taxes withheld at source, for amounts paid or credited to non-residents, on or after the first day of January in the calendar year following the year in which the treaty enters into force; and
  • b) In respect of other taxes, for the taxable year beginning on or after the first day of January in the calendar year following the year in which the treaty enters into force.

(3) Korea-Ethiopia Tax treaty

On July 24, 2014, the Ministry of Strategy and Finance ("MOSF”) signed a draft tax treaty with Ethiopia at the treaty negotiation meeting held in Seoul during July 21 through July 24. The main features of the draft treaty are as follows:

Withholding Tax Withholding Tax Rates
Dividends 5% (with ownership of at least 25%) / 8%
Interest 7.5%
Royalties 5%


Business profits generated from a construction site in Korea (or Ethiopia) which has been in existence for a period of less than 12 months would not be taxed by the other country. Where otherwise generally tax-exempt on capital gains from disposal of shares, those which arise from disposal of shares in a real estate-rich company will be taxed in Korea.

The draft treaty contains provisions on mutual exchange of information, allowing competent authorities to exchange on financial information. The treaty will enter into force once ratified by the National Assembly.


Korea-China agree on international tax cooperation

The Commissioner of Korean National Tax Services (“NTS”) on July 14, 2014 attended the 20th Korea-China NTS conference held in Beijing. Commissioners of both countries exchanged and discussed experiences concerning the trend on global tax administration, reporting of offshore financial accounts and international tax cooperation. Commissioner of NTS also sought proactive support and cooperation from SGATAR TF (known as, “Study Group on Asian Tax Administration and Research Task Force”), a team organized to draw up specific action plans, strengthen international tax cooperation, and tighten the probe against offshore tax evasion in the Asia Pacific region. The commissioners agreed to share ideas and experiences for advanced tax administration systems.

Korea Tax News

Classification of income on delayed payment to ship building company (Josim2013Bu2926, 2014.6.24).

The Tax Tribunal (“TT”) issued its decision on the income classification of indemnity payment.

The case concerns a shipbuilding company (A) which indemnified a foreign ship owner (B) due to (A)’s delay in the delivery of ships it built. Company (A) regarded the indemnity as a sort of penalty and thus classified it as a Korean-source “Other Income” of Company (B).
Company (A) later filed an amended return to seek refund on the withheld tax by asserting that the nature of this payment should not be regarded as penalty for breach of a contract, but as a discount attributable to minor difference from initial contract terms which should not trigger withholding tax in Korea. Company (A) also argued that even if the payment is penalty in nature, (B) can treat the receipt of such payment as business profits generated in the ordinary course of business. Therefore, withholding tax of 2% should have been applied.

TT, however, made the judgment that the payment should fall under the category of “Other Income”, rather than business profit, on the basis that the breach of contract in this case is purely of temporary or incidental nature not in the ordinary course of business.

Updates of Tax Rulings and Cases
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