SOUTH KOREA Law and Practice Contributed by: Je-Heum Baik, Chang Hee Lee, Maria Chang and Min Kim, Shin & Kim
Even in the absence of a fixed place, a foreign cor - poration will be deemed to have a domestic place of business if it operates through a dependent agent in Korea. This “agent” includes a person who: • has, and habitually exercises, the authority to conclude contracts on behalf of the foreign corpo - ration; or • habitually plays a principal role leading to the conclusion of contracts that are routinely finalised without material modification by the foreign corpo - ration. When determining the existence of a PE, the specific treaty definition prevails; however, the CITA definition of a “domestic place of business” is so closely aligned that the two are often functionally indistinguishable. Differences may arise, in particular, with respect to construction or service activities. For instance, many of Korea’s tax treaties establish a 12-month threshold for a construction site PE, thereby protecting shorter- term projects from domestic income tax liability. The treaty threshold is not necessarily above the CITA threshold. Although most of the treaties that have been newly executed or revised since Korea’s 1996 accession to the OECD follow the OECD Model Tax Convention, some older treaties still remain in effect. Even among more recent treaties, deviations from the OECD Model Tax Convention persist, particularly when the counterparty is a developing nation. 3. Taxation of Cross-Border Income 3.1 Income From Immovable Property The taxation of immovable property is generally divided into two principal categories: rental or lease income (recurring income) and capital gains (income realised upon disposition). Rental or lease income from immovable property is generally classified as business income for Korean tax purposes. Resident individuals and domestic corpo - rations are subject to tax on their worldwide income including the rental or lease income. For individuals, such income is aggregated with other categories of income (such as employment income and interest
income) and taxed at progressive rates ranging from 6% to 45%, plus a 10% local income tax. For domes - tic corporations, such income is included in the annual income tax. For non-residents, the very existence of real property in Korea is functionally equivalent to a fixed place of business under domestic law (see 2.4 Taxation of Non-Resident Individuals ); under typical tax treaties, income derived from real property remains taxable in the source state, regardless of whether the recipient maintains a PE. Non-residents are subject to the same progressive tax rates as residents on their Korean-sourced rental income. Furthermore, they are required to file an annual global income tax return, fol - lowing the same compliance procedures as resident taxpayers. Capital gains from immovable property are classified as schedular income, meaning they are taxed sepa - rately rather than being bundled into the global income basket. However, this separation does not suggest a lower tax burden. In view of the historical speculation and pervasive increase in land prices, capital gains from immovable property are often subject to a higher tax burden than ordinary global income. Withholding tax applies to non-resident sellers in the amount of 11% (including local income tax) of the sales proceeds or 22% (including local income tax) of the net gain, whichever is lower, but the withholding will not affect the tax burden as the withheld tax is fully creditable. A typical treaty provision such as Article 13 (1) of the OECD Model Tax Convention does not offer any pro - tection. Of course, Korea does not tax non-Korean capital gains derived by non-residents. For individual sellers, the tax rate mostly depends on the holding period of the property. Short-term hold - ings – generally properties held for less than two years – are subject to significantly higher tax rates, which may reach up to 70% (excluding local income tax). Effective from 1 January 2026, even harsher surtaxes apply to multi-homeowners. In particular, individuals owning three or more residential properties located in designated “regulated areas” may be subject to substantially increased effective tax rates, which can reach up to approximately 82.5% when local income tax is included. A portion of the long-term (three years or longer) capital gains is deductible. For residents, the deduction is more generous where the property
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