Korean Tax Risk of Foreign Corporation Deemed “Actual Business Management Locale” within Korea: Korea Tax Law Basics

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

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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 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

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