If Korea deems a foreign-incorporated company a Domestic Corporation, the company shall be taxed on its worldwide income. The relevant Korean law under which this determination is made is the Corporate Tax Act of Korea (“CTA”). In the typical case, the National Tax Service of Korea designates a foreign-incorporated company as a Domestic Corporation and requests details on overseas earnings to impose tax on the company. Of course, this leads, invariable, to your Korean tax lawyer challenging the determination to the Korean courts.

Domestic Company Tax Residency Test in Korea
The Korean Corporate Tax Act defines a Domestic Corporation as a corporation with:

  1. Headquarters within Korea; or 
  2. Actual Business Management Place in Korea. 

Disputes, normally, concern the definition of Actual Business Management Place after an imposition of a tax on worldwide income (often based on funds being forwarded to the parent company by the Korean company – E.g. license fees) and a request by the Korean National Tax Service for information related to the worldwide income of the parent company.

The Supreme Court of Korea defines the Actual Business Management Place as: the place where “critical management and commercial decisions occur that are necessary to carry out business activities.” The Supreme Court of Korea has provided examples to be utilized by lower courts and has noted that courts in Korea should deem the Actual Business Management Place as Korea if Korea is the:

  1. Place where the Board of Directors meets or Major Decision-Making Bodies Meet;
  2. Place where Senior Management Carries out Major Activities;
  3. Place where Accounting Records are Kept; or
  4. Place where the CEO and other executives conduct business.

The Korean Supreme Court, additionally, noted that if some of these activities occurred in Korea, only for a short period of time, the lower courts should not conclude that the Actual Business Management Place is in Korea.

Please discuss this issue with your Korean Tax Lawyer and discuss how to structure your business in Korea to assist in avoiding this substantial risk. We can be consulted on this issue and IPG Legal works with a renowned English-speaking CPA and Tax Accountant on related issues.

by Sean Hayes

Sean’s profile may be found at: Sean C. Hayes. To schedule a meeting with Sean Hayes, please Schedule a Call with Sean Hayes.

IPG Legal is a leading firm in Korea working on Korean tax matters involving foreign companies and individuals. IPG Legal advises multinational companies, investors, and expatriates on a wide range of issues, including inbound investment structures, tax treaty application, transfer pricing, permanent establishment risks, and disputes with the Korean tax authorities. IPG Legal is known for providing clear, practical, street-smart advice that reflects both Korean tax law and international standards, helping clients manage risk, stay compliant, and make informed decisions when operating or investing in South Korea.