United States-South Korea Tax Treaty
South Korea International Tax Compliance Rules
Quick Summary. The Republic of Korea (ROK), situated in East Asia, is bordered by China and Russia, the Korea Strait and the Sea of Japan, as well as the East China Sea. Its territories consist of the Korean Peninsula and its adjacent islands. A centralized democratic republic, Korea provides for a unicameral legislative branch known as the National Assembly and vests executive power in the president, who serves as the head of state.
Korea is comprised of eight provinces. Under its current constitution, revised and amended in 1987, the “sovereignty of the Republic of Korea shall reside in the people, and all state authority shall emanate from the people.”
The ROK legal system is based on civil law. Subdivisions within the district and high courts govern commercial activities and bankruptcies and enforce property and contractual rights with monetary judgments. The ROK has a written commercial law, and matters regarding contracts are covered by the Civil Act.
The revised Korea-U.S. Free Trade Agreement (KORUS) entered into force January 1, 2019, and continues to allow U.S. investors broad access to the ROK market. Currently, all forms of investment are protected under KORUS, including equity, debt, concessions, and intellectual property rights. With a few exceptions, U.S. investors are treated the same as ROK investors (or third-country investors) in the establishment, acquisition, and operation of investments in the ROK. Investors may elect to bring claims against the government for an alleged investment breach under a transparent international arbitration mechanism.
Income Tax Treaty between the United States and South Korea
An Income Tax Convention with Korea was signed June 4, 1976, and instruments of ratification were exchanged on September 20, 1979.
U.S,-South Korea Tax Treaty.
- THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF KOREA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND THE ENCOURAGEMENT OF INTERNATIONAL TRADE AND INVESTMENT, SIGNED AT SEOUL JUNE 4, 1976
- TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF KOREA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND THE ENCOURAGEMENT OF INTERNATIONAL TRADE AND INVESTMENT, SIGNED AT SEOUL ON JUNE 4, 1976
An Income Tax Convention with Korea was signed June 4, 1976, and submitted by the President to the Senate on September 3, 1976. On July 19 and 20, 1977 and on June 6, 1979, the Senate Committee on Foreign Relations held hearings and this Technical Explanation was presented. The Senate voted its advice and consent on July 9, 1979, and instruments of ratification were exchanged on September 20, 1979.
Currency. South Korean Won (KRW)
Common Legal Entities. Stock corporation, limited liability company, and branches.
Tax Authorities. National Tax Service
Tax Treaties. Korea is a signatory to more than 90 tax treaties. It is a signatory to the OECD’s MLI.
Corporate Income Tax Rate. 10% – 25%
Individual Tax Rate. 6% – 42%
Corporate Capital Gains Tax Rate. Ordinary income rates apply.
Individual Capital Gains Tax Rate. Varies.
Residence. Based upon concept of domicile or place of residence for at least 183 days.
Interest. 14% / 20%
Royalties. 20% (0% for resident companies and varied rated for resident individuals).
Commissions. 20% (0% for resident companies and varied rated for resident individuals).
Transfer Pricing. Based upon arm’s-length standard.
CFC Rules. Yes.
Hybrid Treatment. Expenses are deductible with respect to hybrid financial instruments only if corresponding income is subject to tax in other jurisdiction.
Inheritance/estate tax. Up to 50%.
An independent kingdom for much of its long history, Korea was occupied by Japan beginning in 1905 following the Russo-Japanese War. In 1910, Tokyo formally annexed the entire Peninsula. Korea regained its independence following Japan’s surrender to the US in 1945. After World War II, a democratic government (Republic of Korea, ROK) was set up in the southern half of the Korean Peninsula while a communist-style government was installed in the north (Democratic People’s Republic of Korea, DPRK). During the Korean War (1950-53), US troops and UN forces fought alongside ROK soldiers to defend South Korea from a DPRK invasion supported by communist China and the Soviet Union. A 1953 armistice split the Peninsula along a demilitarized zone at about the 38th parallel. PARK Chung-hee took over leadership of the country in a 1961 coup. During his regime, from 1961 to 1979, South Korea achieved rapid economic growth, with per capita income rising to roughly 17 times the level of North Korea in 1979.
South Korea held its first free presidential election under a revised democratic constitution in 1987, with former ROK Army general ROH Tae-woo winning a close race. In 1993, KIM Young-sam (1993-98) became the first civilian president of South Korea’s new democratic era. President KIM Dae-jung (1998-2003) won the Nobel Peace Prize in 2000 for his contributions to South Korean democracy and his “Sunshine” policy of engagement with North Korea. President PARK Geun-hye, daughter of former ROK President PARK Chung-hee, took office in February 2013 as South Korea’s first female leader. In December 2016, the National Assembly passed an impeachment motion against President PARK over her alleged involvement in a corruption and influence-peddling scandal, immediately suspending her presidential authorities. The impeachment was upheld in March 2017, triggering an early presidential election in May 2017 won by MOON Jae-in. South Korea hosted the Winter Olympic and Paralympic Games in February 2018, in which North Korea also participated. Discord with North Korea has permeated inter-Korean relations for much of the past decade, highlighted by the North’s attacks on a South Korean ship and island in 2010, the exchange of artillery fire across the DMZ in 2015, and multiple nuclear and missile tests in 2016 and 2017. North Korea’s participation in the Winter Olympics, dispatch of a senior delegation to Seoul, and three inter-Korean summits in 2018 appear to have ushered in a temporary period of respite, buoyed by the historic US-DPRK summits in 2018 and 2019.
Tax Treaty Network – International Tax Attorneys
Our international tax expertise allows us to guide clients through tax planning and compliance so that they can focus on what matters most. At Freeman Law, our clients are engaged in an interconnected business environment that spans across the globe. From supply chains to markets, cross-country taxation impacts every global business.