South Korea: A Tax: Consultants Overview

One of the most significant challenges facing multinational corporations today is navigating differing tax rules across jurisdictions. While Korean tax law is broadly aligned with global standards, certain unique features can still produce unexpected results. A key example is the treatment of corporate migration and redomiciliation, the process by which a company transfers its place of incorporation from one jurisdiction to another.

Corporate migration and redomiciliation have become increasingly common worldwide as companies pursue administrative efficiencies, more favourable tax environments, and closer alignment between their legal structures and business operations. In addition, the introduction of Pillar 2 and the US GILTI (NCTI) regime has made simplified intermediary structures a key priority for multinational enterprises seeking group-level tax efficiency. As this trend accelerates, a growing number of businesses are considering whether relocating a foreign parent entity could give rise to Korean tax implications when Korean subsidiaries or Korean shareholdings are involved.

Yet the concept of cross-border corporate migration and redomiciliation remains largely unfamiliar in Korea. Under current law, Korea does not permit inward or outward migration; that is, a Korean-incorporated company cannot convert into a foreign company, and a foreign-incorporated company cannot convert into a Korean one. As a result, Korean tax issues relating to corporate migration arise only when a foreign company holding Korean shares migrates to another jurisdiction.

If a foreign company holding Korean shares changes its jurisdiction of incorporation, and that transition is treated as a deemed transfer of its Korean shares – from the pre-migration entity to the post-migration entity – the transaction could trigger Korean capital gains tax and securities transaction tax. However, Korean tax law contains no explicit provisions addressing the taxation of corporate migration.

Tax Tribunal Decisions and Tax Rulings Regarding “Tax Migration”

Until recently, the Korean Tax Tribunal and tax authorities had issued only a limited number of decisions and rulings concerning “tax migration”, meaning the relocation of a foreign company’s “place of effective management” (ie, central management and control). These precedents did not clearly indicate whether such tax migration also involved a change in the foreign company’s country of incorporation or registered address.

Nevertheless, based on the available precedents, if a foreign company (with no permanent establishment in Korea) holding Korean shares relocates its place of effective management, the relocation should not be viewed as resulting in a transfer of the Korean shares and giving rise to a taxable event in Korea, provided that:

1. the existing foreign company is not liquidated and no new legal entity is created;
2. there is no change in the substance of the foreign company, including its rights, obligations, legal personality, and ownership of its assets;
3. there is no change in the entity entitled to the rights relating to the Korean shares; and
4. the relocation is supported by a bona fide business purpose.

While these principles provided some interpretative guidance, ambiguity remained in cases involving an actual change in the company’s jurisdiction of incorporation.

First Explicit Guidance on Corporate Redomiciliation

In July 2023, the Korean tax authorities issued two tax rulings that directly addressed the tax treatment of a foreign company’s conversion of its country of incorporation. This marked the first time Korean authorities formally examined cross-border corporate redomiciliation in the context of Korean shareholdings.

In Seomyeon-2022-BupgyuGookjo-2200 dated 27 July 2023, the ruling applicant was a foreign company headquartered in Labuan, Malaysia (“MY Parent”), which had a wholly-owned subsidiary in Korea (“KR Sub”). MY Parent sought to change its country of corporate registration (the location of its head office) from Labuan to Singapore (the “Relocation”). Following the Relocation, MY Parent would become a corporation duly formed and existing under the laws of Singapore and would be located in Singapore. Further, under Singapore corporate law, the Relocation would neither result in the creation of a new legal entity in Singapore nor affect the property, rights and obligations accrued to MY Parent prior to the Relocation. MY Parent therefore requested confirmation from the Korean tax authorities as to whether the Relocation would be regarded as a deemed transfer of its shares in KR Sub. The tax authorities concluded that the Relocation should not be viewed as resulting in a transfer of KR Sub shares and giving rise to a taxable event in Korea, provided that:

1. the Relocation does not liquidate MY Parent or result in the creation of a new legal entity; and
2. there is no change in the substance of MY Parent and the ownership of KR Sub shares as the rights, obligations, ownership, and corporate personality of MY Parent remain the same before and after the Relocation.

In Seomyeon-2022-BupgyuGookjo-3368 dated 27 July 2023, the ruling applicant was a foreign company headquartered in Jersey, which held an 80% interest in a Korean company and sought to change its country of corporate registration (the location of its head office) from Jersey to Singapore. In this case, the Korean tax authorities reached the same conclusion as in Seomyeon-2022-BupgyuGookjo-2200, determining that such a relocation should not be treated as a transfer of the Korean shareholding, to the extent the two requirements set out above are satisfied.

The interpretations in these two rulings effectively extend earlier tax migration precedents to circumstances involving a formal change in a company’s country of incorporation, thereby reducing uncertainty for foreign multinationals undertaking cross-border reorganisations.

Implications for Multinational Enterprise Groups

The July 2023 tax rulings provide a clearer indication of Korea’s approach to the corporate redomiciliation of foreign companies holding Korean shares. In particular, these tax rulings reaffirm that the decisive factor in determining whether a taxable transfer of Korean shares has occurred is the continuity of the legal entity, including the preservation of its rights, obligations, ownership, and corporate personality.

However, the absence of explicit provisions means that companies should continue to proceed with caution. The Korean tax treatment of cross-border migrations may depend heavily on the specific facts and circumstances, including the legal mechanics of the migration and the extent to which continuity of the entity, its rights, and its obligations is maintained. In addition, careful consideration should be given to the risk that the Korean tax authorities may attempt to apply the domestic anti-avoidance rule (ie, substance-over-form principle).