After Korean economic crisis in 1997, many foreign companies invested to Korean companies. They repatriated their investment and related profits by selling their equity in Korean companies. According to Korean tax law, capital gains from dealing of shares are subject to Korean taxation at 25% of capital gains or 10% of the proceeds, whichever is lesser. Since many foreign companies used intermediary companies to invest Korea, there have been controversies for whether the treaty benefits under the tax treaty made between Korea and the residence country of intermediary company should be given or not. This article discussed the requirements of a resident to enjoy tax treaty benefits and inter-relation with the revised Article 2-2(1) of the Law for Coordination of International Tax Affairs (the LCITA). According to the revised Article of LCITA, the real recipient of income in economic sense can enjoy treaty benefits. I made three recommendations. (i) it would be required to give guidelines for who can be considered as real recipient of income by the Korean tax authority, (ii) since the withholding agent can be exposed to pay withholding tax and related penalties even (s)he acted in good faith, there should be relevant considerations to withholding agents acted in good faith, and (iii) revising pre-existing tax treaties could be useful to avoid uncertainty that was arising from the application of domestic anti-avoidance rule when the relevant tax treaty was silent for substance-over-form.

After Korean economic crisis in 1997, many foreign companies invested to Korean companies. They repatriated their investment and related profits by selling their equity in Korean companies. According to Korean tax law, capital gains from dealing of shares are subject to Korean taxation at 25% of capital gains or 10% of the proceeds, whichever is lesser. Since many foreign companies used intermediary companies to invest Korea, there have been controversies for whether the treaty benefits under the tax treaty made between Korea and the residence country of intermediary company should be given or not. This article discussed the requirements of a resident to enjoy tax treaty benefits and inter-relation with the revised Article 2-2(1) of the Law for Coordination of International Tax Affairs (the LCITA). According to the revised Article of LCITA, the real recipient of income in economic sense can enjoy treaty benefits. I made three recommendations. (i) it would be required to give guidelines for who can be considered as real recipient of income by the Korean tax authority, (ii) since the withholding agent can be exposed to pay withholding tax and related penalties even (s)he acted in good faith, there should be relevant considerations to withholding agents acted in good faith, and (iii) revising pre-existing tax treaties could be useful to avoid uncertainty that was arising from the application of domestic anti-avoidance rule when the relevant tax treaty was silent for substance-over-form.

Tax treaty, fund taxation in cross-border, abuse of tax treaty, real recipient under the LCITA.