Can a Foreign Company be Deemed a Domestic Company for Tax Purposes and Taxed on Worldwide Income?

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 mKorean Tax Lawyersade 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:

  1. Headquarters within Korea; or 
  2. 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:

  1. Place where the Board of Directors meets or makes Major Decision Making Bodies Meet;
  2. Place where Senior Management Carries out Major Activities;
  3. Place where Accounting Records are Kept; or
  4. 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.

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