SOUTH KOREA Law and Practice Contributed by: Young Joon Chun, Kyu Dong Kim, Yong Whan Choi and Hyeon Jeong, Yulchon LLC
9.6 Hybrid Instruments and BEPS Implementation
ability threshold, but Pillar Two is expected to affect many Korean multinational enterprises that satisfy the EUR750 million revenue threshold. In 2025, in connection with Korea’s domestic imple - mentation of Pillar Two, the government announced the introduction of Korea’s Qualified Domestic Mini - mum Top-up Tax (QDMTT), effective for fiscal years commencing on or after 1 January 2026. 9.3 International Tax Since the launch of the OECD’s BEPS Project, the Korean government has increased efforts to comply with the BEPS standards. In addition, many non-gov - ernmental organisations have raised concerns over various schemes used by multinational companies to avoid paying taxes in Korea even when substantial revenue is realised in Korea. 9.4 Competitive Tax Policy Objectives Korea previously had tax incentives aimed at attract - ing foreign direct investment. However, in December 2017 the EU concluded that it was unfair that these tax incentives applied only to foreign investors, and placed Korea on its blacklist of non-co-operative jurisdictions. Korea revised its tax law to eliminate the disputed preferential tax exemptions, reflecting the Korean government’s efforts to comply with BEPS standards. 9.5 The Competitive Tax System Korea has relatively high CIT rates compared to other OECD countries. However, the government expanded the scale of employment-related tax support by intro - ducing an integrated employment tax credit system and unifying the employment-related tax support sys - tem, and also expanded the tax incentives for invest - ment in national strategic technology (semiconductor/ battery/vaccine) facilities. Other incentives are still provided to eligible foreign direct investments, such as cash grants or exemp - tions from acquisition tax, property tax and customs duties, as explained in 2.3 Special Incentives .
Korea introduced a BEPS-driven rule that limits inter - est deductions for hybrid financial instruments. This rule has been effective since 1 January 2018, and applies to interest on cross-border hybrid financial instruments between Korean corporations (or Korean branches of foreign corporations) and foreign related parties. 9.7 Interest Deductibility and Territorial Tax Regime Korea has a worldwide tax regime rather than a ter - ritorial tax regime. However, as explained in 6.3 Divi- dends From Foreign Subsidiaries , Korea introduced a participation exemption for dividends paid by quali - fied foreign subsidiaries to Korean companies. 9.8 Controlled Foreign Corporation Reform This question is not applicable in South Korea. 9.9 Anti-Avoidance Rules The Korean tax authority handles treaty abuse by applying domestic anti-avoidance rules, such as the substance-over-form principle. Korea has also adopt - ed the LOB (Limitation of Benefits) and PPT (Principal Purpose Test) provisions, which are aimed at ensuring a minimum level of protection against treaty shopping; therefore, additional scrutiny of cross-border tax plan - ning arrangements is expected. 9.10 Transfer Pricing and IP Taxation The 2019 tax reform introduced a new rule for deter - mining arm’s length pricing in cross-border trans - actions involving intangibles, which also addresses appropriate remuneration for functions performed (ie, the development, enhancement, maintenance, protection and exploitation of intangibles). The com - parable uncontrolled price (CUP) method, the profit split method and the valuation method (discounted future cash flows) became effective on 12 February 2019 and take precedence over other TP methods; companies performing functions and assuming rel - evant risks regarding the development, enhancement, maintenance, protection and exploitation of intangi - bles should receive appropriate remuneration for the contributions they have made.
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