ࡱ> MOLq` $bjbjqPqP 2D::%(8$T(XHH"jjjjjj`bbbbbb$9h <jj<<jj   <jj` <`   j< 0aI 0 C!LvC! C! tj& ,$jjj^jjj<<<<(((d ((((((  Answers to FAQs on the Special Withholding Procedure applicable to Foreign Companies or Funds March 14, 2006 This document is prepared in order to help rectify some incorrect reports from overseas with regard to the special withholding procedure for foreign companies or funds which will take effect on July 1, 2006. International Tax Division Ministry of Finance and Economy Should you have any questions, please contact Mr. Kyung Geun Lee (Director of International Tax Division, 822-2110-2201) or Mr. Jin Hong Rim (Deputy Director of International Tax Division, 822-2110-2202). 1. What is the special withholding procedure for foreign investors? Under the procedure, where foreign companies or funds based in areas or countries to be designated by the Minister of Finance and Economy derive interest, dividends, royalties or capital gains in Korea, they are subject to withholding tax under the domestic tax law.* In case the investor concerned establishes within 3 years that he or she is the substantive owner of the income entitled to a reduced tax rate or non-taxation benefit under the relevant tax treaty, the tax authorities, after due diligence, will refund an amount equivalent to any overpaid tax plus interest accrued thereon within 6 months from the application for the refund. * Under the domestic tax law withholding tax rates of interest, dividends, royalties: 25% withholding tax rates for capital gains: the lesser of the 10% of the paid amount or 25% of the capital gains 2. What is the purpose of the introduction of the special withholding procedure? The recently introduced regime is designed to prevent investors of the third countries from unduly claiming Koreas treaty benefits such as paying no or reduced rate by taking advantage of bilateral tax treaties Korea has entered into. The new withholding regime is in line with proactive measures taken by advanced countries such as the US, the UK and Japan in order to tackle international tax avoidance schemes. Some countries such as Germany and Switzerland have also adopted similar measures for the operation of the withholding tax system. * In Germany, where a foreign company is established without reasonable economic motive and carries out no economically substantive activities, it will be subject to withholding tax at a domestic tax rate, being denied the right to claim treaty benefits. * Swiss subsidiaries of foreign companies may, on request, grant treaty-based relief directly at source through a procedure by declaration instead of deducting Swiss withholding tax on dividends to be paid to their foreign parent at the statutory rate. To be eligible for the procedure, the foreign beneficiary of the dividends should be the beneficial owner of the dividends and a joint-stock company resident of a partner state of Switzerland under a double taxation convention or another similar international treaty, and also should hold a substantial participation in the Swiss joint-stock company. 3. Some argue that the proposed regime is in conflict with double tax conventions. As explained above, under the regime, income derived in Korea by foreign investors based in the designated areas will be subject to withholding tax at a regular rate under the domestic tax code, and refund will be subsequently made if the recipient of the income concerned is judged to be its substantive owner. This is just a change in procedural mechanism, rather than an attempt to apply the domestic tax laws without regard to tax treaties. The introduction of the new regime is also supported by the Commentary on the OECD Model Tax Convention, widely regarded as the international norm with regard to tax treaties, in which it is stated that each State is free to use the procedure provided in its domestic law in order to apply the limits provided by the Convention. 4. Will the special withholding procedure be applied in a retroactive manner? The enacted measure will apply only to interest, dividends, royalties or gains from the alienation of shares paid on or after the first day of July, 2006 and not to the investment income paid before that date. Therefore, the measure will not apply retroactively. 5. Which areas or countries are likely to be designated and when will the designation be completed? Only the areas or countries deemed to have high potential to be exploited as stepping stones for tax avoidance purposes will be included in the list of the designated areas. We will keep the number of such areas or countries to a minimum after taking into account various factors such as investment vehicle used and tax avoidance cases conducted through those countries or areas. Recent reports by some foreign newspaper that particular countries are being considered to be subject to the special withholding procedure are simply unfounded, as no decision has been made at all to date regarding such areas or countries. The designation process is planned to be completed sometime during the first half of this year, as the measure takes effect July 1, 2006. 6. Should every foreign fund based in the designated areas go through the special withholding procedure and the subsequent refund (if eligible for the refund) in relation to their income derived in Korea without an exception? Where the recipient of the income concerned gets a prior approval from the Commissioner of the National Tax Service, he or she is entitled to claim a reduced tax rate or non-taxation benefit provided in the relevant tax treaty, without going through the special withholding procedure. 7. When it comes to gains from the alienation of shares, is a foreign company which owns less than 25% of the total shares in a domestic company also subject to the special withholding procedure? Gains from the transfer of shares in a Korean company through securities markets in Korea by a foreign company without a permanent establishment in Korea will not be taxable in Korea if the foreign company owns less than 25% of the total shares in the domestic company at any time in the year of such transfer or during the 5 years prior to the year. Hence, the special withholding procedure will not apply to such capital gains. 8. Recently some foreign newspaper reported that the introduction of the special withholding procedure could stifle foreign investment in Korea or serve as hindrance to Koreas efforts to become a financial-hub in Northeast Asia. Any reaction to these reports? The Korean government has decided to adopt the special withholding procedure in an effort to join the OECD-led ongoing drive to prevent tax avoidance practices around the world. The move has nothing to do with economic nationalism or xenophobic public sentiments, as the article of some foreign news papers might allude to. The government will maintain its open-door policy of creating a business-friendly environment and continue to relax its regulations to make Korea a regional financial hub. In that light, the government will make sure that the recently introduced regime does not stifle foreign investment in Korea or serve as an obstacle to Koreas efforts to become a financial hub in Northeast Asia by keeping the number of the designated areas to a minimum and running the regime in a prudential manner.     PAGE  PAGE 4 7EN[abeostux   ! + @ C I J R  L [ \ ] ^ κή΍v΁΁΁hWhO}CJaJhWhO}CJaJo(h"hO}CJaJo(hHhO}CJaJo(hO}CJaJo(h"hO}CJaJo(h*hO}CJaJo(hO}CJaJhO}CJaJo(hGhO}o(hHhO}5>*CJ aJ o(hO}5>*CJ aJ o( hO}o(*8abcdetuvwx I J K L M N O P Q R n gdO}$a$gdO}$$ ^ ( ) F Sikd$$Ifc!! t0644 la$$Ifa$gd)4lJ&$d%d&d'dNOPQgdO}gdO} ' ( ) #067~nopr˿מו׉מ}qfWD%h$hO}B*CJOJQJ^Jphh$hO}CJOJQJ^JhO}OJQJ^Jo(hkhO}CJaJo(hChO}CJaJo(h[hO}CJaJo(h~ CJaJo(hO}CJaJh _hO}CJaJo(h$hO}OJQJ^JhhO}CJaJo(hV.hO}CJaJo(hO}CJaJo(hVhO}o(him6hO}CJaJhim6hO}CJaJo(F HIJ67nokgkdS$$Ifcl!! t0644 laz$If^z`gd)4lJ  n^ `ngdO}gdO} op!"#+[ikd$$Ifc~!! t0644 lah$If^h`gd)4l'zgdO} L^`LgdO} p^`pgdO} "#+|}hi  !!5!yyhWNyhjCJaJo( h&h3xB*CJaJo(ph h&hjB*CJaJo(phhO}CJaJhA>hO}CJaJo(h[hO}CJaJo(hThO}CJaJo(h(hO}CJaJo(hb6hO}CJaJo(hkhO}CJaJo(h$hO}CJaJo(h#DhO}CJaJo(hO}CJaJo(h[hO}CJaJo(hO}CJaJo(+,-{|}uW$;$If^;`a$gd)4l)ikd$$Ifcl!! t0644 lah$If^h`gd)4l)gdO} hiYZu)$If^)`gd)4l)gdO}ikdG$$Ifc~!! t0644 la u$h$If^h`a$gd)4l)gdO}gkd$$Ifc!! t0644 la] ^ _ d!xh$If^h`gd)4l)gdO}gkd$$Ifc!! t0644 la5!6!e!f!!!""W#X###;$A$n$r$$$$$$$$$$$$$$$$$$$$$$$$$$}hfk0JmHnHuh h0Jjh0JUh_jh_Uh.x@hY+hO}CJaJo(h6ewCJaJo(h6hO}CJaJo(h.8hO}CJaJo(hO}CJaJhAhO}CJaJo(hO}CJaJo(h8wCJaJo((d!e!f!""W#X#$$$$$$$$$$gdO}ikd6$$Ifc!! t0644 la$$$$$$$$$h]hgdO} &`#$gd)401h2P. A!"#$%S Q$$If!vh5!#v!:Vc t6,5!L$$If!vh5!#v!:Vcl t6,5!Q$$If!vh5!#v!:Vc~ t6,5!Q$$If!vh5!#v!:Vcl t6,5!Q$$If!vh5!#v!:Vc~ t6,5!L$$If!vh5!#v!:Vc t6,5!L$$If!vh5!#v!:Vc t6,5!Q$$If!vh5!#v!:Vc t6,5!P@P O}Normal$1$4$a$KHPJ_HmH nHsH tHDA@D Default Paragraph FontRi@R  Table Normal4 l4a (k(No Listz@z O} Table Grid7:V0$1$4$a$PJ2B@2 O} Body TextCJ 4 @4 O}Footer  C".)@!. O} Page NumberH2H 8w Balloon TextCJOJQJ^JaJD8abcdetuvwx IJKLMNOPQRn^()FHIJ67nop ! " # +,-{|}hiYZ]^_defWXI0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I0I00000 0 0000000 0 00000 0 000000000 0 00000 0 0000 0 0000000I00I00I00I00I00I00I00@0@0I00 $$$' 5!$ F o+d!$$ !$  '!!e|fdg lCh #iT"j 4k l mTn 'o |pq ,rds tu v$wx dy|z  { l(|}  ~ 4 fe;tt! ! [ [ 577     sG## {{, , ` `  C<<+ _*urn:schemas-microsoft-com:office:smarttagscountry-regionhttp://www.5iantlavalamp.com/8*urn:schemas-microsoft-com:office:smarttagsdateV*urn:schemas-microsoft-com:office:smarttagsplacehttp://www.5iantlavalamp.com/ :114200637DayMonthYear8B!&FQ3333OP_ &o&)4.x@zJ CNjmefk8w6ew3xO}+.IT~ Njb(^HI ! " -{|_de@8RP@UnknownGz Times New Roman5Symbol3& z Arial;|i0Batang/ |i0д5& zaTahoma"1h[[ DS3DS3!42QHX ?O}24Answers to FAQs on the Special Withholding ProcedureuseruserOh+'0$ 4@ ` l x 8Answers to FAQs on the Special Withholding ProcedureuserNormaluser2Microsoft Office Word@F#@ iWI@JAaI@JAaIDS՜.+,0 hp|  3 5Answers to FAQs on the Special Withholding Procedure Title  !"$%&'()*,-./0123456789:;=>?@ABCEFGHIJKNRoot Entry FaIPData #1Table+C!WordDocument2DSummaryInformation(<DocumentSummaryInformation8DCompObjq  FMicrosoft Office Word Document MSWordDocWord.Document.89q