Double Tax Avoidance Agreement (DTAA) Between India and Korea

The Government of India and the Government of Korea signed a double taxation avoidance agreement (DTAA) on 18th May 2015. It was signed during the visit of the Indian Prime Minister to Seoul. The agreement aims to avoid double taxation and fiscal evasion in the context of taxes levied on income. It was formally enacted on 12th September 2016 after both countries had completed the procedural requirements. Let’s get into more details on this agreement. 

DTAA Between India and Korea

The Indian Union Cabinet (led by Prime Minister Narendra Modi) has provided approval for revising the Double Taxation Avoidance Convention (DTAC) that was formalized in 1985 between the Republic of Korea and India. Here are the key points of this agreement:

• The revised DTAA seeks to prevent the double taxation burden on taxpayers from Korea and India. So, it fosters increased investment, service flows, and technology exchange between the two countries. Also, it guarantees tax certainty for residents of both these countries.
• The current DTAA stipulated the capital gains on shares that will be subject to residence-based taxation. Aligning with India’s policy of taxation levied on capital gains from shares, the updated DTAA specifies source-based taxation for capital gains resulting from the sale of shares indicating more than 5% of the share capital.
• The gains obtained from the division of shares of the company might be taxed in the country where the company is a resident. The condition for this is that the transferor held either directly or indirectly at least 5% of the capital during the 12-month duration before such transfer.
• The revised DTAA seeks to prevent the burden of double taxation for taxpayers from two countries. Hence, it encourages the flow of technology, investment, and services between Korea and India. The agreement provides tax certainty to residents of both countries.
• To encourage the cross-border flow of technology and investment, the updated DTAA reduces withholding tax rates from 15% to 10% levied on fees or royalties for technical services and on interest income.
• The revised DTAA broadens the scope of dependent agent Permanent Establishment provisions to align with the source-based taxation policy of India.
• To streamline the movement of goods via shipping between two countries and in line with the international principle of taxing shipping income, the revised DTAA stipulates special residence-based taxation of shipping income generated from global traffic under Article 8 of the latest DTAA.
• Through the introduction of Article 9(2), the revised DTAA offers an alternative to the taxpayers of both nations to pursue a Mutual Agreement Procedure (MAP) during transfer pricing disputes and also pursue bilateral Advance Pricing Agreements (APA). According to the agreement between the two nations, the MAP requests in transfer pricing cases can be taken into account if the taxpayer submits the request to their competent authority after the revised DTAA is formalized and within three years of receiving the notice of action leads to taxation not aligning with the DTAA.
• The Article on the Exchange of Information is revised to the recent international standard to make sure information can be exchanged as widely as possible. According to this revised article, the country from which the information is requested can’t reject the information on the basis of domestic tax interest. Also, the updated DTAA includes express provisions to streamline the exchange of information possessed by banks. The information that is exchanged under the updated DTAA can now be used for other law enforcement tasks with the approval of the information supplying country.
• The revised DTAA introduces a new Article to facilitate tax collection cooperation among tax authorities.
• This updated agreement introduces a new Limitation of Benefits Article that aims at preventing abuse and making sure the agreement’s benefits are accessible solely to authentic residents of both countries. 

Significance of India - Korea DTAA for Both Countries

• The revised Double Taxation Avoidance Agreement (DTAA) will ensure tax stability for the residents of both countries. It facilitates mutual economic cooperation and encourages the flow of technology, services, and investment between these two countries.
• The revised DTAA now taxes capital gains where they originate, adapts profits of related enterprises fairly, taxes shipping income depending on residence, and outlines when a business is taxable in another country. Also, it defines reasonable tax rates for interest, dividends, royalties, and technical service fees.
• The agreement also includes provisions for effective sharing of information and helping tax authorities collect taxes. Also, it incorporates conditions to make sure only legitimate residents of both countries gain benefits. 

Taxes Covered Under DTAA

The tax levied on the gross amount of the interest is decreased from 15% to 10%. Note that the penalty levied for late payment will not be considered as interest for this article’s purpose.

Under the revised DTAA, if somebody from one country (either India or Korea) spends a total of 183 days or more in another country in a year, the income they generate from work there may also be taxed by that country. Note that only the income directly related to their work in that country will be liable to taxation.

The existing tax treaty allows for taxation of profits from operating ships worldwide in the other contracting state, up to 50% of its domestic tax. As per the revised DTAA, these profits will only be taxed in the resident's contracting state. 

India-Korea DTAA Tax Rates

The revised DTAA stipulates that if the dividends' recipient is a resident of the other country then the tax can’t exceed 15% of the total dividend amount. The former tax treaty's 20% rate and other conditions for claiming the 15% rate have been removed.

Fees for those technical services originating in India and paid to a resident of South Korea would be liable to taxation in India. The corresponding tax rate will not surpass 10% of the total fees paid for such services. The cess and surcharge will be calculated if applicable. 

Taxation on Capital Gains Under DTAA

• If shares sold in India account for up to 5% of the paid-up capital, South Korea will tax the gains. If the capital gains exceed this threshold, India will levy the tax.
• Profits gained from selling shares in a company whose assets chiefly include real estate in a contracting state might be taxed in that state. As per the protocol in the revised DTAA, these shares are defined as those gaining more than 50% of their value either directly or indirectly from real estate. 

Taxation on Employment Income Under DTAA

• If an individual is a Korean resident and his/her employment is outside India, then the salary earned in Korea is tax-exempt in India, as per the DTAA.
• The revised DTAA’s provisions apply in India to the income earned in any financial year (beginning from the first day of April after the calendar year in which the revised DTAA comes into effect).
• Foreign workers who start their employment in South Korea by December 31, 2026, get the option to select a flat tax rate of 19% (including local income tax) on their employment income. This is applicable for up to 20 consecutive years from their joining date in Korea.

Conclusion

Korea has signed Double Taxation Avoidance Agreements (DTAA) with India and several countries to avoid taxation on the same income in the two countries. This India-Korea DTAA is necessary to build economic relationships between the two countries. Individuals and businesses in both countries can benefit from the double taxation relief. Consequently, it promotes investment and trade. If you are bothered about your tax liability on income from Korea, then DTAA regulations can assist you in getting reasonable taxation on your gross income.