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New Tax Treaty between Singapore and South Korea Signed

The Inland Revenue Authority of Singapore has announced the signing of a new income tax treaty with South Korea on 13 May 2019. Once in force and effective, the new treaty will replace the 1979 tax treaty between the two countries.

Taxes Covered

The treaty covers Korean income tax, corporation tax, the special tax for rural development, and local income tax. It covers Singapore income tax.

Withholding Tax Rates

  • Dividends - 10% if the beneficial owner is a company that directly holds at least 25% of the paying company's capital; otherwise, 15%
  • Interest - 10%, with an exemption for:
    • interest arising in a Contracting State and paid to the Government of the other Contracting State; and
    • interest paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or paid in connection with the sale on credit of any merchandise by one enterprise to another enterprise, provided that the recipient is the beneficial owner of the interest.
  • Royalties - 5%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State;
  • Gains from the alienation of shares deriving more than 50% of the value directly or indirectly from immovable property situated in the other State, with an exemption for shares traded on a recognized stock exchange; and
  • Gains from the alienation of shares forming part of a substantial interest in the capital of a company that is a resident of the other State, with a substantial interest deemed to exist when the alienator, alone or together with associated or related persons, holds directly or indirectly at least 25% of the total shares issued by the company.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation. In addition, both countries provide a credit for tax paid on profits out of which dividends are paid if the company receiving the dividends holds at least 25% of the paying company's voting shares or capital stock where the paying company is a Singapore company, or at least 25% of the paying company's share capital where the paying company is a Korean company.

Provisions are also included for a tax sparing credit for tax that would have been payable under paragraph 2 of Article 10 (Dividends) or paragraph 2 of Article 12 (Royalties) but has been reduced or exempted by a Contracting State in order to promote its economic development. The tax sparing credit may not exceed the rates of tax provided for by those Articles (see above).

Entitlement to Benefits

Article 26 (Entitlement to Benefits) provides that a benefit under the treaty shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the treaty.

Entry into Force and Effect

The treaty will enter into force 15 days after the ratification instruments are exchanged.  It will apply in South Korea from 1 January of the year following its entry into force and will apply in Singapore in respect of withholding taxes from 1 January of the year following its entry into force and in respect of other taxes from 1 January of the second year following its entry into force.

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