Korea-Turkey Double Taxation Treaty Enters Into Force, Boosting Economic Ties and Investment

2024.07.20. The Fair Economy — The Ministry of Economy and Finance and the Ministry of Foreign Affairs recently announced that the revised Korea-Turkey Double Taxation Agreement is set to enter into force domestically on the 21st.

According to the two ministries, the entry into force follows the completion of domestic procedures in both countries, including a ratification vote by the National Assembly, after the revised agreement was signed in 2021. These procedures were finalized last June.

A double taxation agreement (tax treaty) is a treaty that eliminates double taxation on transactions between two countries and allows investment income generated locally (in the source country) to be taxed at lower rates specified in the agreement.

South Korea has been signing and implementing tax treaties with Turkey since 1986.

However, reflecting requests to alleviate the higher tax burden on locally established enterprises under the existing agreement compared to other countries, the government began negotiations for revisions in 2011 and finally signed the revised tax treaty with Turkey in Seoul on October 22, 2021.

The main provisions of the revised agreement are as follows.

First, the source country's withholding tax rates on dividends and interest income are reduced. The withholding tax rate refers to the maximum tax rate that can be levied on the income of residents or corporations of the treaty partner under the tax treaty. For dividends, the rate applicable to dividends between related parties (holding 25% or more) is lowered from the current 15% to 10%, while other cases are reduced from the current 20% to 15%. The rate for interest income is also reduced from the current 15% to 10%.

Additionally, transactions intended for tax avoidance that seek to exploit the tax treaty's benefits, such as the application of withholding tax rates to interest, dividends, and royalties, are excluded from the agreement. This reflects the latest international standards incorporated into the treaty in accordance with OECD recommendations to prevent tax avoidance by multinational enterprises and others.

These revisions will apply to taxes subject to withholding collected on or after January 1, 2025, and to other taxes for tax years beginning on or after that date. The entry into force of the revised agreement is expected to reduce the local tax burden for Korean companies operating in Turkey and contribute to expanding economic exchanges between the two nations.

The Ministry of Economy and Finance and the Ministry of Foreign Affairs stated, "We plan to actively pursue the enactment and revision of double taxation agreements to create a favorable environment for our companies' overseas expansion and to boost economic exchanges and investment with foreign countries."