Beneficial Ownership Regulation and Korean Withholding Tax

I. Introduction

Taxation policy significantly influences the operational and financial strategies of corporations. For non-resident and foreign corporations in Korea, the taxation framework, particularly the withholding tax regime, demands acute attention. One major aspect of this regime is the beneficial ownership regulation, a global effort to curb tax evasion, money laundering, and illicit financing.

II. Understanding Beneficial Ownership Regulations

The beneficial ownership regulations aim to uncover the actual beneficiaries of income instead of just the direct recipient. This critical measure helps identify and regulate complex financial structures designed to obscure the ultimate beneficiaries of income and who should be liable for the tax burden.

III. Korean Withholding Tax and its Applicability

In Korea, a non-resident or foreign corporation becomes liable for withholding tax on several types of income originating from Korea, such as dividends, interest, and royalties. The actual rate of withholding tax depends on two main factors: the nature of the income and the existence of a tax treaty between Korea and the foreign entity’s home country.

IV. Beneficial Ownership in the Context of Korean Withholding Tax

The tax treaty benefits hinge on the “beneficial owner” of the income, who has the rights to use and enjoy the income and bear the economic burden of it. Therefore, unless a foreign corporation is the beneficial owner of the income, it cannot claim the benefits of a tax treaty.

V. Korean Withholding Tax Rates

As per domestic tax rules, Korea imposes a withholding tax rate of 22% on dividend, interest and royalty paid to non-resident or foreign corporations. However, these rates may vary depending on the provisions of double tax treaties between Korea and other jurisdictions.

For instance, under the Korea-USA tax treaty, the withholding tax on dividends is reduced to 16.5%(11% for corporation shareholder with voting right of 10% or more), and interest and royalties are reduced to 13.2% and 16.5%(or 11%). Under the Korea-UK treaty, dividends are taxed at 15%(5% for corporation shareholder with voting right of 25% or more), and interest and royalties at 10%(2% for equipment rental fee). Similarly, under the Korea-Japan treaty, dividends are taxed at 15%(5% for corporation shareholder with voting right of 25% or more), interest and royalties at 10%.

VI. Impact and Implications

The introduction of beneficial ownership regulation in Korea has intensified scrutiny over practices like “treaty shopping.” Tax authorities are now more capable of identifying the beneficial owner to determine the appropriate tax treatment. These regulations significantly influence the structuring of operations and investments by non-resident and foreign corporations.

VII. Conclusion

Beneficial ownership regulation represents a robust response from Korea to the global call for enhanced tax transparency and fairness. Non-resident and foreign corporations must strategically approach these regulations, monitor changes in Korean tax law, and possibly seek professional advice to optimize their tax positions. A proactive stance on this issue will pave the way for their financial success in the Korean market.