Globalisation looks as if a clichéd time period that has been round for a while. However, it’s nonetheless very a lot alive as a result of it’s a phenomenon that continues to evolve. Whether corporations have already made investments or are making new investments overseas, tax legal guidelines are always altering in response to the evolving practices of globalisation. This article highlights key tax ideas and concerns for South Korean investors making a foray abroad.
Kim Sunyoung (Sunny) Senior international legal professionalTel: +82 2 316 4655Email: [email protected]
With globalisation, worldwide commerce and investments are ever-increasing as nationwide borders now not pose obstacles to world transactions. Directly correlated with the rise of cross-border commerce are worldwide tax uncertainties that intertwine taxpayers with sovereign authorities of the investor and investee international locations. More usually than not, this raises the burden of double taxation, i.e., the identical earnings being taxed twice – even thrice.
In order to watch the a number of layers of potential taxation, one could look to see the general efficient tax charge of the investment. The easiest method to calculate the efficient tax charge can be the whole quantity of tax paid on worldwide earnings divided by the earnings earned on worldwide earnings, which might permit taxpayers to watch how a lot tax is being paid globally. The larger the efficient tax charge is, the larger the tax burden might be.
Measures put in place to decrease the efficient tax charge are two-fold: international locations agree to cut back the tax burden by means of tax treaties, or determine to present reduction unilaterally by means of home legal guidelines. These two ideas throughout the realm of double taxation are what each investor ought to take into account with the intention to minimise taxes and maximise earnings from their international investments.
South Korea has entered into tax treaties with over 90 international locations. The significance of tax treaties is that they allocate taxing rights for the international locations on sure forms of earnings prescribed underneath the tax treaty. Of course, if there’s a decrease charge underneath the home tax legislation of the nation by which the dividend is being paid out or curiosity funds are made, then we don’t have to depend on the tax treaty. However, as a rule of thumb, when planning investments overseas, you will need to examine first if there’s a tax treaty with South Korea in drive. This permits for a diminished withholding charge to use to earnings varieties comparable to dividends, curiosity and royalties prescribed underneath the tax treaty.
Kim Minhyung (Michelle)Foreign legal professionalTel: +82 2 316 7283Email: [email protected]
For instance, within the US, with out the tax treaty, passive earnings comparable to dividends or curiosity can be topic to a withholding tax charge of 30%. This charge could also be diminished to 10% or 15% for dividends and 12% for curiosity underneath the tax treaty between South Korea and the US. One level to at all times be conscious of is that, as in South Korea, there might be tax compliance issues that must be handled. For occasion, tax varieties must be submitted so as for the diminished tax treaty charges to use. Such compliance will be reasonably time-consuming and tedious. However, it’s completely obligatory that the right varieties are submitted to the withholding agent earlier than the earnings is paid to learn from the diminished tax charge. In essence, simply because the tax treaty prescribes a decrease charge, it doesn’t imply that the decrease charge is obtainable robotically. This sort of compliance is necessary and applies to each strategic and monetary investors.
A tax treaty doesn’t relieve double taxation utterly. It serves to cut back the tax burden by having two international locations agreeing to restrict the train of taxing rights. After paying taxes within the international nation at a decrease charge prescribed underneath the tax treaty, such taxes paid within the international nation will be claimed as credit in opposition to the tax payable in South Korea.
There are two forms of tax credit score: direct international tax credit score and oblique international tax credit score. Direct international tax credit score could also be claimed for the taxes that the South Korean entity paid instantly, which might be equal to withholding taxes, presumably at a diminished charge underneath the related treaty, on earnings comparable to dividends and curiosity. A South Korean entity could declare oblique international tax credit score on the dividend earnings obtained from a subsidiary in regard to the company earnings tax the subsidiary paid, and to the extent that the earnings that the subsidiary paid the tax on is distributed as dividends to the South Korean mum or dad.
In the previous, South Korea’s international tax credit score legal guidelines allowed oblique international tax credit for the company earnings tax paid by first-tier and second-tier subsidiaries. Under the present legislation, nevertheless, oblique international tax credit score is afforded to the tax paid by solely the first-tier subsidiary. Further, the quantity of international tax credit score obtainable is the quantity of South Korean company earnings tax that might have been due if the earnings have been earned in South Korea. If the international tax quantity paid exceeds this restrict, the surplus portion could also be carried ahead for 10 years.
Some points to be conscious of are the native rules concerning everlasting institution, curiosity expense limitation guidelines and switch pricing points.
With regard to the everlasting institution concern, a South Korean investor ought to at all times monitor its actions within the international nation and watch out to not conduct any enterprise actions, as prescribed underneath the related tax treaty or the international nation’s home tax legal guidelines, to present the international nation’s tax authorities any room to deem the South Korean investor, in lieu of the native subsidiary or native department, to have a enterprise place within the international nation. Such a deemed everlasting institution would expose the South Korean investor itself to the international nation’s tax authorities.
Turning to the curiosity expense limitation guidelines, investors planning to utilise a mix of debt and fairness for investment ought to guarantee that the capital construction is throughout the realm of the curiosity expense limitation guidelines, in order that such curiosity expense shouldn’t be inadvertently denied its deduction and/or the denied curiosity is re-characterised as dividends for company earnings tax functions. There are three totally different ways in which the curiosity expense deduction could also be restricted:
(1) Many international locations impose a debt-to-equity ratio for intercompany loans. South Korean investors ought to contribute capital within the type of debt and fairness throughout the ratio prescribed by the legislation so as for the related curiosity expense to be absolutely deductible. For instance, South Korea imposes a 2:1 debt-to-equity ratio;
(2) Denial of curiosity expense exceeding 20-30% of earnings earlier than curiosity, taxes, depreciation and amortisation in international locations that applied the bottom erosion and revenue shifting (BEPS) motion plan 4, issued by the Organisation for Economic Co-operation and Development (OECD); and
(3) Denial of curiosity expense on hybrid monetary devices in international locations that applied the BEPS motion plan 2, issued by the OECD.
Furthermore, if investors are planning to utilise transactions between associated events, preliminary measures comparable to a switch pricing examine needs to be carried out to ensure the rates of interest are set at arm’s size.
There will at all times be authorized compliance points that must be handled first, however when making investments overseas, tax planning needs to be finished concurrently to guarantee that investors are capable of maximise the return on their outbound investments. On a remaining notice, the authors wish to offer you a easy guidelines that it’s best to take into account when making such outbound investments.
For monetary investors, as taxes affect all phases of the investment − acquisition, operation and exit − discovering the correct investment construction will assist minimise the quantity of taxes paid at every stage of the investment and maximise returns. Depending on the investment technique and the character of the anticipated earnings from the investment, totally different buildings could also be utilised to realize the best doable charge of return.
For strategic investors, preliminary tax planning will permit a big-picture perspective to see how a specific investment matches into the investor’s world operation and provide chain. South Korean investors ought to pay shut consideration to the efficient tax charge when planning to broaden their companies overseas. Some key tax drivers to be aware of are:
(1) Holding construction of the investment. Whether the usage of a holding firm could negatively affect the efficient tax charge, or how the usage of the holding firm would affect the move of capital and the general funding construction;
(2) Financing construction. To ensure that curiosity bills will be utilised to their full capability, for occasion, in an M&A deal, utilising an acquisition debt will permit the corporate to make use of curiosity expense deductions and minimise the company earnings tax publicity;
(3) Global provide chain mannequin. To perceive the affect of the investment throughout the world enterprise operation; and
(4) Tax compliance. To minimise the chance of being topic to pointless penalties or fines.
These key tax drivers are finally to see how one investment matches in with the present world construction of the investor, and what steps must be taken in order that it turns into absolutely built-in.
Kim Sunyoung (Sunny) is a senior international legal professional at Shin & Kim. You can contact her at +82 2 316 4655 and [email protected]
Kim Minhyung (Michelle) is a international legal professional at Shin & Kim. You can contact her at +82 2 316 7283 and [email protected]
Shin & Kim
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Jongno-gu, Seoul 03155, South Korea
Tel: +82 2 316 4114
Email: [email protected]