South Korea: New withholding tax regime
Further to our Announcement A12065, dated 26 March 2012, regarding the new tax documentation required by foreign investors who want to enjoy the reduced treaty tax rates, we hereby provide an updated frequently asked questions (FAQ) document forwarded to us by our depository HSBC.
If a foreign investor wants to apply the default tax, then no forms will need to be completed at all. Clearstream Banking1 will apply the default action of full tax payment unless we are advised otherwise.
However, the foreign investor must be aware that this does not preclude the Korea National Tax Service (NTS) from enquiring or investigating at any time in relation to the past five years' tax where the foreign investor may have been enjoying the reduced tax rate under a Double Taxation Treaty (DTT).
According to the new tax regime, a foreign investor who wants to enjoy a reduced tax rate in accordance with a DTT signed by a foreign government and the government of South Korea will be required to submit the respective documentation.
If the application forms are submitted in error, the local tax authorities can enquire further and, based on the result of the investigations, the Korean tax authorities can issue a tax assessment bill retroactively for the past five years.
Background
Before the new procedures for claiming a reduced withholding tax rate pursuant to a DTT, there were no application procedures or any other formal process for making such a claim. Particularly with respect to funds and other overseas investment vehicles (OIVs), withholding agents generally determined the withholding tax rate based on the tax residence of the OIV obtained from the relevant revenue authorities, publicly available fund registration documents etc. The Korean tax auditor would then determine whether to request additional information with respect to the OIV’s investors based upon their examination of the withholding agent’s monthly withholding tax returns, a process that was cumbersome for all parties involved and, at times, contentious.
To make the process more transparent and efficient, the Korean Ministry of Strategy and Finance introduced new procedures in late 2011 for claiming a reduced withholding tax rate pursuant to a tax treaty, which will become effective for all income payments subject to withholding tax made on or after 1 July 2012.
Note: The new procedures apply only to claiming a reduced withholding tax rate pursuant to a DTT and do not impact the existing procedures for claiming any tax exemption under a DTT and do not apply to any tax exemption provided under Korean domestic tax law.
Overview of the new regime
The new withholding tax procedures introduce new application forms to be completed by the beneficial owners of Korean source income. To claim a reduced withholding tax rate pursuant to a DTT, the appropriate application should be completed by the beneficial owner and submitted to the withholding agent (for example, Korean company, custodian bank etc.) before the payment of Korean source income.
Submitted applications must be retained by the withholding agent for five years, starting from the day following the withholding tax payment due date, and submitted upon request to the Chief of the district tax office having jurisdiction over the withholding agent.
In general, applications will be valid for three years from the submission date; however, a new application must be completed and submitted if any changes occur to the information provided in the previously submitted application before the receipt of additional income. If applications are not submitted, the withholding agent will be required to apply the higher domestic statutory withholding tax rates.
Important note:
Korea is a beneficial owner market. That is, the investment registration certificate (IRC) must be obtained in the name of the foreign investor who benefits from the Korean sourced income. This rule is based on Article 6-10 of the Supervisory Regulation on Financial Investment Businesses enacted by the Financial Supervisory Commission:
| (a) | A foreign investor who wants to register with the financial supervisory service in order to invest in listed securities must file the “investment registration certificate application form” with official document(s) that prove(s) its legal existence. |
| (b) | A foreign investor who applies in accordance to the above item (a) must do so in the name of the person for whose account the investment will be made. |
In the case of a fund (where the Financial Supervisory Service has explained that the IRC must be obtained in the name of the fund), the following entities are generally involved:
- Fund;
- Fund manager;
- Trustee bank;
- Distributor;
- Global custodian bank;
- Subcustodian bank;
- Unit holder.
That is, the IRC must be obtained by the actual person who is the actual beneficial owner of the Korean source income. The IRC must not be obtained in the name of a "shell/paper" company whose actual ownership of the Korean source income vests in another person's name. In addition, omnibus accounts are strictly not permitted in South Korea.
Overseas Investment Vehicle (OIV)
A beneficial owner who receives Korean source income indirectly through an OIV should submit the appropriate application to the OIV rather than to the Korean withholding agent. The OIV is required to use the information contained in the beneficial owner’s application to complete the Report of Overseas Investment Vehicle (“OIV Report”) and the Schedule of Beneficial Owners (collectively the “OIV Forms”), both of which must then be submitted to the Korean withholding agent.
In the case of a tiered OIV structure, the OIV (the “investor OIV”) investing in another OIV (the “investee OIV”) is likewise required to prepare the OIV Forms and submit them to the investee OIV before the payment of Korean source income. OIV Forms submitted by an investor OIV to an investee OIV must be attached to the OIV Forms submitted by the investee OIV to the withholding agent or subsequent investee OIV, as the case may be.
Submitted beneficial owner applications and OIV Forms must be retained by the OIV and the withholding agent, respectively, for five years, starting from the day following the withholding tax payment due date, and submitted upon request to the Chief of the district tax office having jurisdiction over the withholding agent.
In general, OIV Forms will be valid for three years from the submission date; however, new OIV Forms must be completed and submitted if any changes occur to the information provided in the previously submitted OIV Forms before the receipt of additional income.
Definition of OIV
An OIV is broadly defined as any overseas vehicle that raises funds through an investment offering, manages investment assets, derives value from the acquisition and disposition of such assets, and distributes such derived value to its investor. Consequently, partnerships, limited liability companies and other types of non-corporate collective investment vehicles (for example, unit trusts) would likely be considered as OIVs.
An OIV may also include a holding company vehicle owned by one or more investors, although further guidance from the Korean tax authorities is necessary.
Public OIV
Certain public OIVs need only to complete and submit the OIV Report to the withholding agent or investee OIV. Moreover, the investor information disclosed on the OIV Report may be aggregated by country rather than by investor on the Schedule of Beneficial Owners.
To qualify for the reduced filing requirement, the OIV must:
- Be similar to a collective investment vehicle under the Financial Investment Services and Capital Markets Act and registered or approved under the laws of a tax treaty partner country;
- Comprise securities not issued by private placement and have at least 100 investors as of the end of the preceding fiscal year; and
- Not be subject to any tax treaty provisions that deny treaty benefits.
Under the first requirement, the OIV should attach to the OIV Report submitted to the withholding agent a document that verifies its registration or approval as a collective investment vehicle by the relevant financial supervisory authority as well as the prospectus.
If, in the case of a tiered OIV structure, such document is submitted to an investee OIV, it should also be attached to the OIV Report submitted by the investee OIV to the withholding agent or subsequent investee OIV, as the case may be. An investor OIV is counted as a single investor for the purposes of the second requirement.
New forms
The table below lists the new forms, responsible parties and information required.
| Form | Responsible Parties | Information/Documentation required |
| Application for Entitlement to Reduced Tax Rate on Domestic Source Income (Non-Resident Individual) [Form No. 29-12] | Applicant: Non-resident individual beneficial owner Recipient: Withholding agent or investee OIV |
|
| Application for Entitlement to Reduced Tax Rate on Domestic Source Income (Foreign Corporation) [Form No. 72-2] | Applicant: Foreign, non-individual beneficial owner (for example, corporation, pension fund etc.) Recipient: Withholding agent or investee OIV |
|
| Report of Overseas Investment Vehicle and Schedule of Beneficial Owners [Form No. 29-13] | Filer: Public and non-public OIVs and possibly holding company vehicles Recipient: Withholding agent or investee OIV |
|
Tax refund request
A beneficial owner who is entitled to a reduced withholding tax rate pursuant to a DTT but did not claim such reduced rate by submitting an application [Form No. 29-12 or 72-2] to the withholding agent may file a reclaim application with the Chief of the district tax office having jurisdiction over the withholding agent within three years from the last day of the month in which the initial withholding was made.
The applicant must also attach evidence to the reclaim application that confirms his tax residence (for example, certificate of tax residence or other equivalent document noted in the request form and any further documents the tax office may request).
Note: The tax reclaim process may require significant time and effort and, therefore, customers are highly recommended to make an effort to claim a reduced withholding tax rate initially through the new procedures.
Signature of forms
The person signing the forms must, in the case of individuals, be the individual himself/herself and, in the case of corporates, public and non-public OIVs, one or more authorised person(s) empowered to represent these entities and able to be held liable for the information declared therein. The NTS has verbally advised that the authorised person(s) should also be able to represent these entities on tax related matters since these forms relate to tax.
Important notes:
| i) | Clearstream will not be responsible to ensure the accuracy and contents of the forms. This must be completed accurately by the customer and investor, who must seek external professional tax advice on the application of the DTTs and understand the implications and consequences of inaccurate declarations. |
| ii) | Clearstream Banking does not perform any checks on the information provided. The only checks that Clearstream Banking and/or its depository HSBC makes upon receipt of documents are confined to non-financial information, such as whether the correct form is filled, whether the IRC name matches with records etc. |
| iii) | The internal processing time taken to arrive at the “Filing Date” from date of receipt of documents will vary depending on whether there are discrepancies as outlined above and other factors. The intention is not to delay and to provide a quick turnaround time. In this regard, Clearstream Banking will also not be responsible should there be discrepancies leading to a delay in arriving at the “Filing Date” and hence the application of the revised tax rate. |
| iv) | The base dates for the purposes of quarterly submissions by Overseas Public Collective Investment Vehicles (OPCIVs) are 31 March, 30 June, 30 September and 31 December. If the conditions to apply the blended tax rates are not met, Clearstream Banking’s depository HSBC will automatically apply default tax rates on each of these dates. If there is a timing gap and the investor wants to file a tax reclaim application, these will be handled by the investor via an appointed external tax agent. |
Further information
For further information, please contact the Clearstream Banking Tax Help Desk on:
| Luxembourg | Frankfurt | |
| Email: | tax@clearstream.com | tax@clearstream.com |
| Telephone: | +352-243-32835 | +49-(0) 69-2 11-1 3821 |
| Fax: | +352-243-632835 | +49-(0) 69-2 11-61 3821 |
or Clearstream Banking Customer Service or your Relationship Officer.
Foreign investors may also consult the English-language website of the Korea NTS, where they can check which article they are subject to when completing this section.
Important note:
The content of this Announcement (including any attachments and other links) are for informational purposes only and is not intended and should not be considered to be legal advice on any subject matter. Readers of this Announcement, whether customers or otherwise, should not act or refrain from acting on the basis of any information included in this Announcement without seeking appropriate legal or other professional advice. Copies (in paper or electronic form) of the content may be delivered to a third party for personal use only.
1. Clearstream Banking refers collectively to Clearstream Banking AG, registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in the Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500 (CBF) and Clearstream Banking, société anonyme, registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Register of Commerce and Companies under number B-9248 (CBL).
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