introduction to south korea - cash management

Introduction to SOUTH KOREA

South Korea has the fourth largest nominal GDP in Asia (USD 1.7 trillion in 2019). Economic growth slowed from 4.4%per year in 2002-2011 to a still fairly good 2.8% in 2014-2019 due to weaker world demand growth, internal shocksand structural factors (such as low labour productivity of SMEs vs. large corporates, high private-sector debt, rapidpopulation ageing and a distorted labour market).

More than ten years of prompt and effective policy response to global shocks have helped to build strongfundamentals, which will help to withstand the COVID-19 crisis. At the beginning of 2020, public finances were solid,public debt was below 40% of GDP, inflation was low and the external position was very strong. In addition, theeconomy enjoys broad diversification and a high level of competitiveness.

Effective management of the COVID-19 crisis and significant support measures should lead to a less severe recessionthan in many countries. In the medium term, real GDP growth is expected to slow to less than 2.5% per year. Weakerglobal demand and trade tensions between the US and China are weighing on South Korea's export performance.However, South Korea’s positioning in global value chains is gradually shifting, which should allow it to reduce itsexposure to the Chinese economy in the medium term.

Summary

BNP Paribas presence

BNP Paribas has been present in South Korea since 1976 and is a leading bank in the country. It is one of the fewinternational banks catering for customers' domestic and international cash management and trade financerequirements, both foreign companies doing business in Korea and Korean entities seeking to expand theirinternational focus.

Currency

Currency

South Korean Won (KRW).

Exchange Rates

2016 2017 2018 2019 2020

Exchange rate:KRW per USD

1,160.3 1,130.4 1,100.6 1.165.4 1,180.3

Source: IMF, International Financial Statistics, June 2021.

Central Bank

The South Korean central bank is the Bank of Korea (BOK - www.bok.or.kr).

Bank supervision

South Korean banks are supervised by the Financial Services Commission (FSC – www.fsc.go.kr) and the FSC'sexecutive branch, the Financial Supervisory Service (FSS – www.fss.or.kr).Additional supervisory functions are performed by the BOK, such as requesting on-site examination of bankinginstitutions by the FSS or joint examination with the FSS.

Bank accounts

Resident / non-resident status

A company, which is incorporated in South Korea, is considered resident while its overseas branch iscategorised as non-resident. A company, which is incorporated out of South Korea, is considered as non-resident, while its domestic branch in South Korea is considered resident.

Bank accounts for resident entities

Within South Korea Outside South Korea

Local CurrencyPermitted without restriction, not freelyconvertible

Not permitted

Foreign Currency Permitted without restriction, convertiblePermitted, with Ministry of Strategy andFinance (MOSF) notification.

Bank accounts for non-resident entities

Within South Korea Outside South Korea

Local CurrencyPermitted with restrictions, not freely convertible.Remittances from accounts abroad require BOKnotification

Permitted with restrictions, notfreely convertible

Foreign Currency Permitted with restrictions, not freely convertible Not applicable

Lifting fees

Lifting fees are applied on payments between resident and non-resident accounts.

http://www.bok.or.kr

http://www.fsc.go.kr

http://www.fss.or.kr

Banks apply either flat fees for a range of transfer values or a percentage of the total transaction value.

BNP Paribas Cash Management Capabilities

Liquidity Management

Physical cash pooling

Notional pooling - Balance compensation

Notional pooling - Interest optimisation

Supported by BNP Paribas

Not required / permitted in SOUTH KOREA or not supported by BNP Paribas

Collections

Cash collections

Cheque collections

Direct debit collections

Domestic incoming transfers

Virtual IBAN

Virtual accounts

International incoming transfers

Card acquiring



Payments

Cash withdrawals

Cheque payments

Direct debit payments

Domestic outgoing transfers

Commercial cards

Virtual cards

International outgoing transfers

SWIFT gpi

Real-time international payments through BNP Paribas' network

Card issuing



Channels

Local e-Banking

Global e-Banking - Connexis

SWIFT/ host to host



Payments & Collections

Market overview

The popularity of the smartphone in South Korea, the adoption rate is close to 100%, has meant the country has beenone of the first and fastest adopters of digital payments. Popular mobile payment providers include Toss, N-Pay andKakaoPay. Pre-paid ‘smart’ cards, such as CashBee, are also increasingly popular. At the end of Q4 2020, there were 16million e-money cards issued. In 2020, credit cards were the most popular payment method in volume terms, and thecredit transfer in value terms.

Electronic banking services are available from all banks. There is no national electronic banking standard in SouthKorea, so companies use banks’ proprietary services.

Online and mobile banking services are provided by the country’s leading banks; there are 16 online and mobilebanking services providers. There were 159 million individual internet banking users at the end of Q4 2020 and 11million corporate internet banking users. According to the central bank, the volume of money transfers carried outonline in 2020, surged 11.9%.

Payment systems

BOK-Wire+ Type • Real-time gross settlement.

Participants • 124 direct.

Transaction typesprocessed

• High-value and urgent domestic and cross-borderKRW-denominated electronic transfers.• High-value and urgent JPY and USD-denominatedinterbank payments.• Net obligations from South Korea’s other paymentsystems.

Operating hours• · · 09:30–17:30 KST, Monday to Friday. (09:00to 17:00 local time, Monday to Friday for paymentssubmitted to BOK-Wire+ regional headquarters).

Clearing cycle details (e.g.cut-off times)

• Payments are cleared and settled in real time.• All net obligations cut-off time = 11:00 KST.

System holidays

• BOK-Wire+ is closed on all South Korean bankholidays.• South Korea’s bank holidays are:• 2nd half 2021: August 15, September 20-22, October3, 9, December 25.• 2022: January 1, 31, February 1, 2, March 1, 9, May 1,5, 8, June 1, 6,August 15, September 9-12, October 3, 9, December 25.

Cheque Clearing Service Type • Multilateral net settlement system.


https://cashmanagement.bnpparibas.com/knowledge/glossary#Net%20settlement%20system


• Cheque (cashier's cheques, current account cheques)and bill payments (promissory notes and bills ofexchange).• Cheque and bill payments are truncated intoelectronic items before being processed.

Operating hours • 16:00–08:00 KST, Monday to Friday.


• Payments are settled on a next-day basis.• Cheque and bill items are truncated for overnightclearing. Cut-off time = 16:00 KST.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• Cheque and Bill Clearing is closed on all South Koreanbank holidays. (Dates as above)

Bank Giro Type • Multilateral net settlement system



• KRW-denominated paper-based credit transfers.• Electronic giro payments (credit transfers, directdebits, standing orders).• Internet giro payments.

Operating hours• 09:00 to 17:00 local time, Monday to Friday. Theinternet giro service has extended hours until 22:00.

Clearing cycle details (e.g.cut- off times)

• Payment information sent to the KFTC (KoreaFinancial Telecommunications & Clearings Institute)for processing.• Electronic and internet giros settled on a next-daybasis.• Electronic giros cut-off time = 17:00 KST.• Internet giros cut-off time = 22:00 KST.• Final settlement takes place via BOK-Wire+ at 11:00KST.• Paper giros are settled on a two-working day cycle.Cut off time = 17:00 KST.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• Bank Giro is closed on all South Korean holidays.(Dates as above).

IFTNET Type • Multilateral net settlement system.

Participants • 51


• KRW-denominated cashier's cheques and irregularcredit transfers.

Operating hours • 09:00-16:00 KST, Monday to Friday

https://cashmanagement.bnpparibas.com/knowledge/glossary#Cheque



Clearing cycle details (e.g.cut off times)

• Participant bank’s customers have funds remittedbetween bank branches in real time.• Accounts instantly debited or credited upon paymentinstruction.• Payments are settled on a next-day basis.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• IFTNET is closed on all South Korean bank holidays.(Dates as above)

HOFINET Type • Multilateral net settlement system.

Participants • 58 participants.


• Electronic banking payments (internet, phone, andmobile banking).• There is a ceiling of KRW 1 billion per transaction forcompanies; KRW 100 million for individuals.

Operating hours • 24 hours a day, 7 days a week


• Payments are settled on a next-day basis.• Participant banks can choose cut-off times between00:00 and 07:00 KST.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• HOFINET is closed on all South Korean bank holidays.(Dates as above)

CDNET System Type • Multilateral net settlement system.

Participants

• All banks (excluding Eximbank, the Post Office, theKorea Federation of Savings Banks and the domesticbranches of HSBC).• 8 special participants.


• Cash withdrawals.• Credit card cash advances.• Funds transfers.• Giro payments.• KRW-denominated cashier's cheques.

Operating hours • ·24 hours a day, 7 days a week.


• Payments are settled on a next-day basis.• NICE e-Banking Services sends CDNET transactioninformation to the KFTC for processing.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• CDNET is closed on all South Korean bank holidays.(Dates as above)



EFTPOS system Type • Multilateral net settlement system.



• Debit card payments at POS terminals.

Operating hours • 08:00-23:30 KST, 7 days a week.


• Payments are settled on a next-day basis.• Payment information sent to the KFTC, where nettransaction values are calculated for each bank.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays • N/A

Cash ManagementService CMS

Type • Multilateral net settlement system.

Participants• 15 bank participants, 11 asset managementcompanies.


• Low-value and high volume credit and debitpayments.

Operating hours • 24 hours a day, 7 days a week.


• Credit transfers are settled on a same-day basis. Cut-off time = 11:30 KST.• Debit transfers are settled on a next-day basis.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays N/A

BANKLINE system Type • Multilateral net settlement system.



• Funds transfers.

Operating hours • 09:00–16:00 KST, Monday to Friday.


• Payments are settled on a next-day basis. Cut-offtime = 16:00 KST.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays• BANKLINE is closed on all South Korean bankholidays. (Dates as above)


https://cashmanagement.bnpparibas.com/knowledge/glossary#Debit%20card

https://cashmanagement.bnpparibas.com/knowledge/glossary#POS



K-Cash Type • Multilateral net settlement system.



• K-Cash e-money card payments.• There is a maximum rechargeable amount of K-Cashof KRW 500,000 for a registered card and KRW50,000 for a non-registered card.



• Payments are settled within a three working-daycycle.• Transaction information is sent to the KFTC forcalculation of participant’s net balances.• Final settlement takes place via BOK-Wire+ at 11:00KST.

System holidays • N/A

B2C E-Commercesystem

Type• Real-time service for funds transactions betweenconsumers and seller



• Processes funds transfers between retailers andcustomers.


System holidays • NA.

B2B E-Commerce system

Type • Payment channel for online registered bills (ORBs).



• Issues and processes ORBs and interbank findtransfers.

Operating hours • 08:00 to 22:00, Monday to Friday.

System holidays

• 2nd half 2021: August 15, September 20-22, October3, 9, December 25.• 2022: January 1, 31, February 1, 2, March 1, 9, May 1,5, 8, June 1, 6,August 15, September 9-12, October 3, 9, December 25.


Credit transfers

Credit transfers are used by companies to pay salaries and suppliers, and to make tax payments.High-value and urgent KRW-denominated credit transfers are settled on a same-day basis via BOK-Wire+.Low-value and non-urgent KRW-denominated credit transfers are settled on a next-day basis via retailpayment systems run by the KFTC.Pre-scheduled, low-value credit transfers are made via the Bank Giro System. Non-scheduled credit transfersare effected through either the Internet Giro Service or the one of payment systems that make up the FinancialInformation Network Systems (FINS). Though final settlement takes place through BOK-Wire+ on a next-daybasis, customers using a FINS system can obtain cash immediately after a funds transfer because the banks areconnected to each other through a shared platform at the KFTC.Cross-border transfers can be made via SWIFT and settled through correspondent banks abroad.Many banks have access to retail payments systems in Europe, including EURO1, STEP1, STEP2 and TARGET2.The volume and value of credit transfers increased 11.2% and 16% respectively in 2020, to 6,572,745 thousand,with a value ofKRW 131,039,119 billion.

Direct debits

Direct debits are used for regular payments, such as utility bills. Direct debits are usually preauthorised throughstanding orders.Companies can collect high-value payments from multiple payer accounts into a single collection account usingthe CMS debit transfer.Direct debits can be settled via the Bank Giro system on a three-day cycle.The CFIP (Committee on Financial Informatization Promotion) has implemented a bank-account mobile debitpayment service (mobile cash). The project aims to build infrastructure that enables users to install a debit-typecash card application on their smartphones which will allow them to make payments to businesses, deposit orwithdraw cash at cash card member stores, or use bank CD/ATMs.

Cheques

The cheque is a common cashless payment instrument, used by both consumers and companies.Current account cheques are used by companies to make high-value, post-dated payments.Cashier's cheques, in the form of bearer-form bank drafts, are used in place of cash for certain payments andbank deposits. Cashier’s cheques can be dispensed at any ATM. The most common preset value is KRW100,000.Cheques are truncated into electronic items via the CTS before being settled on a next-day basis via the ChequeClearing system. Final settlement takes place via BOK-Wire+ on a next-day basis.The volume and value of cheques decreased by 20.3% and 4.6% respectively in 2020, to 49,642 thousand, with avalue of KRW 1,804,902 billion.

Card payments

Credit card payments are popular, especially for retail transactions.At the end of 2020, there were approximately 104 million credit cards held by individuals and 9.8 million creditcards held by corporations. Approximately 110 million debit cards were issued.The IC debit card is the most commonly issued debit card. In Q4 2020, the value of IC debit card transactionstotalled KRW 218 billion compared to KRW 0.2 billion for other branded debit cards. Debit card transactions arecleared through EFTPOS.There are approximately 35 card-issuing companies in South Korea, in addition to MasterCard and Visa.Visa and MasterCard payment transactions are cleared via their respective international card schemes.Extended Korea Payment Network (ExK) is a cross-border ATM network arrangement project allowing SouthKorean payment card holders to withdraw cash from ATMs in the USA, Malaysia, Vietnam, Thailand, Indonesia

and the Philippines, using domestically issued cards, without the need for partnerships with international creditcard companies. Preparations are underway to extend this service other countries.

ATM/POS

There are an estimated 120,306 ATMs in South Korea.ATM payments are settled via CDNET on a next-day basis.POS payments are settled via EFTPOS on a next-day basis.

Electronic wallet

At the end of 2019, there were 17.5 million cards with an e-money function in South Korea.K-Cash, VisaCash and Mybi are popular e-money schemes. K-Cash is a multi-purpose card that can be used onpublic transport, as a cash/credit/debit card, for mobile banking and for purchasing goods. K-Cash payments aresettled via the K-Cash System on a three working-day cycle.Other pre-paid providers include CashBee (a contactless smartcard used to pay bills and make online purchases)and T-money which offers a rechargeable series of cards used to pay transport fares.There were 16 million e-money cards issued in Q4 2020.The government has launched a QR-based payment app called Zero Pay in order to reduce payment processingcosts for small companies.Card issuers, including Shinhan Card, BC Card, and Lotte Card launched a common QR code service calledQRpay in 2019.A Smartphone Payment and Settlement Service (BankWallet) operates as a mobile wallet service in SouthKorea using BankMoney, a pre-paid electronic payment method.Popular mobile payment providers include Samsung Pay, Naver Pay and Kakao Pay.

Channels

Market overview

Liquidity management

Domestic: notional pooling

Domestic notional cash pools are permitted in South Korea but it is not market practice for notional pools to beoffered.

Domestic: cash concentration

Domestic cash concentration structures are widely available. Zero balancing is most commonly used.Resident and non-resident bank accounts can participate in the same cash concentration structure within asingle legal entity.Central bank reporting requirements apply.

Cross-border notional pooling

Cross-border notional cash pools are not permitted in South Korea.

Cross-border cash concentration

Cross-border cash concentration is restricted as it is not permitted to trade the KRW outside of South Korea.

Short term investments

Market overview

Interest payable on credit balances

Interest-bearing current and checking accounts are not permitted.

Demand deposits

Demand deposits denominated in KRW or major foreign currencies are available for terms ranging from oneweek to one year.

Time deposits

Time deposits are available in KRW or major foreign currencies with terms ranging from overnight to 5 years.Non-residents are prohibited from investing in KRW-denominated time deposits with maturities of less thanone year.Institutional banking customers are prohibited from investing in foreign currency-denominated time deposits.

Certificates of deposit

Domestic banks issue certificates of deposit with terms ranging from 30 days to over 12 months. Terms of threemonths are most common.Certificates of deposit can be issued paying fixed or variable interest.The minimum investment amount is KRW 10 million.

Treasury (government) bills

Treasury bills (T-bills) are issued by the government with maturities of less than one year, and typically with amaturity date of 63 days.The Ministry of Economy & Finance issues Korea Treasury Bonds with maturities ranging from three years upto 50 years.Monetary Stabilisation Bonds (MSBs) are issued by the BoK. Maturities range from 14 days to two years. Short-term MSBs have a maturity of less than 28 days.

Commercial paper

Domestic commercial paper is issued in the form of unsecured promissory notes. Most paper is issued for termsup to one year.

Money market funds

Domestic money market funds are an increasingly popular short-term investment instrument in South Korea.

Repurchase agreements

Repurchase agreements with maturities ranging from overnight to one year are commonly available. There areten standardised repo terms: overnight, two days, three days, four days, seven days, 14 days, 21 days, 30 days,60 days, and 90 days.

Bankers’ acceptances

Bankers' acceptances are not commonly used in South Korea.

BNP Paribas insights

BNP Paribas Trade Finance Capabilities

Trade payments

Documentary credits

Documentary collections



Guarantees

Bank guarantees

Standby letters of credit



Supply chain management

Receivables

Payables

Inventory



Trade channels

Connexis Trade

Connexis Supply Chain

SWIFTNet Trade for Corporates

Connexis Connect



International trade

General trade rules

As a member of the Asia-Pacific Economic Cooperation (APEC) forum, South Korea has agreed to liberalise tradeand investment rules between members.

Trade agreements

South Korea has free trade agreements with 60 countries, including with the EU and ASEAN. It is in the processof negotiating eight further FTAs.South Korea’s negotiations with the Philippines are expected to conclude by end-June 2021. Negotiations withCambodia concluded in February 2021.South Korea has signed a continuity Free Trade Agreement with the UK.South Korea is a signatory of the Regional Comprehensive Economic Partnership (RECP).South Korea has officially declared that it will join the CPTPP.

Imports / exports

ImportsCrudeptetroleum

Integratedcircuits

Natural gasRefinedpetroleum

Coal

PrimaryImportsources

China(22.0%)

USA(12.0%)

Japan (9.0%)

ExportsIntegratedcircuits

Refinedpetroleum

Motor vehiclesand vehicleparts

ShipsOfficemachinery

Exportmarkets

China(25.0%)

USA(14.0%)

Vietnam (9.0%)Hong Kong(6.0%)

Japan (5.0%)

Import / export volumes

2016 2017 2018 2019 2020

Exports- goods USD m 511,926 580,310 626,267 556,668 516,604

- services USD m 94,809 89,701 103,678 103,839 90,106

Imports- goods USD m 395,464 466,717 516,180 476,856 434,659

- services USD m 112,148 126,435 133,047 130,684 106,296

Current account as % GDP 6.7 4.9 4.5 3.7 4.6

Source: IMF, International Financial Statistics, June 2021.

Trade finance - imports

Documentation

The following documentation is required in order to import goods into South Korea:bill of ladingcustoms declarationdelivery order.

Import licences

Licences are not required for most imports into South Korea.

Import taxes and tariffs

Tariffs are set on an ad valorem basis at an average of 13.3%.South Korea has eight free economic zones: Incheon, ChingBuk, East Coast, Busan-Jinhae, Gwangyang Bay Area,Yellow Sea, Daegu‑Gyeongbu and Saemangeum Gunsan.

Financing requirements

None

Risk mitigation

None

Prohibited imports

South Korea prohibits the import of certain items in line with UN Security Council resolutions.Specific imports are prohibited in order to protect fauna and flora, for health and safety or moral reasons,and/or for national security.

Trade finance - exports

Documentation

The following documentation is required in order to export goods from South Korea:packing listcustoms declarationbill of lading.

Export licences

Licences are not required for the majority of exports from South Korea.

Export taxes and tariffs

None

Financing requirements

None

Risk mitigation

Korea Trade Insurance Corporation (K-sure), South Korea’s national export insurer, provides state-supported

export insurance.Korea Eximbank (KEXIM), South Korea’s national export credit agency, provides state-supported export credit.Export credit insurance and financing is also available from private insurance companies and from commercialbanks.

Prohibited exports

South Korea prohibits the export of certain items in line with UN Security Council resolutions.Specific exports are prohibited in order to protect fauna and flora, for health and safety or moral reasons,and/or for national security.

Regulatory requirements

Reporting regulations

All transactions between residents and non-residents must be reported to the BOK on a monthly basis.All remittances and withdrawals by residents from accounts held abroad must be reported to the BOK on amonthly basis.Specific transactions, such as netting payments, third-party payments and payments that bypass foreignexchange banks must be reported to the BOK.Additional reports are required to be made to the BOK (or, in some cases, the designated foreign exchangebanks) for particular payments. These include netting payments, third party payments and payments whichbypass foreign exchange banks.

Reporting method

Banks submit reports to the BOK on behalf of their customers.

Exchange controls

Exchange controls are administered by the BOK and the Ministry of Strategy and Finance.Forward trading on import and export transactions is restricted to 100% of the value of the transaction.Domestic financial institutions operating in South Korea are not permitted to take forward currency positionsworth more than 50% of their equity capital. Foreign banks operating in South Korea are restricted to takingforward currency positions of no more than 250% of their equity capital. Restrictions apply to foreign investment in industries such as agriculture, nuclear, financial institutions, publicsector utilities involved in privatisation, transport and communication.Financial and commercial credits to residents from non-residents (excluding trade credits) must be notifieddirectly to the MOSF if in excess ofUSD 30 million.The majority of resident companies can access foreign currency loans for overseas use only, although somesmall and medium-sized manufacturers can obtain a restricted amount of foreign currency financing for thepurchase of domestic facilities.

Taxation

Resident / non-resident

A company which has its headquarters, main office or a place of effective management in South Korea isconsidered to be a domestic company.

Financial instruments

South Korea has no specific rules with regards to the taxation of financial instruments. Refer to the Withholdingtax section for the taxation at source of gains derived from trading in certain financial products.

Capital gains tax applies to income from trading financial derivatives on or after 1 January 2016.

Interest and financing costs

Interest expenses incurred in the ordinary course of business are deductible.Interest expenses attributable to non-business assets are not allowed as deductible expenses for corporationtax purposes. There are also thin capitalisation rules to be observed.

Foreign exchange

Generally, a domestic company can elect one of the following two methods regarding the translation of foreigncurrencies:

the standard foreign exchange rate on the fiscal year-end date; orthe standard foreign exchange rate on the date on which agreement was made.

However, in the case of accounts receivable or payable (including loans) denominated in foreign exchangeowned by a bank, any foreign exchange gain/loss on such accounts should be calculated based on the standardexchange rate on the fiscal year-end date for corporation tax purposes.Generally, a valuation gain/loss on currency forwards or swaps, regardless of the hedging purposes of thecontract, is not allowed as an income or expense for corporation tax purposes until settled or matured.However, in the case of a currency forward or swap owned by a bank, it should be calculated based on one ofthe following two methods, filed with the tax office, and the filing method should be applied continuously:

the standard foreign exchange rate on the fiscal year-end date; orthe standard foreign exchange rate on the date on which agreement was made.

Advance tax ruling availability

A taxpayer can submit a request for a written ruling to NTS or the Ministry of Strategy and Finance (MOSF) toresolve or clarify certain tax issues before entering into transactions. Obtaining a ruling can take from a fewweeks to several months. Such rulings are public information. Although third parties can refer to rulings, theyare only binding upon the party requesting them.The tax authorities may issue a private tax ruling in response to a taxpayer’s inquiry as to theinterpretation/application of the tax law.An advance ruling system also is in place.

Capital gains tax

Domestic companies report capital gains, together with other profits earned by the company, on theircorporate tax return and there is no preferential rate for capital gains.Korean-sourced capital gains derived by a non-resident are taxed at the lesser of 11% of the sales proceedsreceived or 22% of the gains realised.

Withholding tax (subject to tax treaties)

https://cashmanagement.bnpparibas.com/knowledge/glossary#Accounts%20Receivable

Payments to: Interest Dividends Royalties Other income

Resident entities 15.4% or 25% None None None

Non-resident entities 15.4-22% 22% 22% 22%

Interest on a regular loan paid to a non-resident company or an individual is subject to a 22% withholding tax(including the local surtax). Interest on bonds is subject to a 15.4% withholding tax (including the local surtax).The rate may be reduced under a tax treaty, although withholding at the domestic, rather than treaty, ratemay be required for certain payments to jurisdictions regarded as tax havens.Disallowed interest may be treated as a dividend; refer to the Thin capitalisation section.The taxation of a gain from trading in derivative products or sophisticated financial products is still in thedevelopment stage in South Korea, and there are currently no definite rules. Certain gains are treated asinterest and other gains are treated as other income. Withholding tax rates would differ depending upon thecharacter of the income derived.Income from transactions in financial investment services and capital markets derived by a foreign companywith no permanent establishment in South Korea is not treated as Korean-sourced income subject to Koreanwithholding tax.Services rendered by a non-resident company or an individual in Korea generally are classified as personalservices income and subject to a 22% withholding tax (including the local surtax). An exemption may applyunder a tax treaty. Technical service fees for any transfer of technical information or know-how may beclassified as a royalty.In general, there is no branch remittance tax. However, a branch tax, ranging from 2% to 15% of after-taxprofits less deemed re-invested capital, may be levied if a tax treaty between Korea and the country in whichthe branch’s head office is resident allows Korea to impose the branch tax.

Tax treaties / tax information exchange agreements (TIEAs)

The South Korean government has entered into tax treaties with more than 90 countries. When domestic taxlaw conflicts with a tax treaty, the tax treaty overrides domestic law.South Korea has exchange of information relationships with 107 jurisdictions through 96 double tax treaties and11 TIEAs.

Thin capitalisation

If a foreign invested company borrows from a foreign controlling shareholder (FCS), or an FCS or head officeguarantees borrowings from third parties, and such borrowing exceeds 200% (600% for financial institutions)of its net equity or paid-in capital, whichever is greater, then the interest expense on the debt exceeding 200%(600% for financial institutions) of the FCS’s share of the borrower’s net equity or paid-in capital is notdeductible.As from January 1, 2019, deductions of interest expense on borrowings from an FCS are limited to 30% ofadjusted taxable income. When applying this rule alongside the above interest deduction limitation rule, aKorean company is required to apply the rule that results in the lower interest deduction.

Transfer pricing

Transactions with overseas related parties must be made on arm’s-length terms. The following transfer pricing-related information must be disclosed when filing a corporate income tax return:

a report on the selected transfer pricing method and the reason for its selection;a schedule of the taxpayer’s international transactions with foreign related parties; anda summary income statement for foreign-related parties.

Effective from 1 January 2016, domestic companies and permanent establishments of a foreign company thathave annual sales of more than KRW 100 billion and a transaction volume with foreign-related parties of morethan KRW 50 billion per year are required to submit additional transfer pricing documentation (i.e. acomprehensive report on cross-border transactions, including a ‘master file’ and a ‘local file’), which providesorganisation/management information, cross-border transaction information, various business/intangibleasset/financial/tax information, etc.Korean tax law requires country-by-country (CbC) reporting as from fiscal years commencing on or afterJanuary 1, 2016. The CbC report must be submitted within 12 months of the fiscal year-end.Both unilateral and bilateral advance pricing agreements are available.

Stamp duty

Stamp duty tax is imposed when a document verifying that property rights are found, transferred or changedis newly made, but the tax is not significant.

Cash pooling

There are no specific tax rules for cash pooling arrangements. However, under the commercial law and foreigncurrency transaction regulations, there is a provision to enable cash pooling and cash concentration amongaffiliates worldwide.

Financial transactions / banking services tax

Not applicable in South Korea.

All tax information supplied by Deloitte Touche Tohmatsu and Deloitte Highlight 2021 (www.deloitte.com).

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