Tax Treaty

Tax treaties are generally drafted on the basis of the OECD Model Tax Convention (Model Tax Convention), with the details adjusted to reflect each country's tax system and economic relations.

A resident is an individual or corporation that owes a duty to pay tax under the tax law of a particular country.

The criteria for determining residency are as follows.

A permanent establishment is the criterion for determining whether a foreign company is taxable when it conducts business in another country.

For example, when a Korean resident receives dividends from a foreign company, that country may withhold tax at a set rate, after which additional tax may be imposed in Korea.

When a tax treaty applies, the rate may be limited or a foreign tax credit may be available.

The Convention between the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income is a leading example of a tax treaty.

This convention sets out limits on the taxation of dividends and interest, the standards for taxing business income, and the method for preventing double taxation.

Because taxing rights are allocated based on residency, the first step is to determine which country the taxpayer is a resident of before this allocation can be applied.

Residency is generally assessed by reference to factors such as the place of domicile, the length of stay, and the center of economic interests.

The next step is to identify the country in which the income arises.

Source-based taxation may apply depending on where the income arises.

For example, dividends or interest paid by a foreign company may be subject to withholding at a set rate in the paying country, in which case the reduced rate provided under the treaty applies.

Once the country where the income arises and the taxpayer's place of residence are confirmed, the next step is to review whether a tax treaty exists between the two countries.

Where a treaty has been concluded, the taxation standards and rate limits set out in that treaty may be applied.

At this stage, it is important to identify which provisions apply according to the type of income, such as dividends, interest, or business income.

Where a tax treaty applies, the rate imposed in the source country may be limited.

For dividend or interest income, a treaty rate lower than the standard rate may apply, which helps prevent the excessive taxation that can arise in cross-border transactions.

Finally, where tax has already been paid abroad, the foreign tax credit can be used to adjust for double taxation.

The foreign tax credit is a system that allows tax paid abroad to be credited against domestic tax within a certain limit, applied under the 「Adjustment of International Taxes Act」 and related tax laws.

In these situations, it is important to review the relevant country's tax laws together with the tax treaty provisions to determine the appropriate method of taxation.

At Daeryun Law Firm, tax attorneys, international trade attorneys, and customs specialists who hold licensed customs broker credentials work together to review each case.

For tax issues arising from overseas investments or cross-border transactions, we review whether a tax treaty applies and analyze the allocation of taxing rights and the availability of the foreign tax credit on a comprehensive basis to develop a response.

We also examine the structure in which foreign income arises, the form of the transaction, and the nature of the business activity to confirm whether a tax treaty may apply, and where needed, we review responses to the related tax and legal questions.

If you need a review of whether a tax treaty applies or have an international tax matter that calls for review, 🔗Schedule a consultation with a tax attorney to discuss the relevant matters.