South Korea's Withholding Tax On Bonds Passes First Hurdle

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

09 December 2010

A committee of South Korea’s parliament has approved the proposal to re-apply withholding tax on interest payable to foreign investors in South Korean government bonds.

The reintroduction of the withholding tax, which was removed in May last year to try and encourage investment by long-term foreign funds, is now deemed necessary to put a brake on the substantial flow of volatile short-term foreign capital into the country’s financial markets.

The passing of the bill through the committee means that, with the support of the Ministry of Strategy and Finance, the tax could be effective by the beginning of next year. It would be applicable on all bonds purchased by foreign investors on or after November 13, 2010.

The legislation would reintroduce the previous withholding tax on government bonds held by foreign investors, but leaves the actual rate to be applied between zero and 14%, at the eventual choice of the government. However, given the perceived necessity to reduce the inflow of foreign funds, it was said that the maximum 14% rate was more than likely to be applied immediately.

The committee also passed a proposal that South Korean residents should declare all accounts held with overseas financial institutions above a certain amount by June next year. If those accounts were not declared, or a resident declared a smaller amount than was held in such an account, a fine would be payable.

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