Kurt Burrows and Andrew Bath discuss the implications of recent changes to the Korean indirect foreign tax credit regime for Australian companies.
Whilst they may still be good for the odd gift at Christmas (and the general joy that grandchildren bring of course), so called “grandchildren” of Korean companies can create headaches due to the recent tightening of the indirect foreign tax credit regime in Korea.
Unlike section 768-5 of the Income Tax Assessment Act 1997 (or the old section 23AJ of an Act that is of grandparent age, for those playing along at home), there is no corresponding exemption for foreign dividends received in Korea, even for wholly-owned subsidiaries. Instead, there is an indirect foreign tax credit regime that applies in certain circumstances to avoid double-taxation on dividends paid from Australia to Korean parents (or grandparents).
By way of quick background, this foreign tax credit regime operated by looking at the underlying tax paid by the relevant company, i.e. Australian corporate tax on profits.
Through the removal of indirect foreign tax credits for grandchild companies on the Korean side, the potential for double taxation on dividends is, depending on your structure, something that should be considered as a matter of priority. In particular, if your corporate structure in Australia involves multiple layers, then the payment of dividends to the ultimate parent will likely trigger double taxation, being the Australian 30 percent corporate tax rate on the original profit, plus the applicable Korean tax rate (up to 22 percent) on the same underlying income once it is paid as a dividend to Korea.
Working through this issue with numerous clients, it is safe to say that it is more complicated than knitting a scarf, although the joy at the end is worth it all the same!