The Double Taxation Relief (Taxes on Income) (Republic of Korea) Order 1996

Made: 19th December 1996

At the Court at Buckingham Palace, the 19th day of December 1996 Present, The Queen’s Most Excellent Majesty in Council

Now, therefore, Her Majesty, in exercise of the powers conferred upon Her by section 788 of the said Act, and of all other powers enabling Her in that behalf, is pleased, by and with the advice of Her Privy Council, to order, and it is hereby ordered, as follows:—

1

This Order may be cited as the Double Taxation Relief (Taxes on Income) (Republic of Korea) Order 1996.

2

It is hereby declared—

• (a) that the arrangements specified in the Convention set out in Part I of the Schedule to this Order and in the Exchange of Notes constituting an Agreement set out in Part II of that Schedule have been made with the Government of the Republic of Korea with a view to affording relief from double taxation in relation to income tax, corporation tax or capital gains tax and taxes of a similar character imposed by the laws of the Republic of Korea;

• (b) that those arrangements include provisions with respect to the exchange of information necessary for carrying out the domestic laws of the United Kingdom and the laws of the Republic of Korea concerning taxes covered by the arrangements; and

• (c) that it is expedient that those arrangements should have effect.

SCHEDULE

PART I — CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND AND THE GOVERNMENT OF THE REPUBLIC OF KOREA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS

The Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Korea;

Desiring to conclude a new Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains;

Have agreed as follows:

Article 1 — Personal scope

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2 — Taxes covered

Article 3 — General definitions

Article 4 — Resident

Article 5 — Permanent establishment

Article 6 — Income from immovable property

Article 7 — Business profits

Article 8 — Shipping and air transport

Article 9 — Associated enterprises

Article 10 — Dividends

• (1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

• (2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:

• (a) 5 per cent. of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which controls, directly or indirectly, at least 25 per cent. of the voting power in the company paying the dividends;

• (b) 15 per cent. of the gross amount of the dividends in all other cases.

This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

• (3) The term “dividends” as used in this Article means income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident and also includes any other item payable by an enterprise to an associated enterprise which, under the laws of the Contracting State of which the company paying the dividends is a resident, is treated as a dividend or distribution of a company.

For the purpose of this paragraph an enterprise of a Contracting State shall be regarded as an associated enterprise of an enterprise of the other Contracting State where:

• (a) one enterprise participates directly or indirectly in the management, control or capital of the other enterprise; or

• (b) the same persons participate directly or indirectly in the management, control or capital of both enterprises.

• (4) The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

• (5) Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in that other State.

• (6) The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.

• (7) In the event that a resident of a Contracting State is denied relief from taxation in the other Contracting State by reason of the provisions of paragraph (6) of this Article, the competent authority of that other Contracting State shall notify the competent authority of the first-mentioned Contracting State.

Article 11 — Interest

Article 12 — Royalties

Article 13 — Capital gains

Article 14 — Independent personal services

1

Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base.

• (2) The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants.

Article 15 — Dependent personal services

Article 16 — Directors' fees

Directors' fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State.

Article 17 — Artistes and sportsmen

Article 18 — Pensions

Article 19 — Government service

Article 20 — Teachers

Article 21 — Students and apprentices

Article 22 — Other income

Article 23 — Elimination of double taxation

Article 24 — Limitation of relief

Article 25 — Non-discrimination

Article 26 — Mutual agreement procedure

Article 27 — Exchange of information

Article 28 — Members of diplomatic or permanent missions and consular posts

Nothing in this Convention shall affect the fiscal privileges of members of diplomatic or permanent missions and consular posts under the general rules of international law or under the provisions of special agreements.

Article 29 — Entry into force

Article 30 — Termination

This Convention shall remain in force until terminated by one of the Contracting States. Either Contracting State may terminate the Convention, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year beginning after the expiry of five years from the date of entry into force of the Convention. In such event, the Convention shall cease to have effect:

• (a) in Korea:

• (i) in respect of taxes withheld at source, for amounts payable on or after 1st January in the year following that in which the notice of termination is given; and

• (ii) in respect of other taxes, for the taxable year beginning on or after 1st January in the year following that in which the notice of termination is given;

• (b) in the United Kingdom:

• (i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after 6th April in the calendar year next following that in which the notice is given; and

• (ii) in respect of corporation tax, for any financial year beginning on or after 1st April in the calendar year next following that in which the notice is given.

In witness whereof the undersigned, duly authorised thereto by their respective Governments, have signed this Convention.

Done in duplicate at Seoul this 25th day of October 1996 in the Korean and English languages, both texts being equally authoritative.

PART II — EXCHANGE OF NOTES

Your Excellency

Seoul

25th October 1996

I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which has been signed today and to propose on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland that:

• (1) in relation to paragraph (2) of Article 8:

• for the purposes of the Convention, when during an accounting period profits from rental or use, maintenance or rental referred to in paragraph (2) of Article 8 exceed in aggregate 20 per cent. of total profits of an enterprise, such rental or such use, maintenance or rental shall not be regarded as incidental to the operation of ships or aircraft in international traffic.

• (2) in relation to paragraph (3) of Article 10 and paragraph (5) of Article 11:

• the United Kingdom legislation concerning thin capitalisation has been designed and is operated in conformity with the arm's-length principle reflected in Article 9 of the Convention. The special relationship provision in Article 11 of the Convention in conjunction with the definition of interest in that Article and the extended definition of dividends in Article 10 of the Convention ensures that interest re-characterised as a distribution under the thin capitalisation legislation is treated for the purposes of the Convention in the hands of the beneficial owner of the income as if it were a dividend.

• (3) in relation to paragraph (9) of Article 11:

• the paragraph applies to bodies such as pension funds and charities, and is concerned with transactions in interest bearing securities such as corporate bonds and government securities.

• (4) in relation to paragraph (1) of Article 22:

• the purpose of the exclusion from the paragraph for income paid out of trusts or the estates of deceased persons in the course of administration is to allow the recipient of the income the relief that would have been available to him under the provisions of the Convention had he received the income direct instead of through the trust or estate.

If the foregoing proposals are acceptable to the Government of the Republic of Korea, I have the honour to suggest that the present Note and Your Excellency’s reply to that effect should be regarded as constituting an agreement between the two Governments in this matter, which shall enter into force at the same time as the entry into force of this Convention.

I avail myself of this opportunity to extend to Your Excellency the assurances of my highest consideration.

Thomas George Harris

Ambassador Extraordinary and Plenipotentiary of the United Kingdom of Great Britain and Northern Ireland to the Republic of Korea

Your Excellency

Signed

N. H. Nicholls — Clerk of the Privy Council

Explanatory note

(This note is not part of the Order)

The Convention with the Republic of Korea (which replaces the Convention set out in the Schedule to the Double Taxation Relief (Taxes on Income) (Republic of Korea) Order 1978 (S.I. 1978/786)) is set out in Part I of the Schedule to this Order.

The Convention provides for business profits not arising through a permanent establishment to be taxed only in the country of the taxpayer’s residence. Profits attributable to a permanent establishment may be taxed in the country in which the permanent establishment is situated (Articles 5 and 7).

Income from immovable property and gains derived from the alienation of such property may be taxed in the country in which the property is situated (Articles 6 and 13).

International transport profits are generally to be taxed only in the country of residence of the operator (Article 8).

The Convention includes rules for determining taxable profits when a company in one country is related to a company in the other country (Article 9).

The rate of tax imposed in the country of source on dividends derived by a resident of the other country shall not, in general, exceed 5 per cent. of the gross amount if the recipient is a company (other than a partnership) controlling at least 25 per cent. of the voting power in the company paying the dividends and 15 per cent. of the gross amount of the dividends in all other cases (Article 10).

The rate of tax imposed in the country of source on interest derived by a resident of the other country is, in general, not to exceed 10 per cent. of the gross amount flowing to the other country. Certain other interest (e.g. interest payable to the Government of the other country) is exempt from tax in the source state (Article 11).

The rate of tax imposed in the source country on royalties is limited to 2 per cent. of the gross amount of the royalties which are paid for the use of, or the right to use, industrial, commercial, or scientific equipment; and 10 per cent. of the gross amount of the royalties in all other cases (Article 12).

Gains arising from the disposal of movable property are normally to be taxed only in the country of the taxpayer’s residence. Gains arising from the disposal of assets of a permanent establishment or fixed base which the taxpayer has in the other country may be taxed in that other country (Article 13).

The earnings of temporary business visitors and some other individuals are, subject to certain conditions, only to be taxed in the country of the taxpayer’s residence (Articles 14 and 15). Fees received by a resident of one country in his capacity as a director of a company resident in the other country may be taxed in the latter country (Article 16). Income derived from the activities of artistes and sportsmen may be taxed in the country in which those activities are performed (Article 17). Occupational pensions (other than those paid in respect of Government service) and annuities are to be taxed only in the recipient’s country of residence (Article 18). Government service remuneration and pensions are normally taxable only by the paying Government (Article 19). The remuneration of teachers and researchers and payments made to students and business apprentices are, subject to certain conditions, to be exempt from tax in the country visited (Articles 20 and 21). Other i! ncome (with the exception of income from trusts and estates of deceased persons under administration) not specified in the Convention remains taxable only in the recipient’s country of residence (Article 22).

Where income continues to be taxable in both countries credit will be given in the taxpayer’s country of residence for tax imposed by the other country. The credit to be given in the United Kingdom for tax imposed in the Republic of Korea includes, subject to time limits, credit for tax spared under certain provisions of Korean law. In the case of dividends, the United Kingdom will give credit for the underlying tax paid in the Republic of Korea where the shareholder is a United Kingdom company which controls at least 10 per cent. of the voting power in the company paying the dividends (Article 23).

There are provisions safeguarding nationals and enterprises of one country against discriminatory taxation in the other country (Article 25) and for consultation (Article 26) and exchanges of information (Article 27) between the taxation authorities of the two countries.

The Exchange of Notes set out in Part II of the Schedule contains agreements between the United Kingdom and the Republic of Korea in relation to Articles 8, 10, 11 and 22 of the Convention.

The Convention will enter into force thirty days after the date on which instruments of ratification are exchanged. The Convention is to take effect in the United Kingdom on or after 1st April in respect of corporation tax and on or after 6th April for income tax and capital gains tax in the calendar year next following that in which it enters into force.

Footnotes

[^f00001]: 1988 c. 1; section 788 is extended by section 277 of the Taxation of Chargeable Gains Act 1992 (c. 12).

[^f00002]: The instruments of ratification were exchanged on 29th Nobember 1996.