Signing of the Convention between Japan and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (New Japan-ROK Tax Convention) and Related Exchange of Notes

October 8, 1998

  1. The signing of the new Japan-ROK tax convention and the related Exchange of Notes took place on October 8 in Tokyo (Akasaka Palace) between Mr. Masahiko Koumura, Minister for Foreign Affairs of Japan, and Mr. Hong Soon-Young, Minister of Foreign Affairs and Trade of the Republic of Korea.

  2. Negotiation Process
    Japan and the ROK have avoided double taxation under the current tax convention which was concluded in 1970. Since many years have passed since that convention entered into force, the two Governments have been negotiating on revisions since April 1996. As a result, the two Governments reached an agreement on the text of a new Convention together with the related Notes to be exchanged.

  3. Outlines of the new Convention

    (1) Compared with the current one, the new Convention is intended to make the terminology and nomenclature relating to the taxes covered by the Convention more precise to adopt the "attributable income principle" for taxation on income by an enterprise, and to lower the maximum tax rates on dividends which a parent company receives from its subsidiaries, charged in the State of source. The new Convention is drafted on the bases of the OECD Model Convention and similar conventions which Japan concluded with other states in recent years.

    The major points are as follows:

    (a) When an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment therein, the profits attributable to the permanent establishment shall be taxed only in that other Contracting State (attributable income principle). As for the profits from the operation of ships or aircraft in international traffic carried on by an enterprise, however, the total amount of those profits shall be exempt from taxation in the other Contracting State.

    (b) Tax rates in the other Contracting State imposed on dividends paid by a resident in that other Contracting State and on interest or royalties which arise in that other Contracting State shall not exceed the following rates:

    (i)For dividends-5 % when payable between a parent company and its subsidiary
    (however, the rate shall be 10 % until the end of 2003);
    (ii)For interest-10 %;
    (iii)For royalties-10 %.

    (c) Remuneration for short-term visitors whose stay will not exceed 183 days, government officials, students or business apprentices, and professors, shall be exempt from taxation under certain conditions in a Contracting State where they stay.

    (d) a: The "foreign tax credit system" shall be adopted by both Japan and the ROK to avoid double taxation. b: The Japanese side shall accord "tax sparing credit" to the Korean side until the end of 2003.

    (2) The two Governements confirmed the scope of "tax sparing credit" in the related Notes exchanged.

  4. Significance
    The conclusion of the new Convention, helping Japan and the ROK further adjust the right to tax on various kinds of income, is expected to further promote investment, cultural and personnel interchange between the two countries.


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