Zero Tax Rate for non-residents and foreign corporations in Korea
Date: February 14, 2020
Goods and services provided to a non-resident or foreign corporation in the territory of Korea are subject to taxation. However the Korean tax law allows them to be exempted from taxation applying zero tax rate on them where their transactions meet some requirements. The zero tax rate system violates the principle that taxes on goods and services must be imposed where they are consumed and also undermines tax fairness.
This paper sketches the requirements for the application of zero tax rate
II. Requirements for those who use and buy goods and services
Any individual who has his/her domicile or place of residence in the Republic of Korea for at least 183 days.
2) Foreign Corporation
An organization that has its headquarters or main office in a foreign country in the form of a corporation.
III. Requirements for Goods and Services
Goods delivered to a domestic entrepreneur designated by a nonresident or foreign corporation for the entrepreneur's taxable business
Goods supplied to duty-free business operators don’t qualify for zero rate tax. Therefore, 10 percent tax rate is applied to the goods supplied to duty-free operators.
① Professional, scientific and technical activities (excluding veterinary activities, activities of head offices for manufacturing, and activities of head offices for other industries)
② Leasing of intangible property rights
③ Communications services
④ Repair of containers; storage and warehousing within bonded areas; and the shipping agency services, marine transportation brokerage business, and vessel management services under the Marine Transportation Act
⑤ News agency activities; motion picture, video and television program production, sound recording and music publishing activities (excluding motion picture and video exhibition); software development; computer programming; system integration and management; data processing; hosting, portals and other Internet information media service activities; and other information service activities, which all belong to the category of publishing, video, broadcasting, communications and information services.
⑥ Brokerage of commodity
⑦ Business facilities management and business support service activities (excluding landscape care and maintenance service activities, activities of travel agencies and tour operators, and tourist assistance activities)
⑧ Educational services (limited to educational support activities)
⑨ Human health activities (limited to cases of supplying clinical trial services)
⑩ Goods or services similar tothose provided for in items ① through ②, which are prescribed by Ordinance of the Ministry of Strategy andFinance.
★ However, for professional activities in ① and services in ⑦ are limited to where the relevant foreign country grants Korean residents or corporations the identical tax exemption.It means the relevant foreign country grants exemption from taxes equivalent tothe value-added tax or other similar taxes of the Republic of Korea or that the relevant foreign country has no provisions governing taxes equivalent to the value-added tax or other similar taxes of the Republic of Korea.
IV. Requirements for Price Payments – Foreign currency acquisition
Requirements vary with the existence of a domestic business of a non-resident or a foreign corporation.
1) Non-resident and foreign corporation
Any of the following goods or business services that are supplied in the territory of Korea to a nonresident or foreign corporation having no domestic place of business
① The price of which is paid in Korean won at a foreign exchange bank
② The price of which is paid in foreign currencies from a non-resident or foreign corporations overseas and exchanged in Korean won.
③ Where an individual or corporation which provides goods or services for a non-resident or foreign corporation without domestic place of business offsets the price with the onethat the individual or corporation should receive from their counterpart.
④ Transactions that can be recognized as foreign currency acquisition
☞ ① refers to the case where the price from a non-resident or foreign corporations overseas is remitted to an account of foreign exchange bank in foreign currencies and then withdrawn in Korean won at the foreign exchange bank by selling the foreign currencies.
☞ ② refers to the case where the price from a non-resident or foreign corporation overseas is remitted to the non-resident’s or foreign corporation’s account and withdrawn in Korean won at a foreign exchange bank by selling the foreign currencies.
☞ ③ refers to the case where a provider excludes the price for his/her service or goods from the one that they should receive from a non-resident or foreign corporation.
☞ ① and ② qualify for zero tax rate because they contribute to foreign currency acquisition. ③meets the requisition for zero tax rate application because it helps to control outflow of foreign currencies.
2)Non-resident and foreign corporation with domestic place of business
Goods orbusiness services that are supplied in the territory of Korea under directc ontract with a foreign nonresident or foreign corporation having a domesticplace of business: Provided, That this shall apply only where the price is paid by the relevant foreign nonresident or foreign corporation either in Korean wonat a foreign exchange bank
Even though goods or services are supplied under the direct contract with a foreign nonresident or foreign corporation if the actual beneficiary of the goods and services are domestic place of business it does not qualify for the tax rate of zero percent.
3) Cases of price payment not qualifying for zero tax rate
Zero tax rate aims foreign currency acquisition. Therefore, where a transaction fails to verify foreign currency acquisition it is not subject to zero tax rate.
① Goods and services supplied to a nonresident without domestic placeof business and the price is received in Korean won
② Where the price is not withdrawn in Korean won and received in Korean currency or traveler’s check
③ Where the price is received in Korean won through Korean won savings account for non-residents at a foreign exchange bank
Learn more about Korean tax system by visiting our website