Part 4 of 20 · Beginner-friendly guide

Preventing Double Taxation: Korea’s Foreign Tax Credit Mechanism

Doing business abroad? Learn how Korea’s FTC offsets foreign taxes so you don’t pay twice on the same income.

Contents 1) Why FTC exists (the double-tax problem) 2) What counts as “foreign tax” (3 routes) 3) The credit ceiling (how much you can claim) 4) Link to Part 3: foreign dividends & FTC 5) Mini examples (quick math) 6) Summary & next topic 7) Disclaimer

1) Why the FTC Exists

A Korean domestic corporation is taxed on worldwide income. If Country X has already taxed the same income, Korea grants a foreign tax credit (FTC) to avoid double taxation by crediting foreign tax against Korean corporate tax.

Analogy: Think of the credit as a coupon from Country X. Korea accepts that coupon and reduces your Korean tax, up to a limit.

2) What Counts as “Foreign Tax” — Three Routes

A. Direct foreign tax payment

• Tax a Korean company pays (or is withheld) abroad on its own income (e.g., withholding on interest/royalties in Country X).

B. Indirect foreign tax payment

• Tax paid by an overseas subsidiary may be deemed “indirectly paid” when the Korean parent receives a dividend and directly owns ≥10% for ≥6 months.

C. Deemed foreign tax payment

• In limited treaty cases, even reduced/exempted foreign tax can be treated as if paid (treaty-specific benefit).

Eligibility and documentation are essential—keep certificates of withholding, assessments, and treaty references.

3) The Credit Ceiling (Per Country)

The FTC cannot exceed a limit calculated for each country. Conceptually:

FTC Limit (Country X) ≈
Korean corporate tax × (Foreign-source taxable income from X ÷ Total corporate tax base)
Foreign-source income is net of related deductions, non-taxable items, and loss carryovers.

If foreign tax paid > limit, the excess is not immediately creditable (subject to carryover rules, if applicable).

4) Important: Foreign Dividends & FTC (From Part 3)

• Where a Korean company directly holds ≥10% of a foreign subsidiary for ≥6 months, 95% of the dividend may be excluded from gross revenue (non-inclusion).
• Because that 95% is already excluded from Korean taxation, the foreign tax attributable to the excluded portion is not FTC-eligible. No double benefit (exclusion + credit) on the same income.

5) Mini Examples — Quick Math

Example 1: Direct credit on service income

Foreign tax paid in Country X: KRW 40M. Korean corporate tax (pre-FTC): KRW 120M.

Foreign-source income ratio yields an FTC limit of KRW 35M → Allow 35M credit; 5M excess not creditable now.

Example 2: Dividend from 20%-owned foreign sub

Dividend KRW 1,000M; 95% (KRW 950M) excluded. Only KRW 50M is in the Korean base.

Only foreign tax attributable to the taxable 5% slice can be considered for FTC; the rest is ineligible.

Example 3: Indirect credit basics

Korean parent owns 15% >6 months. Sub paid corporate tax abroad.

On dividend receipt, the parent may recognize a portion of the sub’s foreign tax as “indirectly paid,” subject to the ceiling.

Heads-up: Exact formulas, carryforward periods, and treaty rules vary by year and country. Always confirm with current law and treaties.

6) Summary

• The FTC prevents double taxation by crediting foreign tax against Korean corporate tax.
• Three routes: direct, indirect, and deemed (treaty-limited).
• Per-country ceiling applies; foreign dividends with 95% exclusion limit FTC eligibility.

Next (Part 5): Withholding tax on cross-border payments—who must withhold, rates, and treaty relief.

7) Disclaimer

This post is for general information only and does not constitute legal or tax advice. Rules change, and outcomes depend on specific facts. Consult a qualified professional before acting.

Tags (hidden)

Foreign Tax Credit Double Taxation Korean Corporate Tax International Tax Foreign Dividends Korean Taxation Series

© KRTaxPolicy