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Korean government\'s action on tax treaty shopping (June 6, 2005).
The Korean government will supplement domestic tax regulations and seek to amend tax treaties with other countries to prevent local and foreign capitals from dodging taxes through international tax havens.
Purpose of the revision
The purpose of the revision is found in the Korean government\'s will to improve transparency of tax administration by integrating into international tax treaties and domestic tax law and regulation that determines whether to levy tax on capital gains on stock, interests, dividends and royalties based on where the "true" investor is located, when foreign entities invest in a Korean asset through a paper company.
So far the government has focused on avoiding double taxation between the country invested and the country of an investor when signing and revising international tax treaties.
However, the size of foreign investment to Korea and Korean investment overseas have become larger and investment methods have also complicated and diversified, and domestic and foreign funds have conducted treaty-shopping or misused international tax treaties prompting the government to take relevant measures. The tax law revision is designed to adjust outdated tax treaties to reflect changes so far and meet global standards.
Members of the Organization for Economic Cooperation and Development (OECD) including the U.S., Britain and Canada have integrated regulations on preventing tax treaty abuse into domestic tax laws and inserted regulations on stemming tax evasion when signing and/or revising tax treaties. They have also tightened regulations on international tax havens through international organizations such as OECD.
Complement domestic tax laws
When local and foreign concerns invest in a Korean asset and misuse international tax treaties through a paper company set up to dodge taxes, they will be subject to a tax treaty based on where the "true" investors are located. The amendment to tax law that includes the government\'s new regulations into domestic tax law is set to be submitted to the regular session of the National Assembly in 2005.
Plan to revise international tax treaties
To cope with treaty abuses by third-country residents who enjoy the benefit of tax treaties while investing in Korea via tax havens, the government is planning to stipulate in all international tax treaties that benefits stated in the tax treaties such as tax exemption or application of limited tax rate will not be eligible for such abuses.
In addition, the government is seeking to prevent third country residents attempting to take advantage of a tax haven from benefiting from the tax treaty when the counterpart country that had concluded a tax treaty with Korea introduces a tax haven afterwards as in the case of Malaysia.
Korea is to enter into the second round of negotiations with Malaysia in June Seoul to discuss revising the bilateral tax treaty and excluding Labuan, a tax haven in Malaysia, from the Malaysia-Korea tax treaty.
As for the treaty stipulating that taxes on passive income such as interests and royalties will be levied only in countries where true investors are located, the Korean government is pushing for inclusion of regulations stipulating that investors are entitled to treaty benefits only when they are residents of the country concerned.
Revision of tax treaties between Korea and OECD member countries is under review to ensure that taxes on capital gains from stock sales will be imposed not just in the country where an investor is located but in the country where the returns are generated.
The government is also seeking tax imposition by the country where the returns are generated when it comes to capital gains from stock sales by majority shareholders who own over 25 percent of the company.
The government is also seeking tax imposition by the country where the returns are generated when it comes to capital gains from stock sales by majority shareholders who own over 25 percent of the company.
The law revision will be geared toward that taxes on capital gains from stock sales of a company which owns over 50 percent of its assets in real estate can be levied by the country where the real estate is located.
< Source : Ministry of Finance and Economy >
