Calls For Corporate Tax Simplification In Korea Intensify

by Robert Lee, Tax-News.com, London

18 March 2002

Recent talk of improving the investment environment in Korea in order to establish Seoul as a regional hub for international business has intensified calls for simplification of the country's sometimes complex tax regime.

Although the existing rate of taxation for companies operating in Korea is not unreasonable when compared to other developed countries, difficulties in achieving clarification about the establishment of regional headquarters can often lead to punitive taxation on non-Korea sourced income.

A company deciding to locate regional headquarters in Seoul, for example, could end up being subject to full tax on all dividends, interest, and capital gains received from regional subsidiaries, and to a withholding tax of up to 27.5% on interest, dividends and capital gains received from the Korean headquarters by its foreign shareholders. It could also be subject to restrictions on the tax deduction on interest which it pays on its own borrowing.

According to tax experts in the region, measures which could improve Korea's competitiveness as a location for international business could include the adoption of a participation regime, whereby the Korean holding company would be exempted from taxation on dividends and capital gains received and distributed, subject to certain conditions.

It has also been suggested that the taxation of intra-group financing activities would need to be substantially simplified. In order to attract regional management services and R&D and licensing activities to the country, tax incentives could be granted on fees and royalties received by the local headquarters company from regional subsidiaries, according to experts.

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