The South Korean economy is characterised by its heavy reliance on exports, which account for 50% of gross domestic product (GDP). Key exports include machinery, electronics and automobiles. South Korea’s largest export partners are China, the US and Vietnam. 

South Korea has 15 free trade agreements, which cover a significant portion of the world's economy, making South Korea a world leader in international trade. Along with its neighbours, China and Japan, which are the world’s second- and third-largest economies, respectively, South Korea is a vital member of the East Asian economic region. 

Through the Financial Services Commission (FSC), South Korea has been actively supporting financial innovation and digital finance. Open banking, digital sandboxes, MyPayment and MyData are some of the main government-led initiatives. Other top priorities for 2021 include authentication technology, financial technology (fintech) start-up financing, green finance and insurance innovation. 

With its competitive regulatory framework and culture of innovation, entrepreneurial activities can be carried out in South Korea with relative ease. As ranked by the World Intellectual Property Organisation, the country is 5th in its Global Innovation Index 2021. Moreover, South Korea boasts one of the most literate workforces in the world, with relatively competitive wages compared with most other developed nations. 

Corporate Treasury in South Korea  

South Korea is one of the world's most dynamic economies. Its high level of foreign trade and continued deregulation make it an attractive market. In this section, we highlight some of the key factors relevant to treasury and cash management in South Korea.  

 Financial Market Development  

• Seoul is ranked 16th in the 2021 Global Financial Centres Index by Z/Yen Group, nine places higher than in 2020.  
• South Korea has world-class business infrastructure, a highly skilled workforce, and an efficient legal system, although the region’s geopolitical situation creates uncertainty.  
• South Korea has some foreign exchange (FX) controls in place, but the majority of foreign exchange transactions do not require approval or reporting under the Foreign Exchange Transactions Act.  
• Companies can receive foreign exchange from outside of Korea and there is no regulation governing payments to foreign companies. They are, however, required to report most capital transactions in advance, such as foreign currency loans. Remittance of profits from a Korean branch to a head office must be reported to a designated foreign exchange bank. 

Sophistication of Banking Systems 

• South Korea has around 20 commercial banks and specialised banks.  
• There are more than 35 branches of foreign banks operating in the country.  
• South Korea has one of the largest bond markets in Asia, with both government and corporate bonds available. The local currency bond market was valued at KRW2,695.5 trillion at the end of March 2021. 

Regulatory Bodies 

• The banking sector in South Korea is regulated by the FSC, which is responsible for rule making and licensing, and the Financial Supervisory Service (FSS), which conducts prudential supervision. 
• The central bank, the Bank of Korea (BoK), also carries out some supervisory functions, including overseeing foreign exchange controls, which it manages with the Ministry of Strategy and Finance (MOSF).  

Tax 

• Corporate income tax (CIT) is charged at: 
  • 10% on the first KRW200 million of taxable income (plus surcharge of 1%);
  • 20% on taxable income between KRW200 million and KRW20 billion (plus surcharge of 2%); 
  • 22% on taxable income between KRW20 billion and KRW300 billion (plus surcharge of 2.2%); and  
  • 25% on taxable income above KRW300 billion (plus surcharge of 2.5%). 
• Resident companies are taxed on their worldwide income whilst non-resident companies with permanent establishments in South Korea are taxed on Korean-sourced income. 
• Companies are charged an additional tax of 20% if their net assets exceed KRW50 billion (excluding small- and medium-sized enterprises), and companies belonging to business groups are subject to restrictions on cross-shareholding under the Act on Monopoly Regulation and Fair Trade. This tax is scheduled to expire in December 2022. 
• Companies are liable for a minimum tax, which is the greater of (10%, 12% or 17% depending on the size of their tax base) their taxable income before certain tax deductions or credits, or the actual CIT liability after deductions and credits. 
• There is no branch-profit remittance tax on the remittance of profits to the head office by a branch of a foreign company. However, if the tax treaty between Korea and the respective country allows for Korea to impose branch-profit remittance tax, the branch-remittance tax will be 20% on the adjusted taxable income. 
• The standard rate for Value Added Tax (VAT) is 10%, with certain goods and services being zero-rated whilst others are exempted. 
• A securities transaction tax of 0.23% (for shares of Korean-listed companies) or 0.43% is charged on the transfer of shares or interest. 
• Interest income is typically included in taxable income and subject to CIT.  
• Interest expenses that are used for business purposes are generally tax-deductible, subject to thin capitalisation rules. 
• Companies are allowed to recognise unrealised gains and losses on foreign currency transactions. 
• There is no withholding tax (WHT) on dividends for resident companies but WHT of 14% or 25% is charged on interest. For non-resident companies where no tax treaty is in place, WHT of 20% is charged on dividends and 14% or 20% is charged on interest. Where tax treaties are in place and the non-resident company can provide a Certificate of Residence, rates range from 5% to 25% for dividends and 0% to 15% on interest. 
• Tax credits are available for the funding of research and development (R&D) activities as well as for qualified investment in facilities or companies that increase productivity or safety, boost environmental protection or create jobs. 
• South Korea has tax treaties with more than 90 countries and territories. 
• South Korea is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises. 

Benefits for Regional Treasury Centres

• South Korea is a leading financial services hub in Asia. 
• Cash concentration is permitted amongst participating accounts that belong to the same entity, however zero-balancing is more commonly used. Notional pooling is generally not permitted. 
• South Korea is a member of the Asian Payment Network. 
• Foreign banks have a significant presence in South Korea and offer the widest range of cash-management services.