Inward investment into South Korea has been thriving in the past few decades and foreign investors have been able to benefit from various tax incentives available to them. Although these incentives are becoming less advantageous and less available, the overall legal, tax and regulatory climate for investment into South Korea remain favourable to foreign investors.


i Corporate

The two most common types of legal entities under the Korean Commercial Code (KCC) are the chusik hoesa and yuhan hoesa. The chusik hoesa is the most common form of incorporation and refers to a joint-stock company governed by a board of directors with limited liability to its shareholders. A chusik hoesa with paid-in capital of 1 billion won or more must have at least three directors and one statutory auditor, whereas a chusik hoesa that does not meet the paid-in capital threshold is required to have at least one director and is not required to have a statutory auditor. Other than certain matters conferred by law or in the articles of incorporation of the company (AOI) to the authority of the general meeting of shareholders (GMS), the board of directors may make decisions on all important corporate policies and management matters, except for regular day-to-day business matters that are decided by the representative director. Unless otherwise provided in the AOI, all actions and resolutions of the board are adopted by the affirmative vote of a majority of the directors attending a properly constituted board meeting. The chusik hoesa is typically appropriate for a large enterprise that will need substantial capital, as it is the only type of legal entity eligible to list its shares on the Korea Stock Exchange, or that may issue corporate bonds.

In contrast, a yuhan hoesa is a closely held limited liability company, which can be described as a mixture of a joint-stock company and a partnership. Like a joint-stock company, the liability of each member is limited to the amount of his or her contribution to the company. This form of legal entity is typically appropriate for small or medium-sized businesses owned by a small number of individuals or entities. A yuhan hoesa is required to have at least one director regardless of its size. A yuhan hoesa is also subject to other limitations that a chusik hoesa may not be subject to. Foreign investors have increasingly utilised this structure, mainly for the reason of potential tax advantages in their home countries. In addition, a yuhan hoesa allows (in comparison to a chusik hoesa) greater flexibility in terms of corporate governance. For those foreign investors or persons desiring less public disclosure, the yuhan hoesa may be preferred because such companies are not required to publicly disclose their financial information.

The tax implications and liabilities under Korean law for a chusik hoesa and a yuhan hoesa are nearly identical. Both a chusik hoesa and a yuhan hoesa are subject to taxation in Korea. The current applicable corporate tax rate is 11 per cent for taxable income up to 200 million won, 22 per cent for income over 200 million won and up to 20 billion won, 24.2 per cent for income over 20 billion won and up to 300 billion won, and 27.5 per cent for income over 300 billion won.

ii Non-corporate

In general, non-corporate entities are not as commonly used as corporate entities given that the shareholders are exposed to unlimited liability. A hapmyong hoesa is a form of partnership organised by two or more partners who bear unlimited liability for the obligations of the partnership. A hapja hoesa, a limited partnership, consists of one or more partners having unlimited liability and one or more partners having limited liability. From a commercial law perspective, hapmyong hoesa and hapja hoesa are both treated as corporations. From a tax law perspective, hapmyong hoesa and hapja hoesa are subject to corporate income tax but may elect to be treated as partnerships, in which case these entities are treated as pass-through entities for tax purposes.

Under the Korean tax law, tax is exempt at the level of the partnership and each partner is subject to pay and file taxes on earned income distributed from the partnership. If the partner is a non-resident, income distributed from the partnership will be subject to withholding tax in Korea.

A private equity fund (PEF) is considered a corporation for Korean tax purposes but may elect to be treated as a partnership for tax purposes. A PEF electing to be treated as a partnership is taxed at the level of the members at the time of income allocation. Income allocated to the foreign limited partnerships (LPs) by the PEF will generally be regarded as dividend income regardless of the character of the underlying income.


i Tax on profits

Determination of taxable profit

Korean corporations are subject to tax on their worldwide income. Corporate income tax is imposed on a company's taxable income, which is based on the net income after making book to tax adjustments, less deductible expenses and carried forward tax loss. Expenses incurred in the ordinary course of business are deductible, subject to the requirements for documentary support and accrued expenses are not deductible until the expenses are fixed or determined. Depreciation is allowed for tax deduction only when expensed for book purposes.

The tax law allows the following methods for calculating depreciation:

  1. straight-line or declining-balance method for tangible fixed assets, other than plants and buildings;
  2. straight-line method for plants, buildings and intangible assets;
  3. service-output or straight-line method for mining rights; and
  4. service-output, declining-balance, or straight-line method for tangible fixed assets used in mining.

Capital and income

In general, there is no distinction between the taxation of income and capital profit for resident corporations, as capital gains are included in taxable income and taxed at the standard corporate income tax rates. Korean-source capital gains derived by a non-resident are taxed at the lesser of 11 per cent (including local surtax) of the sales proceeds received or 22 per cent (including local surtax) of capital profit.


Losses may be carried forward for up to 10 years. From 1 January 2019, domestic companies and foreign companies may utilise their tax loss carry-forwards to offset 60 per cent of taxable income for a fiscal year. Small and medium-sized enterprises (SMEs) may be allowed to carry losses back for one year.


The corporate income tax rates (effective 1 January 2018) are as follows:

Taxable income Tax rate (progressive)
Up to 200 million won 10 per cent
From 200 million won to 20 billion won 20 per cent
From 20 million won to 300 billion won 22 per cent
In excess of 300 billion won 25 per cent

In addition, there is a local surtax of 10 per cent on the foregoing rates resulting in the final rates ranging from 11 per cent to 27.5 per cent on the tax base.


A Korean company is required to pay (1) interim corporate income taxes within two months from the end of the first six months of the fiscal year and (2) annual corporate income taxes within three months from the end of the fiscal year. The company must file tax returns along with the tax payment for the interim and annual corporate income taxes.

Tax grouping

A domestic parent corporation with wholly owned domestic subsidiaries may elect the consolidated tax group scheme for domestic entities. Where two or more wholly owned subsidiaries exist, the tax consolidation scheme must be applied to all subsidiaries. A corporation seeking tax consolidation is required to submit an application for consolidated tax return filing within 10 business days after the beginning of a business year in which the taxpayer wishes to apply tax consolidation. Foreign subsidiaries are not eligible for tax consolidation. Once the consolidated tax grouping scheme is elected, the scheme must be applied for at least five consecutive business years.

Dividend distributions within the tax group do not trigger any tax costs. Donations or entertainment expenses incurred within the tax group are consolidated for tax reporting purposes.

ii Other relevant taxes

Value-added tax is levied at the rate of 10 per cent on the sale of goods and services in Korea, including imported goods, subject to certain exceptions. A business that sells or provides goods or services to its customers is required to, on a quarterly basis, pay to the competent tax office value-added tax (output VAT) received from such customers. The amount of output VAT to be actually paid to the tax office is the sum of the output VAT received from its customers minus the value-added tax (input VAT) that such business paid to its suppliers for the purchase of good or services (so called 'input VAT deduction').

Stamp duty is levied on agreements relating to the creation, transfer or alteration of rights.

A capital registration tax of 0.48 per cent (including local surtax) is levied when a company registers its incorporation or capital increase with the court registry. The capital registration tax rate for a company incorporated in the Seoul Metropolitan Area triples to 1.44 per cent.

Securities transaction tax is levied on the transfer of shares at 0.5 per cent of the share transfer price. The rate is reduced to 0.1 per cent or 0.25 per cent for the transfer of listed shares.

A company owning real property such as land, buildings, ships and aircraft is subject to property tax on these assets at the rate of 0.1 per cent to 4 per cent, depending on the type of property. Comprehensive real estate tax is also levied on real estate.

Acquisition tax is levied on any company acquiring real estate, motor vehicles, heavy equipment and certain other items generally at the rate of 1.1 per cent to 4.6 per cent (including local surtax).

A company is required to withhold taxes on payments to its employees, including wages, salaries, bonus and other amounts received for employment services rendered. An employer is required to make social security contributions for national pension, medical insurance, unemployment insurance and industrial injury compensation insurance to the relevant social security authorities. Social security contribution rates vary depending on the number of employees and the industry.


i Corporate residence

A foreign corporation with its place of effective management in Korea may be deemed as a domestic corporation. The place of effective management refers to a location where key management and commercial decisions necessary for business operations are implemented. Key management activities and commercial decisions necessary for the operation of a corporation's business relate to a corporation's long-term business strategies, fundamental policies, corporate finance and investment, management and disposal of key properties, and essential income generating activities. The place of effective management of a corporation is determined on a case-by-case basis, by taking into account the location where meetings of the board of directors or other equivalent decision-making body are held, location where the chief executive officer and other officers perform their day-to-day duties, location where senior managers perform their daily management activities and location where accounting records are generally maintained (Supreme Court Decision, 2014Du8896, 14 January 2016).

To avoid becoming fiscally resident in Korea, a foreign entity should ensure that key management activities and commercial decisions are not made in Korea, including holding meetings where key decisions are made or maintaining books or other important business documents of the foreign entity.

ii Branch or permanent establishment

A non-locally incorporated entity is deemed to have fiscal presence in Korea if (1) it has a fixed place of business (a branch, an office, a workshop, etc.) in Korea where the entity's business is wholly or partly carried on; or (2) the employees of the foreign entity provide services in Korea for more than six months during any consecutive 12-month period or the employees render similar types of services continuously or repetitively over a two-year period, even if each of the service periods do not exceed six months in a consecutive 12-month period. A fixed business place of a foreign company does not trigger a permanent establishment (PE) if its activities are of a preparatory or auxiliary nature on behalf of its head office, such as advertising, collecting and distributing information, or market research. On the other hand, preparatory or auxiliary activities that are carried out on behalf of third parties (including affiliated parties) would give rise to PE in Korea.

In addition to the above, a foreign company without a branch office or other fixed presence in Korea may nevertheless be deemed to have a PE in Korea if it conducts business in Korea through a person who has authority on its behalf to conclude contracts (or to negotiate important and detailed terms and conditions of contracts) and regularly exercises this authority. Such persons will constitute 'dependent agents', so long as their role is sufficiently important for the local business of the foreign company. A foreign company that does business in Korea through a dependent agent in Korea is deemed to have a PE in Korea for tax purposes. On the other hand, if a foreign company carries on business through a broker, general commission agent or any other agent of independent status, and the agent acts in the ordinary course of its business, the foreign company would not on that basis be deemed to have a PE in Korea.

An entity deemed to have a PE in Korea is subject to corporate income taxation in Korea with respect to the portion of its business profits attributable to the PE. An arm's-length amount of profit may be allocated in accordance with the arm's-length price determination methods stipulated in the Korean tax law. Given the inherent limitations in allocating an arm's-length price, which may objectively be accepted as being appropriate, issues often arise regarding profit allocation and may eventually lead to a tax imposition.

With regard to dual resident entities, a majority of the tax treaties signed by Korea include a provision that deems the entity to be a resident of a country where effective management takes place. Tax treaties generally allow competent authorities of the treaty parties to reach mutual agreement to resolve dual residency issues.

If the tax treaty between Korea and the country in which a foreign corporation is residing allows the imposition of a branch profits tax, the tax is imposed on the adjusted taxable income of the Korean branch. Where applicable, the branch profits tax is levied in addition to the regular corporate income tax (CIT), at the rate of 20 per cent (or at a reduced rate as provided in a treaty) of the adjusted taxable income of the Korean branch.


i Holding company regimes

A qualified domestic stock-listed holding company that owns a more than 40 per cent share ownership in its domestic subsidiary will receive a 100 per cent deduction for dividends, while a 90 per cent deduction is allowed for share ownership of 40 per cent or less and an 80 per cent deduction is allowed for share ownership of 30 per cent or less. A qualified domestic holding corporation, other than a stock-listed company, will also receive a 100 per cent deduction for share ownership of more than 80 per cent, 90 per cent for share ownership of 80 per cent or less, and 80 per cent for share ownership of 50 per cent or less.

Dividends received from a foreign company are, in principle, subject to corporate income tax in Korea, but the recipient company may be eligible for an indirect foreign tax credit for foreign income tax paid by the foreign company in its country of residence.

ii IP regimes

Foreign-invested companies that engage in certain high-technology businesses designated by the government or that are located in certain designated areas may apply for exemption of customs duties or local taxes if certain conditions are satisfied. Tax credits are also available for certain qualifying expenditures on research and development, and investments in energy saving, pollution control, vocational training facilities and employee housing.

The Korean tax laws provide various tax incentives to encourage domestic companies to engage in research and development, technology development and job training.

iii State aid

No state aid is available in Korea. However, certain programmes or business activities may be eligible for certain subsidies. Programmes eligible for subsidies, expense items, rates and amounts of national subsidies available are announced annually during the government budget proposal. Taxpayers seeking subsidies are required to file applications and receive approval from the relevant government agencies.

iv General

Korean subsidiaries of foreign multinationals that meet certain foreign investment requirements and that engage in qualifying business or industry activities in designated Free Enterprise Zones, Free Investment Zones, or Free Trade Zones may be eligible for various tax exemptions or reductions.


i Withholding outward-bound payments (domestic law)

Korean source interest, dividends and royalties that are not attributable to a permanent establishment in Korea are generally subject to a withholding tax of 22 per cent (including local tax) at the time of payment to the foreign person. The statutory rate of withholding may be reduced or eliminated under an applicable tax treaty.

ii Domestic law exclusions or exemptions from withholding on outward-bound payments

No domestic law exclusions or exemptions from withholding on outbound payments exist in Korea.

iii Double tax treaties

Certain income such as dividends, interests or royalties paid to non-residents (Korea-sourced income) are generally subject to withholding tax at the statutory rate of 22 per cent (inclusive of local surtax) if no relevant treaty between the non-resident's country and Korea applies. To enjoy the benefits of a lower rate of withholding tax under a particular treaty, the beneficial owner of the Korea-sourced income is required to submit to the withholding party evidentiary documents demonstrating that the beneficial owner is eligible for the lower rate of withholding tax by virtue of an applicable tax treaty.

According to the constitutional law, tax treaties have the same effect as domestic laws in Korea. In case of a conflict between the tax treaty and the domestic law in Korea, the tax treaty takes precedence over domestic laws. As of November 2019, Korea has entered into tax treaties with 93 countries globally. The chart below is a summary of the reduced tax rates for dividends, interests and royalties under the tax treaties that are currently in force. The applicable domestic withholding tax rates, which vary from 2.2 per cent (including local income tax) to 22 per cent (including local income tax) for cross-border payments made to non-resident individuals or corporations without a permanent establishment in Korea, will apply if such rate is lower than the reduced tax rate under the tax treaty or if there is no relevant tax treaty.

Dividends (%) Interest (%) Royalties (%)
Domestic rates      
Companies 22 15.4/22 22
Individuals 22 15.4/22 22
Treaty countries      
Albania 5/10 10 10
Algeria 5/15 10 2/10
Australia 15 15 15
Austria 5/15 10 2/10
Azerbaijan 7 10 5/10
Bahrain 5/10 5 10
Bangladesh 10/15 10 10
Belarus 5/15 10 5
Belgium 15 10 10
Brazil 10/15 10/15 15/25
Brunei 5/10 10 10
Bulgaria 5/10 10 5
Canada 5/15 10 10
Chile 5/10 5/10/15 5/10/15
China 5/10 10 10
Colombia 5/10 10 10
Croatia 5/10 5 0
Czech Republic 5/10 10 10
Denmark 15 15 10/15
Ecuador 5/10 12 5/12
Egypt 10/15 10/15 15
Estonia 5/10 10 5/10
Ethiopia 5/8 7.5 5
Fiji 10/15 10 10
Finland 10/15 10 10
France 10/15 10 10
Gabon 5/15 10 10
Georgia 5/10 0/10 10
Germany 5/15 10 2/10
Greece 5/15 8 10
Hong Kong 10/15 10 10
Hungary 5/10 0 0
Iceland 5/15 10 10
India 15 10 10
Indonesia 10/15 10 15
Iran 10 10 10
Ireland 10/15 0 0
Israel 5/10/15 0/7.5/10 2/5
Italy 10/15 10 10
Japan 5/15 10 10
Jordan 10 10 10
Kazakhstan 5/15 10 10
Kenya 8/10 12 10
Kuwait 10 10 15
Kyrgyz Republic 5/10 10 5/10
Laos 5/10 10 5
Latvia 5/10 10 5/10
Lithuania 5/10 10 5/10
Luxembourg 10/15 5/10 5/10
Malaysia 10/15 15 10/15
Malta 5/15 10 0
Mexico 0/15 5/15 10
Mongolia 5 5 10
Morocco 5/10 10 5/10
Myanmar 10 10 10/15
Nepal 5/10 10 15
Netherlands 10/15 10/15 10/15
New Zealand 15 10 10
Norway 15 15 10/15
Oman   5/10 5 8
Pakistan 10/12.5 12.5 10
Panama 5/15 5 3/10
Papua New Guinea 15 10 10
Peru 10 15 10/15
Philippines 10/25 10/15 10/15
Poland 5/10 10 5
Portugal 10/15 15 10
Qatar 10 10 5
Romania 7/10 10 7/10
Russia 5/10 0 5
Saudi Arabia 5/10 5 5/10
Serbia 5/10 10 5/10
Singapore 10/15 10 15
Slovak Republic 5/10 10 0/10
Slovenia 5/15 5 5
South Africa 5/15 10 10
Spain 10/15 10 10
Sri Lanka 10/15 10 10
Sweden 10/15 10/15 10/15
Switzerland 5/15 5/10 5
Tajikistan 5/10 8 10
Thailand 10 10/15 5/10/15
Tunisia 15 12 15
Turkey 15/20 10/15 10
Turkmenistan 10 10 10
Ukraine 5/15 5 5
United Arab Emirates 5/10 10 0
United Kingdom 5/15 10 2/10
United States 10/15 12 10/15
Uruguay 5/15 10 10
Uzbekistan 5/15 5 2/5
Venezuela 5/10 5/10 5/10
Vietnam 10 10 5/15

iv Taxation on receipt

Non-local dividends and income received from non-Korean sources are generally included in the income tax base of the recipient and subject to tax. Dividends attributable to investors resident in Korea are in principle subject to corporate income tax at progressive tax rates of 11 per cent (for taxable income up to 200 million won), 22 per cent (for taxable income from 200 million won to 20 billion won), 24.2 per cent (for taxable income from 20 billion won to 300 billion won), and 27.5 per cent (for taxable income in excess of 300 billion won). Taxes imposed by foreign governments on income recognised by a resident taxpayer are allowed as a credit within the limit against the income taxes to be paid in Korea, or as deductible expenses in computing the taxable income. The excess foreign tax credit can be carried forward for up to five years.


Entities are commonly funded through either debt, equity or both. Although dividends are not tax-deductible, interest expenses incurred in the course of borrowing, including guarantee fees and bank fees, may be deducted for tax purposes.

i Thin capitalisation

Interest incurred in the normal operation of a business is, in general, recognised as a tax-deductible expense as long as the relevant loan is used for business purposes. A shareholder loan extended by a foreign parent company to its Korean subsidiary, however, is subject to the thin capitalisation rule, whereby any interest paid on the shareholder loan in excess of two times the paid-in capital of such Korean company contributed by such foreign parent company (in the case where the Korean company is a financial institution, six times the paid-in capital) cannot be recognised as a tax-deductible expense and will be subject to corporate tax. Furthermore, the excess amount of the interest will be deemed as a dividend and subject to withholding tax at the statutory rate of 22 per cent (inclusive of local surtax).

In line with the Organisation for Economic Co-operation and Development (OECD)'s recommendation on the limitation of interest expense deductions (base erosion and proft shifting (BEPS) Action 4), effective from 1 January 2019, interest expense paid by a Korean company with respect to intercompany loan transactions with overseas related parties in excess of 30 per cent of the 'adjusted taxable income' (i.e., taxable income before depreciation and net interest expenses) cannot be recognised as tax-deductible expenses and will be subject to corporate tax.

As a result of introduction of the OECD rule on limitation of interest, the rule that imposes a higher tax burden (i.e., recognition of lower tax-deductible expenses) applies between the thin capitalisation rule and the OECD rule.

ii Deduction of finance costs

Interest payments and other borrowing costs are generally tax deductible. Interest incurred in the ordinary course of business is deductible as long as the related loan is used for business purposes. There are, however, a number of exceptions to the general rule, as follows, where the interest payments will not be tax deductible:

  1. any borrowings from a foreign shareholder, or from a third party under a payment guarantee by the foreign shareholder, that exceed two times (six times for financial companies) the equity of the relevant foreign shareholder, any such excess interest and discount fees are non-deductible and are re-characterised as dividends (thin capitalisation rule);
  2. net interest in excess of 30 per cent of the adjusted taxable income for all related-party loans will be non-deductible from 1 January 2019;
  3. debentures for which the creditor is unknown;
  4. bonds and securities on which the recipient of interest is unknown;
  5. construction loans and loans for the purchase of land and fixed assets up to the date on which the assets are acquired or completed must be capitalised as part of the cost of the asset and depreciated over the life of the asset, whereas interest incurred after the date of completion or acquisition is deductible; and
  6. interest on loans related to non-business purpose assets or funds loaned to related parties.

For foreign corporations without a permanent establishment, interest payments and other borrowing costs are not deductible.

iii Restrictions on payments

There are no specific restrictions on payment of dividends. Under the Korean commercial law, however, a company may pay dividends within the limit of the value of net assets stated on the balance sheets after deducting the amount of capital and reserves. In such respects, there is a limitation on the amount of dividends payable.

iv Return of capital

Return of capital is not permitted and equity capital can be repaid by way of a reduction. Reduction on a pro rata basis based on the ratio of holdings by shareholders would generally not trigger any tax implications. If the repurchase price of the shares exceed the initial acquisition price of such shares, the differential between the repurchase price and acquisition price would be deemed as dividends and subject to dividend income taxation. Where shares are held by related parties and shares of only specific shareholders are reduced at lower than fair market value, any gains incurred by a majority shareholder who, together with related parties, hold 1 per cent or more of the total number of shares issued or 300 million won or more in face value of the shares, is subject to gift tax.


i Acquisition

Non-local companies acquiring local businesses commonly structure the transaction by using local holding companies as a vehicle for acquisition of the local business. Although buyers may use both debt or equity, or both to fund their investment, investors generally prefer the use of debt, as this allows the local company to deduct any interest expenses incurred on its borrowings against its taxable income within certain limits prescribed under the tax law. In such cases, the interest rates on borrowings from related parties should be set at an arm's-length rate equal to the market rate. Investors should also take into consideration thin capitalisation and interest limitation rules discussed in Sections VII.i and ii.

ii Reorganisation

For a merger that meets all of the following requirements, capital gains or losses on a transfer may be exempt if:

  1. a merger is conducted between domestic corporations that have continued to operate their business for at least one year as of the registration date of the merger, provided that the corporation is not established solely for purposes of merging with other corporations;
  2. the value of the stocks of a surviving corporation or the parent corporation of the surviving corporation is at least 80 per cent of the total costs of the merger received by the stockholders of a merged corporation in return for such merger;
  3. the stocks are distributed in proportion to the equity ratio of each relevant stockholder in the merged corporation;
  4. the controlling stockholders of the merged corporation hold such stocks until the last day of the business year in which the registration date of the merger falls;
  5. the surviving corporation continues to operate the business succeeded to from the merged corporation until the last day of the business year in which the registration date of the merger falls; and
  6. the surviving company continues to employ more than 80 per cent of the merged company's employees by the last day of the business year in which the registration date of the merger falls.

If wholly owned subsidiaries are merged into a parent company or merged with each other, the merger may be implemented on a tax-free basis even if the above conditions are not satisfied, provided that both are domestic companies.

However, the tax-free benefits for a qualified merger may be 'clawed-back' if assets or shares of the surviving company are disposed of within two to three years after the merger.

iii Exit

There are no specific tax penalties associated with a business relocating outside of Korea. Entities seeking to close their Korean operations would be required to liquidate and dissolve the Korean entity and file final tax returns.


i General anti-avoidance

The Korean tax law provides for a 'substance-over-form' rule that allows a transaction that meets formality requirements to be re-characterised based on its substance. Under the 'substance-over-form' rule, each transaction under a series of transactions undertaken for no purpose other than tax avoidance may be re-characterised for tax purposes to reflect the substance of such series of transactions.

ii Controlled foreign corporations

Pursuant to the Korean tax laws, a Korean resident who owns, directly or indirectly, 10 per cent or more of the outstanding shares of a controlled foreign corporation (CFC) at the end of each taxable year is taxed directly on the pro rata portion of the distributable retained earnings of the CFC as deemed dividends, even if the CFC does not distribute the income. Where a CFC actually distributes its retained earnings as dividends subsequent to the taxation of this amount as deemed dividends, the distributed amount is excluded from the scope of deemed dividends.

A CFC is defined as a foreign corporation meeting the following conditions: (1) the foreign corporation has a head or principal office located in a country or region in which the effective tax rate on the income actually earned by the corporation is 15 per cent or less; (2) the foreign corporation has a special relationship with a Korean resident; and (3) such Korean resident directly or indirectly owns 10 per cent or more of the foreign company's outstanding shares at the end of each taxable year.

There are two main exceptions to the CFC rules: (1) the active business operation exception; and (2) the qualified holding company exception. Under the active business operation exception, the CFC rules do not apply if the foreign company has an office, shop, factory or other fixed facility in the foreign country through which it actually engages in business operations. Under the qualified holding company exception, the CFC rules do not apply if the subsidiaries of the foreign holding company, which are located in the same country or region as the foreign holding company, have held stocks issued by its affiliates for at least six consecutive months as of the date of dividend distribution and the passive income (i.e., dividend and interest income) derived by the foreign holding company from subsidiaries located in the same country or region constitutes 90 per cent or more of the foreign holding company's total income (excluding income derived from the conduct of active business).

iii Transfer pricing

The Korean transfer pricing regulations are based on the arm's-length standard and are generally consistent with the Organisation for Economic Co-operation and Development (OECD) Guidelines. The Korean transfer pricing regulations prescribe transfer pricing methods, impose transfer pricing documentation requirements, and contain provisions for advance pricing agreements (APAs) and mutual agreement procedures (MAPs).

The Korean transfer pricing regulations stipulate that transfer prices should be consistent with the arm's-length standard. The transfer pricing methods stipulated in the Korean tax laws are as follows:

  1. comparable uncontrolled price method, resale price method or cost-plus method;
  2. profit split method and transactional net margin method; and
  3. other unspecified methods.

The most appropriate and reliable method should be adopted among the methods above considering all relevant factors and circumstances.

iv Tax clearances and rulings

Advance tax rulings may be obtained prior to completing a corporate transaction through a formal advance tax ruling system established by the National Tax Service (NTS). When seeking an advance ruling, the party seeking the ruling must disclose its identity and all the relevant facts applicable to the transaction. Although tax clearances or rulings are not required to acquire a local business, a taxpayer conducting international transactions with foreign parties are required to disclose such transactions by submitting a statement of international transactions to the relevant district tax office by the deadline for filing a tax return.


The Korean tax laws introduced anti-avoidance measures aligned with the OECD recommendations specifically on BEPS Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status), among others, to prevent abusive business structure aimed at decreasing the Korean tax revenue. The measures include the following:

  1. The PE rules were expanded to bring them in line with the latest OECD guidelines. With respect to dependent agent PEs, a person that plays a principal role leading to the conclusion of contracts may constitute a PE, even if such person does have the authority to conclude contracts. Moreover, rules were introduced to counter artificial avoidance of a PE through fragmenting business activities to take advantage of PE exemptions for activities of a preparatory and auxiliary nature.
  2. The foreign investment tax incentive scheme, which provided tax exemptions for foreign-invested companies in new growth sector businesses, was repealed as a result of being identified as being harmful and resulting in the brief inclusion of South Korea in the EU's list of non-cooperatives jurisdictions.
  3. The loss carry-forward offset limit for branches of foreign corporations in South Korea was reduced from 80 per cent to 60 per cent from 1 January 2019 in line with the measures already implemented for domestic corporations.
  4. The introduction of new rules to treat an overseas investment vehicle as the beneficial owner of Korean-source income if at least one of the following conditions are met:
    • the investment vehicle is subject to tax in its jurisdiction of residence and the investment vehicle was not established with the purpose of evading Korean tax;
    • the investment vehicle is unable to disclose its investors or only partially discloses, in which case the investment vehicle may be considered the beneficial owner in respect of income attributed to the investors not disclosed (treaty benefits denied when this condition applies); or
    • the investment vehicle is considered the beneficial owner under the provisions of an applicable tax treaty.
  5. The transfer pricing rules are expanded to provide that in determining whether a transaction is at arm's length, the tax authority must accurately delineate the transaction in consideration of the commercial and financial conditions between a resident and its foreign related party, and where a transaction lacks commercial reason, the tax authority must disregard or recharacterise the transaction.


The 2019 tax revision bill issued in July 2019 focuses on boosting the economy and supporting industrial innovation, pursuing inclusiveness and fairness and broadening the tax base and improving the tax system. The bill contains various tax incentives aimed at promoting investments, primarily those involving small and medium-sized companies and start-ups. Various tax reduction measures are aimed at encouraging research and development. These measures are expected to provide more leverage for smaller businesses to benefit from tax incentives for various investments made. The tax authorities seek to also improve the tax system as a means for broadening the tax base and increasing tax revenue.


1 Sung Doo Jang is a partner and Maria Chang is a senior foreign attorney at Bae, Kim & Lee LLC.