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The Income Tax Agreement between Taiwan and Korea entered into force on December 27, 2023 and took effect on January 1, 2024

The Ministry of Finance states that the Agreement between the Taipei Mission in Korea and the Korean Mission in Taipei for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (hereinafter referred to as “the Taiwan-Korea ADTA”) was signed on November 17, 2021. After both sides completed their respective domestic law requirements and notifying procedures, the Taiwan-Korea ADTA entered into force on December 27, 2023 and became effective on January 1, 2024, making it the 35th comprehensive Income Tax Agreement for Taiwan. The Taiwan-Korea ADTA is the 2nd Income Tax Agreement that Taiwan concluded with Northeast Asian countries after Japan. 

Our Ministry of Finance elaborates that the Taiwan-Korea ADTA includes 29 Articles, which provide appropriate tax reduction or exemption and tax administrative cooperation measures (please refer to the attached table) including a reduced withholding tax rate of 10% for dividends, interest, and royalties; tax exemption for business profits or independent personal services under specific conditions; relevant dispute resolution mechanism (mutual agreement procedure), and so on. In the absence of the Taiwan-Korea ADTA, a Taiwanese enterprise receiving technical service income sourced from Korea and having no place of business in Korea would be subject to a withholding tax of 22% (including local income tax) on the gross payment of the service income. However, after the Taiwan-Korea ADTA became effective, if a Taiwanese enterprise has no permanent establishment (PE) in Korea as defined in this ADTA, but receives technical service income sourced from Korea, the technical service income may enjoy tax exemption in Korea.

The Ministry of Finance further explains that the Taiwan-Korea ADTA includes provisions for requesting a mutual agreement procedure (MAP). If a tax resident of either Taiwan or Korea considers that the actions of one or both sides result or will result in taxation not in accordance with the provisions of this ADTA, the resident may request that the competent authorities of both sides consult with each other to resolve the dispute. For example, multinational enterprises (MNE) may apply for corresponding adjustments in accordance with relevant provisions to eliminate double taxation arising from transfer pricing adjustments assessed by one side. They may also apply for a bilateral advance pricing arrangement (BAPA) to reduce the risk of facing transfer pricing audits, thereby enhancing tax certainty and reducing tax barriers to cross-border trade or investment. This will serve as a foundation for deepening bilateral economic and trade cooperation.

The Ministry of Finance notes that based on the statistics from Taiwan’s Ministry of Economic Affairs, Korea was Taiwan’s 5th-largest trading partner in 2022, while Taiwan was the 6th-largest trading partner for Korea. In terms of bilateral investment, as of October 2023, Taiwanese enterprises invested a total amount of approximately US$2.9 billion in Korea, and Korean enterprises invested a total amount of approximately US$1.7 billion in Taiwan.  Taiwan and Korea have close economic and trade relations and the industries of both sides complement each other in the fields of semiconductor and memory manufacturing. With the Taiwan-Korea ADTA taking effect, it will establish a favorable tax environment for the people and businesses of both sides. This will facilitate the movement of personnel, goods, technology, and capital between the two sides. As a result, it will strengthen supply chains, and foster industrial collaboration and resilience. It will also further allow both sides to explore opportunities for cooperation in industries such as food, tourism, healthcare, beauty, and gaming.

The Ministry of Finance emphasizes that, based on the principles of equality and reciprocity, it will continue to promote the signing of Income Tax Agreements with countries with close economic and trade relationships so as to provide Taiwanese businesses with more comprehensive tax benefits and protection for their overseas investments.

Table of the highlights in the Taiwan-Korea ADTA:

Scope

Persons Covered

Residents, as defined in accordance with domestic tax laws of either Taiwan or Korea, including individuals and enterprises.

Taxes Covered

Income tax, including Special Tax for Rural Development and Local Income Tax of Korea.

Key measures of tax exemption or reduction

Business Profits

If an enterprise of either Taiwan or Korea carries on business in the other territory without constituting a permanent establishment (hereinafter referred to as “PE”) therein, business profits of that enterprise are exempted from taxation in that other territory.

The term PE includes:

  1. Physical PE: e.g., a place of management, a branch, or an office.
  2. Project PE: a project that continues to exist for a period of more than six months. (The period during which activities are carried out by an associated enterprise should be aggregated.)
  3. Service PE: the furnishing of services for a period or periods exceeding more than 183 days in any twelve-month period. (The period during which activities are carried out by an associated enterprise should be aggregated.)
  4. Agency PE: a person acting on behalf of an enterprise of a territory and habitually exercising an authority to conclude contracts in the name of that enterprise in the other territory.

However, an enterprise shall be deemed as having no PE if its maintenance of a fixed place of business (e.g., logistic warehouse) in the other territory is solely for the purposes of storage, display, or delivery of goods or merchandise, for purchasing goods or merchandise, or for collecting information, etc. as long as these activities are of a preparatory or auxiliary character.

Income from Investment

Dividends: the tax charged is not to exceed 10% of the gross amount of the dividends.

Interest: the tax charged is not to exceed 10% of the gross amount of the interest; certain interest is exempted from taxation.

Royalties: the tax charged is not to exceed 10% of the gross amount of the royalties.

Capital Gains

Except for the conditions listed below, gains derived from the alienation of shares shall be taxable only in the territory where the alienator is a resident:

  1. If more than 50% of the value of the shares directly or indirectly derived from real property are situated in the other territory, the other territory may tax such gains.
  2. If the alienation of shares of a company which is a resident of the other territory, where, at any time during the 12-month period preceding such alienation, and if the alienator directly or indirectly held at least 25% of the capital of that company, that other territory may tax such gains.

Dispute Resolution

Mutual Agreement Procedure

Residents of either territory may, within the stipulated timeframe, present their cases to the competent authority with respect to their residence and request the mutual agreement procedure in order to resolve or prevent disputes resulting from cross-border taxation under the following circumstances:

  1. Disputes on the application of the  Taiwan-Korea ADTA;
  2. Disputes on the corresponding adjustments for transfer pricing cases;
  3. Applying for a BAPA, to minimize the risks of double taxation under transfer pricing audits, as well as to increase tax certainty.

Attachment:

  1. Download the Chinese, Korean, and English texts of the Taiwan-Korea ADTA, or visit the Ministry of Finance website (www.mof.gov.tw)>Home>Services>International Fiscal Affairs>Income Tax Agreements.
  2. Please refer to the above point for the Regulations Governing Application of Agreements for the Avoidance of Double Taxation with Respect to Taxes on Income.
  3. Please also refer to the first point for the application forms for Income Tax Agreements.

Contact person: Ms. Lin, Tian-Cin, Section Chief.

Contact Number: +886-2-23228150

Issued:Dept. of International Fiscal Affairs Release date:2024-01-05 Last updated:2024-01-05 Click times:906