Tax Insights

from India Tax & Regulatory Services

Revised Tax Treaty signed between

India and South Korea

October 28, 2016

In brief
India and South Korea have signed a revised Agreement for Avoidance of Double Taxation (tax
treaty) On 18 May, 2015, in Seoul. The revised tax treaty replaces the existing tax treaty signed
between the two countries in 1985 and shall be effective in India from 1 April, 2017

The Central Board of Direct Taxes has issued a press release dated 26 October, 2016 to this effect.
Key revisions include:1

 Capital gain arising on sale of shares of an Indian company to be chargeable to tax in India.

 Taxpayers may apply for Mutual Agreement Procedure (MAP) in Transfer Pricing (TP) disputes as
well as apply for bilateral Advance Pricing Agreements (APA).

 The MAP requests in TP cases to be presented by the taxpayer to its competent authority after
entry into force of revised tax treaty, and within 3 years of the date of receipt of notice of action
giving rise to taxation not in accordance with the tax treaty.

 As per a separate MOU between the two countries, collection of taxes during the pendency of MAP
proceedings would be suspended for a period of 2 years (extendable for another 3 years) subject to
providing on demand security/ bank guarantee.

In detail
Significant changes have been highlighted below:

Revised tax treaty Highlights

Article 3 - The term “tax” has been clarified to exclude any amount payable in respect
Definition of any default or omission in relation to the taxes to which the tax treaty
applies, or a penalty or fine imposed in relation to those taxes.

Article 5 –  PE to also include specifically - a sales outlet, a warehouse for providing

Permanent storage facilities for others, a farm, plantation or other place where
Establishment agricultural, forestry, plantation or related activities are carried on.
(PE)
 Service PE clause introduced - furnishing of services, including
consultancy services, through employees or others would lead to a
service PE, if such activities (same or connected project) continue for
more than 183 days within any 12-month period.

1
As per the Press Release dated October 26, 2016 issued by the Government of India

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Tax Insights

Revised tax treaty Highlights

 Insurance PE clause introduced – collection of premiums or insuring risk through
dependent agent (other than re-insurance) would be deemed as PE.

 Building site or construction, installation or assembly project, or supervisory activities in

connection therewith, would constitute a PE if such site project or activities last more than
183 days2 within any 12 months period.

 Dependent Agent PE- The scope has been expanded to include the following additional
activities of agent:

a) Habitually exercising in that state an authority to conclude contracts in the name of the
enterprise subject to activities mentioned in Article 43

b) Maintaining stock of goods or merchandise and regular delivery in the contracting

state;

c) Securing orders in the contracting state.

The exclusion for preparatory and auxiliary services is provided with clause (a).

Article 8 -  Profits derived from operation of ships in international traffic would be taxable only in the
Shipping and Air state of residence, as opposed to a limited right of taxation in source state in the original
transport treaty.

 Profits from operation of ships or aircrafts has been defined to include:

 Rental of a ship or aircraft on a bare boat charter basis,

 the use, maintenance or rental of containers (including trailers and related equipment)
used for the transport of goods and merchandise;

 Interest on investments directly connected with the operation of aircraft and ships in
international traffic.

Article 9 -  Where the profits are taxed in one country, an appropriate consequential adjustment
Associated would be made by another country.
Enterprises
 The competent authorities of both states may consult on such matters with each other,
paving the way for Bilateral APA and MAP on TP matters.

Article 10 –  Tax rate reduced from 20% to 15%.

Dividends

Article 11- Interest  Tax rate reduced from 15% to 10%.

 Penalty for delayed payment not to be considered as interest.

Article 12 –Income  Tax rate reduced from 15% to 10%.

from Royalty/Fee
for Technical
Service (FTS)

Article 13 - Capital  Introduction of source rule based taxation on capital gains, viz.:
gains
 Gains from alienation of shares of company, the property of which consists of
immovable property, may be taxed in the country in which the immovable property is

2
Earlier, the criterion for constituting PE was 9 months
3
Existing in the original DTAA

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Revised tax treaty Highlights

situated. As per the protocol, such shares mean deriving more than 50% of their value
directly or indirectly from immovable property.

 Gains from alienation of shares of the company may be taxed in the country in which
the company is a resident, in case the transferor held directly or indirectly at least 5% of
the capital at any time during the 12 month period preceding such transfer.

Article 14 - Income derived by individual from performance of professional services taxable in the
Independent contracting state in which the services are performed, where the stay of individual exceeds
Personal Services 183 days in any 12-month period.

Article 15 - The threshold limit for short stay exemption has been revised from “183 days in the previous
Dependent year or taxation year concerned” to “183 days in any 12 month period commencing or
Personal Services ending in the fiscal year concerned”.

Article 22 – Other Where the right or property, in respect of which income is generated is effectively connected
Income to a PE/ fixed base such income shall be taxed as per the respective articles (Article 7 or 14).

Article 26 – Article on “Exchange of information” has been amended in line with the treaties entered into
Exchange of by India with countries including Australia, Singapore, Norway and the Netherlands. This
information article is applicable notwithstanding Article 1 and Article 2 of the revised tax treaty, and would
help the Revenue Authorities of two contracting states to exchange taxpayer information.

Article 27 – Article on “Assistance in the collection of taxes” has been introduced to lend assistance to the
Assistance in the contracting states in the collection of revenue claims, subject to certain conditions and
collection of taxes procedures. This article is in line with the tax treaties entered into by India with Australia,
Norway, Nepal, Finland, Luxemburg, among others.

Article 28- The tax treaty benefits will be denied where one of the main purposes is to avoid taxes. Benefit
Limitation of of tax treaty for interest, royalty, FTS, dividends, capital gains and other income would not be
benefits available to residents if they are controlled directly or indirectly by non-residents.

The takeaways will also provide a welcome undertaken prior to 1 April,

 The introduction of bilateral
APA and MAP on TP matters
is a welcome move, as it would
bring certainty on the tax
aspects. Reductions in the
interest and royalty/ FTS rate
boost to business between the
two countries.
 While source based taxation of
capital gains from disposal of
shares has been introduced, it
is to be seen if the investment
2017 would be grandfathered.
Let’s talk
For a deeper discussion of how
this issue might affect your
business, please contact your
local PwC advisor

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Tax Insights

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