Taxes for Foreign Shareholders: Dividend Income and Tax Treaties

1) What counts as dividend income?

Dividends are profit distributions from a Korean domestic corporation to its shareholders. For non-residents/foreign corporations, dividends are Korean-source income and subject to withholding at payment.

2) Step 1 — Domestic law: 20% WHT (+ local income tax)

Under Korean domestic rules, dividends paid to non-residents/foreign corps are subject to 20% withholding tax. In addition, a local income tax (10% of the WHT) is levied. Practically, if no treaty benefit applies, the cash-out is 22% of the gross dividend.

Rule of thumb: Domestic 20% is the starting point. A treaty may reduce it.

3) Step 2 — Tax treaties & limited rates

Korea’s tax treaties generally cap Korea’s dividend withholding to a limited rate (often 5–15%), applied instead of the domestic 20% when conditions are met.

Ownership thresholds: Lower rates (e.g., 5%) often require a corporate shareholder with ≥25% (or 10%) direct ownership; otherwise a higher cap (e.g., 15%) applies.
Recipient type: Corporate vs. individual may produce different caps.
Direct vs. indirect: Some treaties require direct ownership to get the lower rate.

How it’s applied: The payer applies the treaty rate at source when the shareholder substantiates residence & BO status with required forms.

4) Conditions: BO test & PE connection

Beneficial owner (BO): Treaty rate applies only if the payee is the beneficial owner of the dividend (not a conduit). Missing BO → domestic rate.
Permanent establishment (PE) link: If the shares are effectively connected to the non-resident’s Korean PE, the dividend is taxed as business profits (treaty WHT cap generally does not apply).

Substance matters: Interposed holding entities without substance risk denial of treaty benefits (LOB/BO clauses).

5) Withholding & filing timeline

Payer: The Korean company is the withholding agent.
Deadline: File/pay WHT by the 10th day of the month following the dividend payment date.
Documentation: Obtain certificate of residence and required treaty claim forms to apply reduced rates at source.

6) Quick numerical examples

Scenario	Rate applied	Cash WHT on KRW 100,000 dividend
Domestic law only (no treaty docs)	20% + 10% local on WHT = 22%	KRW 22,000 withheld
Treaty general cap	15% (plus local 10% of WHT included in cap*)	KRW 15,000 withheld*
Treaty lower cap for ≥25% corporate	5% (cap*	KRW 5,000 withheld*

*Many treaties express a single capped percentage; in practice the Korean system applies the capped treaty rate as the total Korean levy at source.

7) Common mistakes & quick checks

No residence certificate: Without current-year proof, payer must use domestic 20% (≈22% with local surcharge).
Ownership threshold missed: Indirect or fluctuating holdings may disqualify the 5% tier.
BO not demonstrated: Conduit holdings, lack of substance → treaty denial.
PE connection ignored: Shares effectively connected to a Korean PE → business income rules, not WHT cap.

Checklist: Up-to-date residence cert, BO declaration, cap tier & ownership test, LOB/substance proof, share register snapshot at record date.

8) Summary & next topic

Default for foreign shareholders: 20% WHT (+ local), applied by the Korean payer.
Tax treaties usually reduce this to 5–15%, if BO and other conditions are met.
PE connection and missing documents commonly block treaty relief.

Next (Part 18): Global Income Tax for individuals—when Korea requires you to aggregate wages, dividends, and business income.

9) Disclaimer

General information only, not tax advice. Treaty caps and documentation vary by country and year. Confirm the latest treaty text and Korean guidance or consult a professional.

Tags (hidden)

Dividend Withholding Tax Tax Treaty Beneficial Owner Permanent Establishment International Tax KRTaxPolicy Korean Taxation Series

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