Foreign corporation tax consulting

Who this is for

• Foreign parent companies with a Korean subsidiary, branch or liaison office, and the finance staff of those Korean entities
• Foreign-invested companies that have received advance notice of a tax investigation, or notice of third-party or financial verification
• Companies paying or receiving service fees, royalties, interest or management fees from the parent without documentation supporting the price
• Companies that have decided to wind down Korean operations and need to understand the closure and liquidation tax burden in advance
• Companies newly subject to external audit that must reconcile statutory accounts with head-office reporting

Audit defence — the work starts before the notice arrives

A tax investigation does not begin when the notice arrives. The Framework Act on National Taxes requires the tax office to give advance notice of the tax items, period and grounds 20 days before the investigation starts, but those 20 days are for organising material that should already exist, not for creating it. Selection for a regular audit follows from the Commissioner’s periodic analysis of compliance using assessment data and accounting-integrity material such as external audit opinions, which means your filed returns and your books and vouchers need to agree with each other as a matter of routine. Even before any notice, we review related-party transactions, expenses at high risk of disallowance, and the basis on which the parent’s charges were calculated, so that the field of argument is already narrow. If notice has arrived, we fix the scope of the material to be produced by reference to the tax items and period stated in it, then settle the order of production and the explanation before the investigation opens. An investigation must be kept as short as possible, but it can be extended where the taxpayer clearly delays or refuses to produce books — so managing your own production schedule is the most practical way to keep it short.

Dealings with the parent — transfer pricing and withholding travel together

The money that moves between a Korean entity and its parent is where foreign corporation tax most often goes wrong. The Act on Adjustment of International Taxes lets the tax authority assess or reassess on the basis of the arm’s-length price where the price of an international transaction with a foreign related party is too low or too high. The transaction can be perfectly real and still be adjusted if the price cannot be explained. At the same time, interest, dividends and royalties flowing out to the parent are classified as domestic-source income under the Corporate Tax Act and are subject to withholding at the moment of payment. Which head of income applies determines the rate, and a lower treaty rate prevails where one exists. We assemble the contract, evidence that the service was actually performed and the cost-allocation basis into a documented rationale for the price, and we fix the income head, the rate and treaty eligibility for each payment in advance — which prevents both under-withholding and over-withholding.

Closure and liquidation — filings survive the decision to leave

Deciding to wind down Korean operations is a commercial judgement, but a fixed set of filings follows it. Liquidation income on dissolution is the value of the residual assets less total equity as at the date the dissolution is registered, and corporate tax on that income is due within three months from the last day of the month in which the value of the residual assets is finalised. In practice the biggest variable is when and how that value is finalised. Liquidate with assets still carried at book value and unexpected liquidation income appears; leave parent-company loans or unpaid service fees unresolved and a withholding problem reappears at the distribution stage. We estimate the likely liquidation income by reviewing assets and liabilities before the dissolution resolution, and we schedule the VAT closing return, the deregistration of employees from the four social insurances and withholding on the distribution of residual assets as one timeline.

Routine filings — three months after the fiscal year ends is the anchor

A foreign-invested company files on the same framework as a domestic one. Corporate tax is due within three months from the last day of the month in which the fiscal year ends, at rates from 10% to 25% depending on the tax base. Companies that follow a parent’s non-December year-end frequently misread that starting point. VAT is due within 25 days after the preliminary return period ends, and the final return within 25 days after the taxable period ends. We build an annual filing calendar around your own fiscal year and mark the points where head-office reporting and Korean filing deadlines pull against each other, so the closing schedule can be worked backwards.

Documents to prepare

• Corporate registry extract, business registration certificate, foreign-investment registration certificate
• Financial statements and corporate tax returns for the last three fiscal years, including tax adjustment schedules
• All agreements with the parent — services, royalties, loans, management fees, and side letters
• Schedule of related-party transactions with cost-allocation and pricing documentation
• Advance notice of tax investigation or pre-assessment notice, if received
• If liquidation is contemplated: draft dissolution resolution, schedule of assets and liabilities, parent-loan balances