Taxation on Branches of Foreign Corporations in Korea

Taxation on Branches of Foreign Corporations in Korea

1. Overview

The branch tax is a tax that is additionally applied on the after-tax income after imposing corporate income tax on branches of foreign corporations.

If a foreign company originally entered Korea in the form of a subsidiary or joint venture company, corporate income tax is levied on the corporate income, and then corporate income tax or income tax is separately withheld on the dividend income. On the other hand, in case of entering into Korea in the form of a branch, if any remaining income after paying corporate tax on its income is repatriated to the head office or the main office of the foreign corporation and then distributed in part or in whole amount to the shareholders of the foreign corporation, then there would be difficulties from the perspective of Korean tax authorities that have jurisdiction over the branch of the foreign corporation in terms of collecting taxes associated with the dividend paid as it occurs outside of Korean tax authority’s jurisdiction. As such, the branch tax is adopted in a bid to correct these problems and to maintain the fairness of taxation between a foreign corporation entering Korea as a local corporation and one entering Korea as a branch office.

2. Main contents

(1) Applicability

The branch tax is not applied to the domestic branches of all foreign corporations, but only to the extent that the branch tax is separately stipulated in a relevant provision of the tax treaty with each foreign country. In other words, the branch tax is not imposed on the domestic branches of foreign corporations headquartered in a country with which Korea did not sign a tax treaty or which Korea has a tax treaty with but relevant provision explicitly states branch tax does not apply.

(2) Applicable countries per tax treaties

The taxable income and branch tax rates of the countries that currently stipulate branch taxes as taxable under their tax treaties with Korea are as follows.

Country	Tax Base	Tax Rate	Reference
Canada	The adjusted taxable income of the Korean Branch	5%	Tax Treaty Article 10-6
France	The adjusted taxable income of the Korean Branch	5%	Tax Treaty Article 10-7
Australia	The adjusted taxable income of the Korean Branch	15%	Tax Treaty Article 10-6
Indonesia	The adjusted taxable income of the Korean Branch	10%	Tax Treaty Article 10-6
Philippines	Amount of the remittance by a branch to its head office	10%	Convention Article 5
Brazil (*1)	The adjusted taxable income of the Korean Branch	15%	Tax Treaty Article 10-6
Kazakhstan	The adjusted taxable income of the Korean Branch	5%	Tax Treaty Article 10-6
Morocco	The adjusted taxable income of the Korean Branch	5%	Tax Treaty Article 10-6
Thailand	The adjusted taxable income of the Korean Branch	10%	Tax Treaty Article 10-6
Panama	The adjusted taxable income of the Korean Branch	2%	Tax Treaty Article 10-6
Peru	The adjusted taxable income of the Korean Branch	10%	Tax Treaty Article 10-6
India	The adjusted taxable income of the Korean Branch	15%	Convention Article 2
Türkiye (*2)	Amount of the remittance by a branch to its head office	7.5%	Tax Treaty Article 10-4

(*1) In case of Brazil, only if Korean corporation has a presence in Brazil

(*2) This shall apply to taxable years beginning on or after January 1, 2025.

(3) The calculation of Taxable income

The adjusted taxable income shown in the table above is calculated as follow:

Taxable earnings of the business year of the Korean Branch – Corporate tax and local income tax – Portion of the earnings deemed to be reinvested in branch operations

However, in the case of the Philippines, profits actually repatriated to the Philippines out of Korea become the taxable income.

3. Implications

In case a foreign company headquartered in a country where the branch tax is stipulated as taxable under its tax treaty with Korea contemplates an option of entering into Korean market, the branch tax effect should be carefully taken into consideration when determining the types of Business Entities. In addition, branches of foreign corporations in Korea should take extra caution to make sure that branch tax is not omitted when filing a corporate tax return in Korea.