SOUTH KOREA Law and Practice Contributed by: Je-Heum Baik, Chang Hee Lee, Maria Chang and Min Kim, Shin & Kim
for nearly all newly concluded and renegotiated tax treaties. Notwithstanding this general alignment with the OECD Model, Korea’s tax treaties continue to retain “UN-style” source-based taxing rights in specific are - as. For example, many Korean tax treaties include a Service Permanent Establishment provision, even in the absence of a fixed place of business. Under these provisions, a permanent establishment (PE) may be deemed to exist where a foreign enterprise furnishes services, including consultancy services, in Korea for a specified duration (commonly exceeding six months or 183 days). 1.4 Multilateral Instrument Korea ratified the MLI on 13 May 2020, to modify its bilateral tax treaties and address base erosion and profit shifting (BEPS). The MLI entered into force for Korea on 1 September 2020, and generally applies to taxes withheld at source on payments made on or after 1 January 2021, and to other taxes for taxable periods beginning on or after 1 March 2021. With respect to Article 7 of the MLI (Prevention of Treaty Abuse), Korea adopted the Principal Purpose Test (PPT) set out in Article 7 (1). Under the PPT, a treaty benefit may be denied where it is reasonable to conclude, based on all relevant facts and circum - stances, that obtaining such benefit was one of the principal purposes of an arrangement or transaction, unless granting the benefit would be consistent with the object and purpose of the relevant Covered Tax Agreement.
foreign corporations are subject to territorial taxa - tion only, which means that they are liable for Korean tax only on income sourced within the territory of the Republic of Korea. 2.2 Tax Residence of Individuals Under the IITA, an individual is classified as a resident of Korea if either of the following is satisfied. Domicile An individual is deemed a resident if they maintain a domicile in Korea. The existence of a domicile is determined based on objective indicators of “living ties” with Korea, including, among others, when the individual: • has an occupation that normally requires residence in Korea for 183 days or more; or • has family members residing in Korea with whom the individual shares their livelihood, and, based on occupation and property, is expected to reside in Korea continuously for 183 days or more. Residence An individual is also treated as a resident if they main - tain a place of residence (abode) in Korea for 183 days or more. Historically, this 183-day threshold was applied on a calendar-year basis. Effective from 2026, however, a new “rolling period” rule applies, and an individual will be deemed a resident even when the aggregate 183-day period spans over two years. This amendment is intended to prevent an individual from splitting their stay over a two-year period to avoid resi - dency status. 2.3 Taxation of Resident Individuals Korean tax residents are generally subject to taxa - tion on their worldwide income. Korean domestic law provides transitional relief and preferential regimes, particularly for expatriates and other individuals with cross-border income or assets. Short-Term Residents (Five Years or Less) Individuals who have been Korean tax residents for a total of five years or less during the preceding ten-year period are not fully subject to worldwide taxation. Dur - ing this grace period, taxation is limited to:
2. Territoriality, Residence and Permanent Establishment
2.1 General Principle of Territorial Taxation The territorial scope of taxation is primarily determined by a taxpayer’s residency status, which distinguishes between worldwide and territorial taxation. The extent of a taxpayer’s tax liability depends on the degree of the taxpayer’s connection to the country. Residents and domestic corporations are subject to worldwide taxation. In contrast, non-residents and
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