Korea-Taiwan 'Double Taxation Avoidance Agreement' Implementation Nears... Semiconductor Companies' Tax Burden Decreases

Ministry of Government Legislation Passes 'Double Taxation Prevention and Tax Evasion Prevention Act' Between Two Countries
"Improving Investment and Trade Conditions, Tax Exemption Benefits for Domestic Companies Entering Local Markets"

The implementation of the 'Double Taxation Avoidance Agreement' between South Korea and Taiwan is just around the corner. Once the treaty comes into effect, semiconductor companies operating in Taiwan will receive tax exemption benefits. On the surface, South Korea maintains the 'One China' policy while covertly cooperating with Taiwan for national interests such as supply chain diversification.

According to the Ministry of Economy and Finance, the Ministry of Foreign Affairs, and other related ministries on the 13th, the 'Agreement on the Avoidance of Double Taxation and the Prevention of Tax Evasion with respect to Taxes on Income' between the Korean Representative Office in Taipei and the Taipei Representative Office in Korea passed the Legal Affairs Office on the 10th. The bill will be submitted to the National Assembly in September, and once promulgated, the bill will take effect immediately.

An official from the related ministries explained, "Since it is not possible to conclude a conventional government-to-government treaty with Taiwan, the agreement is limited to economic and cultural fields, and domestic law is being enacted accordingly," adding, "There are also tax issues concerning Taiwanese companies operating in Korea, so the government cannot handle this unilaterally and requires the consent of the National Assembly."

Participants are taking a commemorative photo at the "46th Korea-Taiwan Economic Cooperation Committee" jointly hosted by the Federation of Korean Industries and the Taiwan International Economic Cooperation Association in October last year.
[Image source=Yonhap News]

This bill was prepared to implement the taxation agreement agreed upon by South Korea and Taiwan in November 2021. The agreement was made with the Taipei Representative Office rather than Taiwan itself due to diplomatic issues. Since South Korea officially severed diplomatic relations with Taiwan in August 1992, the representative offices of both countries have effectively served as embassies. This treaty also takes the form of a private agreement rather than a state treaty.

The taxes covered by the agreement include income tax, corporate tax, special rural tax, and local income tax. Once the bill is enacted, profits earned from real estate and permanent establishments can be taxed at the source of income. For example, if a Korean semiconductor company operates a business in Taiwan and generates revenue, the tax burden will effectively be borne only locally. Additionally, dividends, interest, and royalties paid to the other party will be taxed at the source at a rate not exceeding 10% of the total amount, and capital gains tax, except for certain properties such as real estate, will be taxed only in the residence of the transferor.

"Improvement of Investment and Trade Conditions, Domestic Tax Exemption Benefits for Local Companies"

The government expects that the implementation of the agreement will improve investment and trade conditions for Korean citizens and companies and enhance market competitiveness. In particular, semiconductor, textile, and gaming companies operating locally are expected to benefit by effectively receiving domestic tax exemption benefits.

In the industry, voices calling for a double taxation avoidance agreement have been raised for years, centered around the Federation of Korean Industries. Japan, for example, expanded its market share in Taiwan's import market to the mid-teens percentage by enjoying tax exemption benefits through an agreement signed in 2015. In contrast, although South Korea has steadily increased trade volume, its market share in Taiwan has reportedly stagnated at around 6% for over a decade.

On December 23, 2016, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho (second from the right, then Saenuri Party member) met with Wu Tzu-hsin, Deputy Minister of Finance of Taiwan, and others.

Choo Kyung-ho, Deputy Prime Minister and Minister of Economy and Finance, also emphasized the importance of the Korea-Taiwan taxation agreement during a negotiation visit to Taiwan in 2016 as a member of the Saenuri Party. At that time, Deputy Minister Choo met with Wu Tzu-hsin, Deputy Director-General of the National Taxation Bureau of Taiwan's Ministry of Finance, stating, "If both sides strengthen economic cooperation, we will become good economic partners enjoying economic development in the global market," and added, "Although the agreement is somewhat overdue, I will pay close attention to ensure its completion."

Once the agreement takes effect, the relationship between South Korea and Taiwan is expected to become stronger. South Korea officially maintains the 'One China' policy recognizing the People's Republic of China as the sole legitimate government, but it is increasing economic contacts with Taiwan behind the scenes. This is due to Taiwan's status as South Korea's sixth-largest trading partner amid the U.S.-China competition and supply chain diversification trends. Last year, trade between the two countries amounted to $56.4 billion, an 11% increase from the previous year.

Taiwan also hopes to strengthen relations with South Korea. In February, Liang Guangzhong, Representative of the Taipei Representative Office in Korea, stated, "Despite the unstable international situation, South Korea and Taiwan have maintained a solid cooperative relationship," and proposed, "Let us strengthen mutually beneficial cooperation based on mutual trust."

This content was produced with the assistance of AI translation services.