Foreign corporations, doing business in Korea, may be deemed local corporations subject to taxation on worldwide income if the foreign-incorporated company is deemed a Korean “domestic corporation” for Korean tax purposes. This liaison-office Korean Tax Risk can, thus, lead to taxes on worldwide income, a tax audit and even criminal sanctions against those operating in Korea. We have dealt with matters were employees, even, received exit bans.
Thus, in most cases the establishment of a local Korean corporation is essential in assisting in shielding your foreign corporation from tax and other liabilities unless substantial reasons exist to not establish a local Korean corporate entity.
One of the most significant risks of foreign companies doing business in Korea without a local entity is being deemed a local corporation subject to tax on worldwide income. A domestic corporation under the Corporate Tax Act of Korea is a company with its “actual business management locale” within in Korea.
The Supreme Court has ruled, in numerous cases, in this regard. One of the most noteworthy recent cases is a case concerning a Singaporean company that marketed foreign securities in Korea. The company succeeded in the National Tax Service of Korea’s challenge, however, the case cost the company a challenge right up to the Supreme Court.
Domestic Corporation Test in Korea: “Actual Business Management Locale”
Test to Determine is a Foreign Corporation shall be treated as Korean Corporation for Tax Purposes in Korea
The Korean Supreme Court, in a myriad of cases noted, in short, that lower courts should consider the “totality of circumstances” and, thus, consider such factors to determine if a foreign-incorporated corporation shall be considered a Korean domestic corporation for tax purposes.
The Supreme Court of Korea notes that following factors must be considered:
- If key senior management is operating in Korea;
- Whether the company houses key financial and other documents within Korea; and
- Whether the company holds board meetings and other important meetings in Korea.
Sean Hayes may be contacted at: SeanHayes@ipglegal.com.Sean is co-chair of the Korea Practice Team at IPG Legal. He is the first non-Korean attorney to have worked for the Korean court system (Constitutional Court of Korea) and one of the first non-Koreans to be a regular member of a Korean law faculty. Sean is ranked, for Korea, as one of only two non-Korean lawyers as a Top Attorney by AsiaLaw. Sean is known for his proactive New York-style street-market advice and his aggressive and non-conflicted advocacy. Sean works with some of the leading retired judges, prosecutors and former government officials working in Korea.Sean’s profile may be found at: Sean C. Hayes
- Korean Tax Risk of Foreign Corporation Deemed “Actual Business Management Locale” within Korea: Korea Tax Law Basics
- Can a Foreign Company be Deemed a Domestic Company for Tax Purposes and Taxed on Worldwide Income?
- Amendment to the Korean Foreign Investment Promotion Act 2019 – Investment Incentives in Korea
- Korean National Tax Service Tax Law News Release to Foreign Corporate Taxpayers: Korean Tax Law Updates
- Guide to Establishing a Company in Korea: Branch vs. Office; FIPA vs. FETA
- Korean Tax Law Amendment Press Release by Korean Government
- The Korean Tax Law Reform Proposal of 2022
- Company Car Expense Deductions in Korea: Korean Tax Law Updates
- Unfair/Wrongful Dismissal of Foreign Executives under Term Contract with Korean Chaebols
- Filing your U.S. Taxes as an Expat in Korea: Foreign Earned Income Tax Exclusion
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