SOUTH KOREA LAW AND PRACTICE Contributed by: Tehyok Daniel Yi, Gun Kim, Kyu Hyun Kim, Sun Hee Kim, Yong Whan Choi, Yong Min Lee, Jung Woo Lee and Hyeon Jeong, Yulchon LLC
9.2 Withholding Taxes on Dividends, Interest, Etc In general, interest and dividends paid to a non-resi - dent company or individual are subject to a 22% with - holding tax (including local income tax). The rate may be reduced under applicable tax treaties. Many tax treaties provide a lower withholding tax rate for divi - dends received by shareholders whose shareholding exceeds the ownership percentage specified in the treaty. The Korean tax authority takes a conservative position in relation to the application of reduced treaty rates, which can differ depending on the beneficial owner of the Korean source income. A beneficial owner is a person who bears legal or economic risk related to Korean source income and who, in substance, holds ownership rights over this income, including disposal rights. In particular, the Korean tax authority tends to chal - lenge the use of treaty countries by non-treaty coun - try residents by aggressively applying the substance- over-form principle to argue that entities established in favourable treaty countries are not the beneficial owners of the relevant Korean source income. 9.3 Tax Mitigation Strategies “Step Up” of Depreciable Asset Basis Depreciation and amortisation expenses are calcu - lated based on the original acquisition cost, making any “step up” strategy impracticable. “Earnings Stripping” With Intercompany Debt Under Korea’s thin capitalisation rules, where amounts borrowed by a Korean company from a foreign con - trolling shareholder exceed a multiple of its equity (six times equity for financial institutions and two times equity for non-financial institutions), interest attributable to the excess borrowing is treated as a non-deductible deemed dividend paid by the Korean company to its foreign controlling shareholder. In addi - tion, interest deduction is disallowed for net interest (interest paid less interest received) paid by a Korean company to a foreign-related party in excess of 30% of its adjusted net income (earnings before interest, taxes, depreciation, and amortisation) (30% deduction limitation rule).
The corporate income tax is imposed at progressive marginal rates. The current rates are as follows: • 9% on taxable income up to KRW200 million; • 19% on income between KRW200 million and KRW20 billion; • 21% on income between KRW20 billion and KRW300 billion; and • 24% on income exceeding KRW300 billion. A local income surtax, equivalent to 10% of the cor - porate income tax liability, is also imposed. Under a government-submitted tax amendment bill, each rate is expected to increase by one percentage point for taxable years beginning on or after 1 January 2026 – ie, 10%, 20%, 22% and 25%, respectively. Partnerships are exempt from tax at the partnership level, but each partner is subject to tax on income allocated from the partnership. VAT is imposed on the supply of goods and services. The applicable VAT rate is generally 10%, but zero- rated VAT is available for exported goods and ser - vices rendered outside Korea and for certain services provided to a non-resident in a foreign currency. Cer - tain goods and services including unprocessed food, medical and health services, and financial and insur - ance services are VAT exempt. Acquisition tax is imposed in connection with the acquisition of certain properties, such as real estate, motor vehicles, construction equipment and golf memberships. The acquisition tax rate varies depend - ing on the type of assets and ranges from 0.96% to 4.6% of the acquisition cost. However, the rate can be significantly higher for corporations acquiring resi - dential properties or other real properties located in metropolitan areas. Securities transaction tax is imposed on the transfer of shares. The securities transaction tax rate for pub - licly traded shares is currently 0.15% and the tax rate for unlisted shares is 0.35%. Under a government- submitted tax amendment bill, the tax rate for publicly traded shares is expected to increase to 0.2%.
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