The tax authority denied the taxpayer’s claim for a foreign tax credit for the Chinese withholding tax on the grounds that the payment for the guarantee service was not interest properly subject to withholding tax, but rather was “other income” under the Korea-China income tax treaty taxable only in Korea.
The Tax Tribunal on June 14, 2024, held (2023 Boo 8173) that the taxpayer was not entitled to a foreign tax credit under Article 57 of the Korean Corporate Income Tax Act for Chinese withholding tax imposed on payment received from its Chinese subsidiary for providing the subsidiary a guarantee service, which was illegitimately treated by the Chinese tax authorities as interest subject to 10% withholding tax.
The tax authority denied the taxpayer’s claim for a foreign tax credit for the Chinese withholding tax on the grounds that the payment for the guarantee service was not interest properly subject to withholding tax, but rather was “other income” under the Korea-China income tax treaty taxable only in Korea. Because the withholding tax collected by the Chinese authorities was illegitimate, the taxpayer was not entitled to a foreign tax credit for such tax under Article 57 of the Korean Corporate Income Tax Act, which requires that the country of origin (in this case, China) has the right to impose tax on the foreign-source income.
The Tax Tribunal agreed with the tax authority and held that the taxpayer was not entitled to a foreign tax credit for the illegitimately withheld tax, and that the taxpayer’s remedy lies in trying to collect tax from China.
Read a September 2024 report prepared by the KPMG member firm in Korea