Double Tax Avoidance Agreement (DTAA) Between India and Korea

Like other DTAA agreements, the India-Korea DTAA also provides relief from double taxation on the same income to taxpayers. The agreement applies to Indian residents, Korean residents, and NRIs. Through this agreement, you can claim tax credits for the taxes paid in one country in another country, certifying that the tax is paid effectively in one country. 

Apart from this, the agreement also eliminates tax ambiguities and provides a clear framework for the taxation of cross-border technology, investment, and personnel transfers between India and Korea.

Want to know more about the double taxation avoidance agreement between India and Korea, and what things are revised in it? Read the blog and get your answers. 

Salient Features of New India-Korea DTAA

On May 18th, 2015, during the visit of the Prime Minister Shri Narendra Modi to Seoul, a new revised DTAA between India and Korea to avoid double taxation and prevent fiscal evasion with respect to taxes was signed. The revised agreement came into force on September 12th, 2016, after both countries completed the procedural requirements. Before that, the agreement was signed between the two countries on July 19th, 1985, and was notified on September 26th, 1986. Further, let's know the salient features of the revised India-Korea DTAA:

• The older DTAA provided for residence-based taxation of capital gains on shares. In line with the capital gain taxation policy of India on shares, the new agreement provides for source-based taxation arising from alienation of shares comprising more than 5% share capital. 
• To promote cross-border investment and technology flow, the new DTAA reduces the withholding tax rates from 15% to 10% on fees for technical services, royalties, and interest income.
• The new DTAA agreement also expands the scope of the dependent agent Permanent Establishment provisions in line with the source-based taxation policy of India. 
• Article 8 of the revised Korea-India tax agreement talks about the exclusive residence-based taxation of income from shipping from international traffic. It is done to facilitate the movement of goods through shipping between two nations and in accordance with the global principle of taxation on shipping income.
• With the introduction of Article 9(2), the revised agreement offers recourse to the taxpayers of both nations to apply for the Mutual Agreement Procedure (MAP) in transfer pricing disputes and apply for bilateral Advance Pricing Agreements (APA). Further, the MAP requests in case of transfer pricing can be considered if the taxpayer submits the request to their competent authority after the entry into force of the revised DTAA. Additionally, within 3 years of getting the notice of action leading to taxation not aligning with the DTAA.
• The Article on Exchange of Information to provide exchange of information to the widest possible extent, is also updated as per the latest international standard. As per the revised agreement, the country from which information is asked cannot deny it based on domestic tax interest. Apart from this, the revised DTAA also contains provisions to facilitate information exchange held by banks. Considering this, under the revised DTAA, the information exchange can now also be used for other law enforcement purposes, with the authorization of the information-providing country.
• The new DTAA also introduced a new Article for assistance in the collection of tax between tax officials.
• Apart from this, the revised DTAA states a new Limitation of Benefits Article- anti-abuse provision. It ensures that the India-South Korea DTAA agreement is available to only genuine residents of both nations.

Further, the revised DTAA between India and Korea aims to avoid the tax burden of double taxation between the two nations. Additionally, promote and stimulate the flow of technology, investment, and services between the two countries. Apart from this, the agreement provides tax certainty to taxpayers of India and Korea.

These are the silent features of the revised DTAA between India and Korea. Moving ahead, let's know the significance of this agreement between the two countries. 

What is the Significance of India-Korea DTAA for Both Countries?

The significance of India-Korea DTAA for both countries is as follows:

• The revised Korea-India tax agreement ensures tax stability for residents of both countries. It facilitates mutual economic cooperation and improves the flow of services, technology, and investment between the two countries.
• The revised DTAA taxes capital gains from where they arise, fairly adapts profits of related enterprises, imposes tax on shipping income depending on residence, and states when a business is taxable in another country. Also, it offers reasonable tax rates for royalties, dividends, interest, and technical service fees.
• The India-Korea tax treaty also facilitates effective information exchange and tax collection cooperation between both countries. Additionally, it includes anti-abuse provisions to ensure that only genuine residents can claim benefits under DTAA and avoid double taxation.

So, these are the key reasons why the India-Korea DTAA is important for both countries. Moving further, let's know the taxes covered under this agreement. 

What are the Taxes Covered Under the DTAA Between India and Korea?

The tax on the gross amount of interest from 15% reduced to 10%. Note that the penalty imposed for late payment is not considered interest for this discussion. Under the new DTAA, if an individual from one country stays a total of 183 days or more in another country in a year, the income earned from work there may also be taxed by that nation. Here, know that only the income directly associated with their work in that country is taxable.

Previously, the tax treaty allowed for the profit taxation from operating ships in the other country to be taxed up to 50% of its domestic tax. Under the new DTAA, these profits are now taxable in the country where the ship owner lives.

Apart from this, the updated DTAA states that if an individual from Korea receives dividends from India, the taxation on them should not be more than 15%. This is a modification from the previous dividend rate, i.e., 20%, and the conditions for qualifying for the 15% rate have also been removed. 

Additionally, if a Korean resident receives fees for their technical services from India, these are taxed up to 10%. Any applicable cess and surcharge will also be determined.

These are the taxes covered under the DTAA between India and Korea. Moving forward, let's know how capital gains are taxable under this DTAA.

Taxation on Capital Gains Under India-Korea DTAA

If an individual sells Indian shares that represent up to 5% paid-up capital of the company, Korea will tax any gains. However, if the capital gain is more than 5%, India will tax that capital gain. Additionally, if an individual sells shares in a company that holds real estate, the profit generated from that sale may be taxable in the country where the property is situated. Further, as per the revised agreement, these shares are stated as those gains of more than 50% of their value, either directly or indirectly, from real estate.

Apart from this, capital gain generated from the sale of immovable property is taxable in the country where it is located. For instance, you are an NRI who holds property in India and has sold it; the capital gain generated from that, as per DTAA on NRI property income, is taxable in India. 

This was all about the DTAA benefits on capital gains that taxpayers received under the revised agreement. Now, moving ahead, let's look at employment taxation under this agreement. 

Taxation on Employment Income Under India-Korea DTAA

If an individual is a resident of Korea and their employment income is generated outside India, then that income is not taxable in India. The revised DTAA provision applies in India to the income earned in any financial year beginning from the first day of April after the calendar year in which the new DTAA comes into effect. 

Additionally, foreign workers who start their job in Korea by December 31, 2026, have the option to choose a flat tax rate of 19% including local tax on their salary income. It is applicable for up to 20 consecutive years from their employment date in Korea.

So this is how, under the revised India-Korea DTAA, employment income is taxed. 

Final Thoughts

Lastly, the revised India-Korea DTAA aims to avoid the double taxation burden on taxpayers of the two countries and balance the flow of investment, services, and technology between Korea and India. The new provision offers tax certainty to the residents of Korea and India.

Furthermore, if you need more information on DTAA between India and Korea or need assistance in claiming the treaty benefits, connect with Savetaxs. We have a team of financial experts who provide you with personalized guidance as per your tax situation. So contact us and maximize your tax refunds.