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Korea: Definition of ownership for applying withholding tax rate on dividends according to a DTT

06 October 2014   (0 Comments)
Posted by: Author: Alex Joong-Hyun Lee
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Author: Alex Joong-Hyun Lee (PwC Seoul)

Under the Article 12 of the Korea-US double tax treaty (DTT), the lower withholding tax (WHT) rate of 10%(excluding a local income tax) is applied on dividends where the beneficial owner of dividends holds 10% or more of the outstanding shares of the voting stock of the paying company. In other cases, the 15% (excluding a local income tax) rate applies. In this regard, Korean tax authorities had generally taken a stance that the lower WHT rate (10%) under the Korea-US DTT is only applicable if the beneficial owner ‘directly owns’ 10% or more of the shares.

Further, the Korean Tax Tribunal had advocated the tax authorities’ stance. However, in a ruling on the WHT rate on dividends under the Korea-Japan tax treaty in 2013, the Supreme Court ruled that the definition of ownership should not be limited to direct ownership unless the DTT explicitly requires the recipient to directly own the shares. In addition, in several recent rulings on the WHT rate on dividends under the Korea-US tax treaty, the Tax Tribunal also arrived at the same conclusion that the term ‘beneficial ownership’ includes direct and indirect ownership and rejected the Korean tax authorities’ assessment of taxes on dividends at the rate of 15%.

PwC observation:

It would be necessary to revisit whether the proper WHT rate on dividends has been applied to the beneficial owners, who are the residents of the US, Japan, and other countries that have entered into a tax treaty with Korea and such treaty does not explicitly require direct ownership. Considering the fact that the Supreme Court and the Tax Tribunal held the term ‘ownership’ includes both direct and indirect ownership, the beneficial owners can be provided with a lower WHT rate.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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