If a foreign company acquires shares of a Korean company and sells the same shares later for profit, are the gains made taxed in Korea?
The answer is yes since such gains are regarded as Korean-sourced income under the Corporate Tax Act of Korea (the CTA), but there is no capital gain tax under certain circumstances if the shares involved are publicly listed.
Specifically, under the CTA, if and when a foreign corporation makes any gains from sale of shares issued by a domestic corporation, the foreign corporation is required to pay 11% of the amount paid for the shares as taxes (10% corporate tax on the amount paid for the shares and 10% resident tax on the relevant corporate tax amount). Or, if the original acquisition value of the shares and share transfer expenses could be identified, the taxes levied would be an amount that is smaller of (i) 11% of the amount paid for the shares and (ii) 27.5% of the gains made from the share sale (25% corporate tax on the gains made and 10% resident tax on the relevant corporate tax amount).
However, as an exception to the above, rule, if the shares involved are publicly-listed, any gains made by the selling foreign corporation may not be taxed at all, provided certain requirements are met.
That is, the enforcement decrees to the CTA provide tax exemption to a foreign corporation without any domestic place of business in respect of any gains from share sale if (i) the foreign corporation sells shares of a publicly-listed domestic corporation through the securities market and (ii) the total shareholding owned by the foreign corporation, together with related parties to that foreign corporation, has been less than 25% of the total shares issued and outstanding, or less than 25% of the amount of the total issued and outstanding shares of the domestic corporation, during the year to which the date of the share transfer belongs and the immediately previous five year period.
So, in sum, if a foreign company holding shares of a non-listed Korean company sells the shares, then there will be tax consequences in respect of any gains made from the share sale as first noted above (11% of the amount paid for the shares or 27.5% of the gains made, whichever is smaller). In case of publicly listed shares, in most cases, a foreign company shareholder with no business presence in Korea and with minor stakes in a publicly-listed Korean company will not be required to pay any capital gains taxes in Korea, if such shares are sold through securities market.
To be sure, it is noted that in order to determine the exact tax implications for any share transaction occurring in Korea (from a foreign company’s standpoints), it would be advisable to check the relevant tax treaty (if such treaty exists) between Korea and the relevant foreign jurisdiction to see whether there are any treaty provisions overriding Korean tax law provisions.