SOUTH KOREA Law and Practice Contributed by: Young Joon Chun, Kyu Dong Kim, Yong Whan Choi and Hyeon Jeong, Yulchon LLC
ernments 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. 6.2 Non-Deductible Local Expenses This question is not applicable in South Korea. 6.3 Dividends From Foreign Subsidiaries The Korean government introduced a participa - tion exemption for dividends from foreign subsidi - aries through the 2022 tax law amendment. Under the participation exemption rule, if a Korean com - pany receives dividends from a foreign subsidiary, a dividend received deduction applies to 95% of the dividends, and only the remaining 5% of such divi - dends 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. 6.4 Taxation of Intangibles Developed by Local Corporations 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. 6.5 Controlled Foreign Corporation-Type Rules Korea has CFC rules designed to prevent Korean cor - porations 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 17.5% 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 for - eign 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. 6.6 The Substance of Non-Local Affiliates Under Korean tax law, the substance-over-form princi - ple 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 immedi - ate foreign recipient of the Korean source income and attribute such income directly to the parent company. 6.7 The Sale of Shares in Non-Local Affiliates 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).
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
Korean tax law contains substance-over-form rules, which are used by the Korean tax authority to rechar - acterise transactions and look-through entities resid - ing in favourable tax jurisdictions that are not deemed to be the beneficial owner of the Korean source income.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
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 20 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:
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