Luxembourg and Korea: New protocol, new opportunities
On 14 June 2013, the updated version of the 1984 Tax Convention between Luxembourg and the Republic of Korea was ratified by Luxembourg via a Protocol concluded on 29 May 2012.
Further to these changes,
- Luxembourg and non-Luxembourg taxpayers should revisit their existing investments into Korea to ensure that the more favourable conditions are actually applied;
- Luxembourg and non-Luxembourg taxpayers should bear in mind the more favourable provisions when deciding on future investment streams into Korea;
- Luxembourg Banks should revisit their existing loan agreements granted to Korean entities and at the same time check whether new loan agreements may be of commercial interest;
- Luxembourg SICAVs should ensure that the reduced withholding tax rates foreseen in the Protocol are taken into consideration by the Korean withholding agents once the Protocol has entered into force.
The main considerations are as follows:
The default withholding tax rate on dividends remains the same at 15% but the Protocol now provides for a reduced withholding tax rate of 10% if the beneficial owner is a company (other than a partnership) that holds directly at least 10% (formerly 25%) of the capital of the company distributing the dividends.
The reduction of the required stake of share capital is particularly interesting with respect to more moderate investments into Korean companies.
The withholding tax levied on interest payments to banks is reduced from 10% to 5%. For all other interest payments, the standard withholding tax applicable remains at 10%.
This reduced withholding tax on interest payments to banks is favourable compared to the withholding tax rates applied in the Conventions entered into by Korea with other countries.
The new withholding tax rate applied on royalties in connection with the use or the right to use commercial, industrial or scientific equipment or information concerning industrial, commercial or scientific equipment is 5%. For all other types of royalties, the withholding tax rate has been reduced to 10% (formerly 15%).
These newly reduced withholding tax rates on royalties have become even more advantageous for Korean companies paying royalties to Luxembourg companies since the Korean domestic tax law currently provides for a withholding tax rate of 20%.
The Protocol provides for the removal of the deemed tax credit with respect to dividend and interest available to Luxembourg taxpayers investing in Korea.
The provision with regard to the exclusion of the Luxembourg holding 1929 and any similar Luxembourg companies from the benefit of the convention is removed.
The Luxembourg private wealth management company (in French: société de patrimoine familial) should consequently benefit from the favorable provisions of the Convention to the extent (i) it qualifies as resident of Luxembourg in the sense of Article 4 of the Convention and (ii) it is treated as a beneficial owner of Korean source income for Korean tax purposes.
As they are treated in Luxembourg as corporations exempt from income tax, the Luxembourg SICAVs (sociétés d'investissement à capital variable) were not considered as eligible to benefit from the Convention (Response of the Korean Ministry of Strategy and Finance dated 16 May 2011) based on the reference made to “any similar law” in the text of the Convention. Since this provision has been abolished, the Luxembourg SICAVs are likely to benefit from the Convention between Luxembourg and Korea once the Protocol has entered into force.
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.