제목 없음June 30, 2006
Designation of subject
territory under Special Withholding Procedure
* Source
: Ministry of Finance and Economy
\'Special Withholding Procedure\' refers to a new tax regime introduced
with a view to preventing the abuse of tax treaty benefits. When non-residents
or foreign companies residing in a designated area subject to the tax regime
(\'subject territory\') gain interest, dividends, royalties and capital gains
from the alienation of shares, they are subject to withholding tax as stipulated
under the domestic tax law. The tax withheld shall be returned if they indeed
are proved to be beneficial owners after due diligence.
1. Legal grounds for the designation of subject territory
The Special Withholding Procedure will take into effect from July 1, 2006
in accordance with the Income Tax Act (Art. 156-4) and Corporate Tax Act (Art.
98-5).
2. Designated territory
The Ministry of Finance and Economy has designated Labuan, Malaysia as a
subject territory, and duly posted such announcement.
3. Reasons for the designation
After the designation of \'subject territory\' was confirmed after consideration
whether a candidate territory or a country retains a special taxation system
which is considered harmful under international standards and whether a candidate
territory or a country has a tax treaty with Korea that may be abused for the
purpose of tax avoidance.
4. Effect of designation
The withholding taxpayer should comply with the new regime as stipulated
under the domestic tax law* when he/she provides interest, dividends, royalties
and capital gains from the alienation of shares with non-residents or foreign
companies residing in the designated territory (Labuan, Malaysia).
* Withholding tax
rates under the domestic tax law
- Earning of interest,
dividends or royalties: 25 percent of the paid amount
- Capital gains:
the lesser of the 10 percent of the paid amount or 25% of the capital gains
5. Additional designation in the future
Territories or countries subject to the special withholding procedure may
be newly designated, if such territories or countries retain harmful taxation
system within the purview of international norms or when cases of tax treaty
abuse are deemed to be frequent. Designated territories or countries can be
lifted out of the list with elimination of probable tax avoidance due to changes
in their tax regime or revision of tax treaty.
6. Operational process of special withholding procedure
(1) Withholding tax rate
When a withholding taxpayer remits interest, dividends, royalties and capital
gains from the alienation of shares (collectively, \'income\') to non-residents
or foreign companies residing in Labuan, Malaysia, he/she is subject to the
above withholding tax as stipulated under the domestic tax law.
However, when recipient of the income concerned obtains a prior approval
from the Commissioner of Korea\'s National Tax Service, then the tax rate* under
the tax treaty shall be applied.
* Withholding tax rates under the tax treaty by and between Malaysia and
Korea
- 15 percent on earning of interest, 10~15 percent on dividends and royalties,
and tax exemption on capital gains from the alienation of shares are imposed
to non-residents and foreign companies residing in Labuan, Malaysia.
(2) Application for prior approval
The actual beneficiary of the income generated in Korea (earning of interest,
dividends, royalties, and capital gains from alienation of shares) submits a
\'standard application form\' to the Commissioner of Korea\'s National Tax Service
prior to the actual receipt of such income, together with supplementary documents
proving \'his/her being the beneficial owner of such income\' (i.e., \'certificate
of resideny in the subject territory/country, and \'income disposal plan\').
(3) Review of the application and notification of the review result
Upon receipt of prior application from the beneficial owner, the National
Tax Service shall review it and determine whether the applicant being the beneficial
owner of income generated in Korea and notify the decision within 3 months.
(4) Application for \'correction request\' and notification of the review result
When failed to apply for or obtain \'prior approval\' for such reasons as absence
of required documents, non-residents or foreign companies can file a \'correction
request\' with due presentation of written documents proving their being the
legitimate beneficial owner under the tax treaty within 3 years from the withholding
tax payment date.
The head of pertinent tax office shall determine whether refund is available
after verifying whether the \'correction request\' being within the purview of
the set-out correction cases within 6 months upon receipt of such request.
