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
Cross-Licensing or Similar Arrangements Korean tax law does not have specific regulations regarding cross-licensing. However, if taxpayers use cross-licensing or similar arrangements to avoid taxa - tion in Korea, the Korean tax authority can impose tax by applying the substance-over-form principle. For example, if a Korean company holding a patent enters into a cross-licence agreement with a foreign-relat - ed party that does not hold a patent, the Korean tax authority may impose tax on the Korean company on the basis that the Korean company’s royalty income was intentionally reduced. Use of Net Operating Losses Tax losses can be carried forward for 15 years, although annual utilisation is capped at 80% of annual taxable income (with an exception granted for SMEs Consolidation is available for a Korean parent compa - ny and its directly or indirectly owned Korean subsidi - aries, provided that the parent company owns 90% or more of the subsidiaries. A taxpayer may elect the consolidated tax filing regime upon approval from the tax authority, but such election cannot be revoked for five years. and distressed companies). Consolidation Tax System 9.4 Tax on Sale or Other Dispositions of FDI Capital gains derived by non-residents from the sale of shares in Korean companies or Korean real estate (including the sale of shares in real estate rich com - panies) are either exempt from Korean tax under an applicable tax treaty or subject to withholding tax at 11% of the sale proceeds or 22% of the capital gains, whichever is lower. The purchaser is obliged to collect and pay the tax. Under many tax treaties, capital gains from the sale of Korean company shares are not taxed in Korea. However, controlling shareholders (with ownership percentage conditions varying by tax treaty) are often taxed in Korea when they sell Korean shares. Unlike capital gains from the sale of shares, capital gains from the sale of Korean real estate (and shares of real estate rich companies) are generally subject to tax in Korea under most tax treaties.
Foreign investors can invest in a Korean partnership through a “blocker” corporation to avoid being directly taxed on partnership income (ie, the foreign investors become shareholders of the “blocker” corporation and the “blocker” corporation becomes a partner of the partnership). In this case, it is the “blocker” cor - poration and not the foreign investors that is taxed in Korea on the income derived by the partnership. When the Korean “blocker” corporation repatriates accumulated profits to its shareholders (ie, the foreign investors), dividend withholding tax is imposed (the tax rate may be reduced by applicable tax treaties). 9.5 Anti-Evasion Regimes The Korean tax authority closely monitors compa - nies whose profitability suddenly drops or whose profits fluctuate over a number of years. The Korean tax authority is likely to scrutinise companies that have had significant business restructuring, as well as those paying substantial royalties or management service fees to foreign companies and companies with financial transactions with foreign-related parties. Korea is a member of the OECD and generally follows the OECD Transfer Pricing Guidelines for Multination - al Enterprises and Tax Administrations (the “OECD Guidelines”). However, the OECD Guidelines do not have the force of law, while the Law for the Co-ordina - tion of International Tax Affairs (which governs transfer pricing in Korea) does. Accordingly, the Korean tax authority might not accept a taxpayer’s arguments if they are based solely on the OECD Guidelines. Deduction is limited for interest paid on hybrid instru - ments that are treated as debt in Korea but treated as equity in a foreign country. A Korean entity that is classified as a tax transparent entity in Korea but is considered a corporation in the counterpart country is not subject to a separate anti- hybrid rule in Korea. In other words, there is no anti- hybrid rule in Korea. However, if a Korean corporation invests in a foreign entity that is tax transparent in its country of residence but is opaque under Korean tax law (a reverse hybrid entity), the Korean entity can elect to treat that foreign entity as tax transparent for Korean tax purposes. This special rule is considered
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