South Korea and Portugal have agreed to amend the Double Taxation Avoidance Convention. This is the first amendment made in about 26 years since the two countries entered into force in 1997.
The Ministry of Strategy and Finance announced on the 19th that it had agreed and tentatively signed the entire protocol through the second round of negotiations on the revision of the Korea-Portugal Tax Treaty held in Lisbon, Portugal from the 16th to the 18th. This is the first amendment since the treaty entered into force in 1997. The Ministry of Strategy and Finance predicted that South Korea’s taxation rights would expand through the treaty amendment.
According to the agreement, the limiting tax rate on dividends and interest between corporations in the source country was lowered. The dividend tax rate will be lowered from 10% to 5%, and the interest rate will be adjusted from 15% to 10%. The source-country limiting tax rate refers to the marginal tax rate that can be imposed by the country that has preferential taxation rights to companies that have entered the country. For the portion exceeding the applicable tax rate, the other country has the right to tax. An official from the Ministry of Strategy and Finance explained, “By reducing the limited tax rate, there is an aspect that Korea’s taxation rights are secured more.” This is because the scale of interest and dividend income from Korean corporations collected in Portugal was relatively larger.
In addition, interest income related to export finance was added to the tax exemption of the source country, and Korea’s taxation rights on international transportation income of Korean shipping companies were also expanded. In addition to rental income generated from the use of bare boats (empty boats), income from container rental and other uses is included as shipping income. This is a favorable change for Korea, a shipping powerhouse. In addition, the requirements for the exclusion of permanent establishments were strengthened by reflecting the contents of the OECD Tax Source Erosion Prevention (BEPS) revised in 2017 to prevent tax avoidance by companies. In a structure in which a country with a permanent establishment has the right to tax, the standard for a permanent establishment has been narrowed to broaden the right to tax. The Ministry of Strategy and Finance explained, “The tax treaty concluded this time will contribute to expanding investment and securing our taxation rights.”