South Korea To Tax Foreign Investors In Kimchi Bonds

by Mary Swire, Tax-News.com, Hong Kong

09 September 2011

The Ministry of Strategy and Finance has announced that it will impose a withholding tax on interest received by overseas investors in foreign currency bonds issued in South Korea.

In measures to ease capital inflows and volatility, and curb increases in short-term debt, during a period of global financial uncertainty, the Ministry had already, this year, re-introduced a 14% withholding tax on interest paid to foreign investors in South Korean government bonds, lowered the ceiling on banks’ foreign exchange positions, and imposed a levy on banks’ foreign-currency liabilities.

The current measure involves the so-called ‘Kimchi’ bonds, or foreign currency-denominated bond issued in the South Korean market. While they are defined as bonds from foreign issuers, the term is also used in practice to refer to such bond issuance by domestic entities.

With effect from next year, after parliamentary approval, foreign investors will be required to pay a 14% tax on interest income from Kimchi bonds. The Ministry has also described the move as establishing equality with the taxes payable by domestic investors in the same bonds.

In addition, it was disclosed that it is planned for taxes to be imposed on some derivative products, also from next year.

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