2 Changes on the Horizon that Could Impact Non-Korean Investors – November 05, 2018 by Jim Rosing

Throughout late 2017 and into 2018, the Republic of Korea proposed changes that will impact Korean-sourced income for non-Korean investors. Namely, a key change to the reporting requirements for Overseas Collective Investment Vehicles will help streamline treaty claims, while changes to the safe harbor on capital gains withholding tax could result in additional tax obligations for non-treaty countries.

Changes to Overseas Collective Investment Vehicle Reporting

Currently, Overseas Collective Investment Vehicles are required to report on the underlying investors, who are considered beneficial owners of the entity, to determine the applicable withholding tax rates for each source of Korean income. This reporting regime is very similar to the US W-8IMY reporting, where such information as names, addresses, ownership percentages and applicable treaty rates for each investor is required.
 
Korea’s proposal calls for a reduction in reporting, allowing the Overseas Collective Investment Vehicle to be seen as the beneficial owner and therefore eliminating the need to report on its underlying investors. Slated to become effective January 1, 2020, this should provide a more streamlined and efficient means for treaty claims made by investment funds on Korean-sourced income.
 
In response to this proposal, the Investment Company Institute has responded with comments requesting further guidance as to the eligible entities. As written, the proposal leaves open for interpretation whether U.S. Regulated Investment Companies and U.S. Collective Investment Trusts would fall under the classification as an Overseas Collective Investment Vehicle. Korea is expected to respond and provide more clarification in the coming months.

Changes to Safe Harbors on Capital Gains Witholding

Another item proposed by the Republic of Korea is a change to the safe harbor provisions on capital gains withholding tax for non-Korean investors.
 
Current law exempts non-Korean investors from paying capital gains tax on listed shares of Korean companies if they own less than 25%. The proposed change would lower the threshold from 25% to 5% ownership of the listed shares issued. If the proposed change is accepted, the rate of tax would be the lesser of 11% of the sales price or 22% of the capital gain.
 
It’s important to note that non-Korean investors exempt from tax under the current treaty would still be exempt if the proposed rules are accepted. The changes would mainly impact investors from countries without treaties, such as the Cayman Islands or U.S. entities not entitled to treaty benefits under Article 17 of the current U.S./Republic of Korea Tax Treaty. However, the implementation of the safe harbor changes does not appear imminent. It was initially included in the August 2017 draft law to be effective July 1, 2018, but was postponed for further review. 
 
Although the above proposals are still under debate and will require further guidance before any implementation, they follow a growing trend of countries looking outside their borders to grow their potential tax bases while trying to streamline the compliance process.

Please contact a member of your service team, or contact Jim Rosing at jrosing@cohencpa.com for further discussion.
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.