The Korean government has proposed to the Malaysian government to exclude Labuan from the Malaysia-Korea Tax Treaty. The two governments are planning to meet early next year to discuss the proposed amendment.

Until now the Korean National Tax Service (NTS) has recognized Labuan as part of Malaysia and entitled to enjoy the treaty's benefits (NTS Ruling Kuk-Chong 46017-535 of August 7 1999). Currently, the treaty provides for reduced or exempted taxation as follows:

  • in respect of dividends - 10% withholding tax where shareholder ownership is at least 25%, and 15% withholding tax in other cases;
  • in respect of interest - 15% withholding tax; and
  • in respect of capital gains - no withholding tax on gains from the alienation of securities (not including real estate and other immovable property which is subject to standard Korean taxation, the maximum rate of which is 29.7%).

The Korean government is expected to negotiate for the exclusion of individuals and entities that benefit from preferential tax treatment under the Labuan Offshore Business Activity Tax Act 1990 (as amended) from the treaty benefits. The proposed amendment is likely to be accepted by Malaysia since it has already effected similar amendments to its tax treaties with other countries including Australia, the United Kingdom, the Netherlands, Switzerland and Sweden. For example, the Malaysian and Australian governments agreed that the provisions of the Malaysia-Australia Tax Treaty will not apply to individuals carrying out offshore business activities under the aforementioned act.

If the amendment is implemented, the applicable withholding tax rates under Korean domestic tax law will be as follows:

  • in respect of dividends - 27.5% withholding tax (including resident surtax);
  • in respect of interest - 27.5% withholding tax (including resident surtax); and
  • in respect of capital gains - withholding tax of the lesser of 11% of the transfer price or 27.5% (including resident surtax) of the gains from alienation of securities.

The Korean government's action with respect to Labuan seems to be part of a broader trend to eliminate or reduce particularly favourable tax benefits given under tax treaties with various countries.

For further information on this topic please contact Dong Soo Kim or Sangmoon Chang at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email ([email protected] or [email protected]).