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FAQ

  • Title
    What are the cases where the amounts of reduced or exempted taxes, such as the corporate tax, are recollected?
  • Content

    The following is the summary of the related cases where the reduced or exempted taxes are recollected. For specific information, please refer to the Restriction of Special Taxation Act Article 121-5.

    - Where a registration is revoked or the relevant foreign-invested company closes down its business

    - Where the standards for tax deduction or exemption under the Restriction of Special Taxation Act are not satisfied

    - Where a person, who has received a corrective order as he/she failed to implement the contents of reports, fails to comply with it 

    - Where a foreign investor transfers the stocks, etc. which he/she owns under the Act to a national or a corporation of the Republic of Korea

    - Where the payment of investments, acquisition of long-term loans or employment of workers conducted by a foreign-capital invested enterprise engaged in a business other than that listed in the Restriction of Special Taxation Act within five years (three years for standards for tax deduction or exemption relating to employment) 

    - Where the subject matter of investment is used for other purpose than the reported ones or disposed of

    - Where the ratio of the stocks, etc., of foreign investors falls short of the ratio of the stocks, etc., at the time of deduction or exemption, after the taxes have been reduced or exempted 

  • Title
    Does the minimum tax rate apply to a company which is subject to the tax deduction or exemption for foreign investment?
  • Content

    The Restriction of Special Taxation Act Article 121-5 provides that such case is not subject to the minimum tax rate.

  • Title
    What are the required documents when registering a foreign-invested company, and how long does it take?
  • Content

    The following documents are required for foreign-invested company registration. The registration procedure normally takes three days.

    - A copy of report of incorporation and business registration application form

    - A certified copy of corporate register

    - A copy of office lease contract

    - A copy of shareholder statement or investor statement

    - A copy of business license and certificate of completion of report (a copy of permission and registration form or a business plan are required for the relevant company) 

    - A copy of cash investment statement (in case the applicant invests cash)

    - A copy of foreign investment notification form or a copy of certificate of purchase of foreign exchange

    - Foreigner registration card or a copy of passport (In case the representative of the company is a non-resident)

  • Title
    What are the methods of figuring the arm’s length standard that are recognized by the Korean tax authority?
  • Content

    The Adjustment of International Taxes Act allows companies to choose the most reasonable method from the below:  

    1. Comparable Uncontrolled Price Method

    1. Comparable Uncontrolled Price Method

    2. Resale Price Method

    2. Resale Price Method

    3. Cost Plus Method

    3. Cost Plus Method

    4. Profit Split Method

    4. Profit Split Method

    5. Transactional Net Margin Method

    5. Transactional Net Margin Method

    6. Other methods deemed reasonable as prescribed by Presidential Decree

    Other methods shall be applied only when computing arms’ length price is not possible under the methods mentioned above.

  • Title
    What is the transfer price taxation system?
  • Content

    In order to prevent international tax evasion of for example multinational companies, Korea has a system to protect its country’s tax rights. If a company has a special relationship with a company A and sells goods at a cheaper price or buys goods at a higher price (actual price) compared to other trading partners (arms-length price), the tax rate levied will correspond to the arms-length price and not the actual price.

  • Title
    How is the amount of tax reduced and/or exempted calculated if a foreign-invested company operates both tax deduction business and businesses that do not receive tax deduction?
  • Content

    For this case, the foreign-invested company shall differentiate the tax deduction business from other businesses and amount of tax assessment of the corporate tax is multiplied by the tax base of the relevant business from the total tax standard, which is then multiplied by the tax deduction ration. 

    The formula is as the following: 

     

    Amount of tax reduced and/or exempted = amount of tax assessment × (tax base of the relevant business ÷ total tax standard)

    × deduction rate

     

    Tax deduction ratio = foreign investment rate × deduction rate (100%, 50%)

  • Title
    Can a foreign-invested company benefit from tax deduction under Article 121.2 of the Restriction of Special Taxation Act and also from Article 6 of the Act for startup small businesses?
  • Content

    A foreign-invested company shall choose either foreign investment tax deduction or startup small business tax deduction if the company can benefit from both of them. 

    However, if the company can differentiate the business that benefit from foreign investment tax deduction from other businesses and the income generated from these businesses, the company can receive tax deductions for both foreign investment business and other businesses. 

  • Title
    When is the deadline for applying for tax deduction of a foreign-invested company and can the company receive tax deduction if it has applied for tax deduction after the deadline?
  • Content

    The deadline for applying for tax deduction is the closing date of the tax year that includes the opening date for business of the foreign-invested company. 

    If a foreign-invested company applies for tax deduction after the deadlines, the company can receive tax deduction within the period left excluding the tax year that includes the date of applying for tax deduction. The company will not receive tax rebate for the tax paid before the decision for the tax deduction. 

  • Title
    Even if a foreign-invested company receives tax deduction for five to seven years, the company does not generate profit in the initial stage of business due to its large-scale investment. Therefore, would not the tax deduction be ineffective?
  • Content

    Tax deduction shall be applied to the initial year of generating income of the business that is subject to tax deduction, not from the opening date for business. Therefore, the tax deduction is very effective to the recipient. 

    However, if there is no profit from the relevant business in the fifth year of the opening date for business, the tax deduction shall be applied from the fifth year of the opening date for business. 

  • Title
    What are the differences in tax between a foreign-invested company and a branch office in Korea?
  • Content

    There is no difference in the tax rate and the report and payment of taxes between a foreign-invested company and a branch office except for the scope of the obligation. 

    A foreign-invested company is a domestic corporation. Therefore, it is required to pay corporate taxes for all income generated at home and abroad. However, a branch office in Korea shall only pay taxes for the amount of income generated in Korea. 

    A branch office in Korea may have to pay branch tax depending on the tax treaty with the relevant country and it shall be benefit from tax deductions under the Restriction of Special Taxation Act like other Korean corporations. 

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