Updated Canada-S Korea DTA Cuts Withholding Tax

by Mike Godfrey, Tax-News.com, Washington

06 September 2006

The governments of Canada and South Korea have signed revisions to the 1980 bilateral tax treaty which will cut taxes on dividend and interest income.

If approved, the agreement will cut withholding tax on dividend income for shareholders from each country (with a 25% or more stake in a company) to a maximum of 5%, down from the current 15% rate.

The maximum tax rate on interest income will also fall, from 15% to 10%, while state-run banks will be exempted from taxation as part of efforts to promote bilateral investment.

The South Korean Ministry of Finance and the Economy said in a statement that the tax cut "is expected to spur Canada's investment in Korea".

The statement added that the updated agreement clarifies the boundaries for taxing profits made during securities transfers, and prevents the setting up of shell companies in third countries to avoid paying taxes, a tactic known as 'treaty shopping'.

The two countries have also agreed to more freely exchange tax information.

The revised agreement needs to be approved by lawmakers in both countries, but the ministry estimated that the new treaty could become effective by the beginning of next year.

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