If Korea deems a foreign incorporated company a Domestic Corporation, the company shall be taxed on its worldwide income. The relevant law, this determination is made under, is the Corporate Tax Act of Korea (“CTA”). In the typical case, the National Tax Service of Korea designates the foreign-incorporated company a Domestic Corporation and requests details on overseas earnings in order to impose taxes on overseas earnings. Of course this leads, invariable, to your Korean tax lawyer challenging the determination to the Korean courts.
Domestic Company Tax Residency Test in Korea
The Korean Corporate Tax Act defines a Domestic Corporation as a corporation with:
- Headquarters within Korea; or
- Actual Business Management Place in Korea.
Disputes, normally, concern the definition of Actual Business Management Place after an imposition of a tax on worldwide income (often based on funds being forwarded to the parent company by the Korean company – E.g. license fees) and a request by the National Tax Service of information related to the worldwide income of the parent company.
The Supreme Court of Korea defines the Actual Business Management Place as: the place where “critical management and commercial decisions occur that are necessary to carry out business activities.” The Supreme Court has provided examples to be utilized by lower courts and has noted courts should deem the Actual Business Management Place as Korea if Korea is the:
- Place where the Board of Directors meets or makes Major Decision Making Bodies Meet;
- Place where Senior Management Carries out Major Activities;
- Place where Accounting Records are Kept; or
- Place where the CEO and other executives conduct business.
The Supreme Court, additionally, noted that if some of these activities occurred in Korea, only for a short period of time, the lower courts should not conclude that the Actual Business Management Place in Korea.
Please discuss this issue with your Korean Tax Lawyer and discuss how to structure your business in Korea to assist in avoiding this substantial risk.
- Korean Tax Risk of Foreign Corporation Deemed “Actual Business Management Locale” within Korea: Korea Tax Law Basics
- Korean National Tax Service Tax Law News Release to Foreign Corporate Taxpayers: Korean Tax Law Updates
- Korean Tax Law Amendment Press Release by Korean Government
- Korean Real Estate Acquisition Taxes for Purchase of Real Estate in Korea
- Filing your U.S. Taxes as an Expat in Korea: Foreign Earned Income Tax Exclusion
- Company Car Expense Deductions in Korea: Korean Tax Law Updates
- Amendments to Corporate Tax Rates in Korea for 2012: Korea Corporate Tax Rates in Korea
- Tax Liability of Controlling Shareholders in a Korean Company: Tax Law Updates
- Korea May Not Eat Apple’s Double Irish with a Dutch Sandwich Tax Strategy
- Personal Tax Rates in Korea to Rise in 2012: Individual Income Tax Rates in Korea