Korea: Definition of ownership for applying withholding tax rate on dividends according to a DTT
06 October 2014
Posted by: Author: Alex Joong-Hyun Lee
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.
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%.
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.
This article first appeared on pwc.com.