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Korea (Rep.)-Malaysia

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Treaty between Korea (Rep.) and Malaysia – pre-approval application procedures for benefits finalized

The Korean Ministry of Finance and Economy (MOFE) has finalized the pre-approval procedures for Labuan-based investors to apply for treaty benefits in respect of withholding tax. Given that the MOFE's intent is to prevent sham transactions and combat treaty shopping with the recent amendments to the International Tax Coordination Act, the pre-approval procedures would serve as a guide for investors of other countries in dealing with the Korean National Tax Service (NTS).

Application procedures

A Labuan-based or a third-country shareholder investor of a Labuan entity would be eligible for the reduced rate of withholding tax as in the Korea (Rep.)- Malaysiatreaty, if one of the following conditions are met:

-   the recipient is the true beneficial owner who has the right to dispose the income and bears the legal or economic risks that is connected with the income;
-   the recipient is a qualified governmental entity of its resident country;
-   the recipient is the shareholder of a listed company;
-   at least 50% of the aggregate voting shares of the recipient is owned directly or indirectly by an individual, a qualified governmental entity of the resident country, or a listed company;
-   the recipient is a charitable organization or other tax-exempt entity provided at least 50% of the beneficiaries of the entity are residents in its resident country;
-   passive income which was received by the recipient in the past 3 years is 10% or less of the total income of the recipient;
-   the recipient is an investment company, investment trust or similar company that has at least 100 investors in the previous taxable year and the financial authorities of its resident country regulate the entity for transparency and independency purposes; or
-   the income tax assessment on the investment income of the recipient in its resident country is more than 50% of the Korean income tax over Korean withholding tax on the investment income.

Requisite documents

The requisite documents to be submitted for the application for the pre-approval are set out below. The process of the application will take about 3 months:

-   a certificate of residency
-   articles of incorporation and other documents to prove the existence and business purposes of the entity;
-   details of members in the Board and shareholders including percentage of shareholdings;
-   details of employees including the number of employees, their duties and functions as well as nationality;
-   details of economic and business purposes of investments in Korea (Rep.)
-   details of financing methods
-   details regarding the usage of the Korean-source income, e.g. reinvestment
-   documents of statutory requirements for the past 3 years such as tax returns and registrations, audit and financial reports; and
-   documentation to prove the type/status of the recipient e.g. a qualified government entity or a listed company, etc.

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