7 June 1991 Income Tax Severed Letter - Canada-Korea Income Tax Convention

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Dear Sirs:

Re: XXX
Canada-Korea Income Tax Convention (1978) (the "Convention")

This is in reply to your letter to International Audit Division dated May 2, 1991 which, as you know, was referred by that Division to us.

The taxation of your company by Korea is a matter under the jurisdiction of the government of Korea. Canada has no responsibility and authority in connection therewith. Accordingly, we recommend that you communicate directly with the taxation authorities of the Republic of Korea concerning taxation by that country.

Article 22 of the Convention provides that where the taxation of a resident of Canada by the Republic of Korea is not in accordance with the Convention the Canadian resident may apply to the Canadian competent authority for assistance in resolving the dispute between the Canadian resident and the Korean taxation authorities. However, you have not suggested that Korea has acted not in accordance with the Convention. Nor have you provided us with sufficient information to permit us to formulate an opinion on that subject. We enclose herewith a copy of Information Circular 71-17R3 published by the Department discussing requests for competent authority assistance.

We can make the following general observations which may be of assistance to you:

• 1. Generally, the Convention does not affect the right of Korea to require that withholdings be made from payments by residents of Korea to residents of Canada on account of the potential tax liability of the Canadian residents pending the filing of returns etc in Korea by the Canadian residents justifying exemption from Korean tax by virtue of the Convention.
• 2. Article 18 of the Convention only applies in respect of "Remuneration ... paid to any individual in respect of services rendered to [one of the Contracting States] or a subdivision or local authority thereof in the discharge of functions of a governmental nature." That Article could not be applicable to income earned by your corporation.
• 3. Having regard to the definition of "resident of a Contracting State" in paragraph 1 of Article 4 of the Convention, in particular the requirement that the person be "liable to taxation therein", there is a technical argument that XXX is not a resident of Canada for purposes of the Convention and thus not entitled to the benefits of the Convention for Korean tax purposes. However, we expect that Korea would not interpret paragraph 1 of Article 4 in this manner.
• 4. Assuming the payments to XXX are not royalties covered by Article 12 of the Convention, we assume (based on the very limited information that you provided) that the taxation of the payments by Korea would be governed by Article 7 of the Convention. If this assumption is correct, whether or not your company is liable for Korean tax or eligible for a refund by virtue of the Convention will likely depend upon whether the company has a permanent establishment in Korea to which the payments are attributable. We note that the definition of the term "permanent establishment" is elaborated upon in Article 5 of the Convention.