- The Korean subsidiary is a normal foreign-invested company: FDI notification, registration, business and customs registration.
- The Korea–Hong Kong treaty caps Korean withholding at 10% on dividends to a 25%+ corporate shareholder, 15% otherwise, and 10% on interest and royalties.
- Hong Kong charges no tax on dividends paid out; dividends received are exempt under the FSIE rules if the participation or substance conditions are met.
- Royalties received in Hong Kong from Korea can be taxable under the FSIE nexus rules.
- The treaty does not protect gains on Korean shares: Korea taxes them at the lower of 11% of the price or 22% of the gain.
- A mainland Chinese parent holding directly pays 5% on Korean dividends; holding through Hong Kong costs 10%.
Hong Kong holding companies sit above a large share of Asia’s trading businesses: electronics and components groups sourcing in Guangdong, consumer brands run from Kowloon, European and American groups whose Asian procurement and treasury live in Central. When such a group starts selling in Korea, the Korean company is usually set up as a subsidiary of the Hong Kong company because that is where the regional bank accounts, contracts and management already are.
The tax result depends on three sets of rules: Korean domestic law — the Corporate Tax Act and the Adjustment of International Taxes Act; the Korea–Hong Kong tax treaty (한·홍콩 조세조약), in force since 27 September 2016 and applied from 2017; and Hong Kong’s Inland Revenue Ordinance, including the foreign-sourced income exemption (, FSIE) regime in force since January 2023. This guide takes them in order, with the set-up steps first.
Why Hong Kong — and when it is the wrong layer
Hong Kong’s advantages for a trading group are practical as much as fiscal. Profits tax is 8.25% on the first HKD 2 million and 16.5% above for a company, and only on profits sourced in Hong Kong. There is no withholding tax on dividends or interest paid out, no capital gains tax, multi-currency banking, and a legal system familiar to European and American counterparties. For a group whose suppliers are in mainland China and whose customers are across Asia, the Hong Kong company is the natural centre.
The question to ask before using it for Korea is what the Hong Kong layer adds. For a European or American parent, a direct holding often gets a better Korean treaty rate — Germany and the United Kingdom, for example, have 5% dividend rates for substantial holdings against Hong Kong’s 10%. For a mainland Chinese parent, the Korea–China treaty gives 5% on dividends to a company holding 25% or more, so routing through Hong Kong doubles the Korean withholding. Hong Kong still makes sense where the Hong Kong company is the real regional business — the buyer, seller and treasury — but not as a pass-through. Compare rates with the treaty rate checker and read Chinese companies in Korea for the mainland route.
| Shareholder of the Korean company | Korean dividend withholding (25%+ holding) | Royalties | Notes |
|---|---|---|---|
| Hong Kong company | 10% | 10% | Treaty since 2017; principal purpose test via the MLI |
| Mainland Chinese company | 5% | 10% | Korea–China treaty |
| Singapore company | 10% | 5% | Updated treaty since 2020 |
| No treaty | 22% | 22% | 20% plus local income tax |
Treaty caps as published; each requires beneficial ownership and a certificate of residence.
Setting up the Korean subsidiary
The Hong Kong parent invests under Article 5 of the Foreign Investment Promotion Act like any foreign investor: a foreign investment notification at a Korean foreign exchange bank before the capital is wired, the capital paid from the parent’s own account, incorporation, and registration as a foreign-invested company. KRW 100 million or more makes the company a foreign-invested company and supports a D-8 visa for a manager sent from Hong Kong; see D-8 visa requirements. Hong Kong is treated as a separate jurisdiction from mainland China for this purpose, but the bank and the registry will look through to the ultimate owners.
A trading company then registers with the tax office for business and VAT purposes, obtains a customs clearance code (통관고유부호) to import in its own name, and usually a trade business number from the Korea International Trade Association. Product permits come on top for regulated goods — electrical and radio products need KC certification, cosmetics and food have their own regimes; see trading companies in Korea.
| Document from Hong Kong | Where it comes from | Used for |
|---|---|---|
| Certificate of Incorporation and Business Registration Certificate | Companies Registry; IRD Business Registration Office | Existence of the parent |
| Latest annual return (NAR1) or company search | Companies Registry | Directors and shareholders |
| Articles of association | Companies Registry | Corporate capacity |
| Board resolution and power of attorney | Parent’s board | Authority to invest and file in Korea |
| Apostilles | High Court of Hong Kong | Recognition in Korea |
| Certificate of resident status | Inland Revenue Department | Treaty rates in Korea |
Hong Kong applies the Apostille Convention, so no consular legalisation is needed. Korean translations are required.
Korean banks will ask for the ultimate beneficial owners behind the Hong Kong company and for evidence of the source of the capital. Groups with mainland Chinese shareholders should expect detailed questions; prepare a structure chart with percentages, identity documents and a short description of the group’s business. See opening a Korean bank account.
Korean tax on the trading company
The Korean subsidiary pays corporate tax under the Corporate Tax Act at 10% up to KRW 200 million, 20% up to KRW 20 billion, 22% up to KRW 300 billion and 25% above, plus local income tax of one tenth — 11% to 27.5% in total. It charges and remits 10% VAT and recovers import VAT. None of this depends on the shareholder being in Hong Kong; see Korean corporate tax in 2026 and VAT.
For groups with consolidated revenue of EUR 750 million or more, Korea’s global minimum tax rules and Hong Kong’s income inclusion rule and Hong Kong minimum top-up tax, both applying from 1 January 2025, add a 15% floor. A normally taxed Korean trading company rarely triggers top-up tax; a lightly taxed Hong Kong holding can.
Dividends to Hong Kong
Korea withholds 22% on dividends to foreign companies under Article 98 of the Corporate Tax Act. The Korea–Hong Kong treaty reduces this to 10% where the beneficial owner is a company — not a partnership — holding directly at least 25% of the capital of the Korean company, and to 15% in other cases. The Korean company withholds, pays the tax by the tenth of the next month, and remits the net dividend through its foreign exchange bank under the remittance guarantee in the Foreign Investment Promotion Act.
Before declaring a dividend, the Korean company must set aside a legal reserve (이익준비금, iik junbigeum) of at least a tenth of the cash dividend until the reserve equals half the capital, under Article 458 of the Commercial Act. See dividend withholding tax in Korea.
Beneficial ownership and the principal purpose test
To obtain the treaty rate, the Hong Kong company files an application for the reduced treaty rate (제한세율 적용신청서, jehan seyul jeogyong sincheongseo) with the Korean payer before payment under Article 98-6 of the Corporate Tax Act, with a Hong Kong certificate of resident status and documents showing it is the beneficial owner. Without them the payer withholds 22%; the excess can be reclaimed within five years by a request for correction (경정청구, gyeongjeong cheonggu) if the claim is good.
Two filters apply. Korean courts use the substance-over-form principle to disregard holding companies that have no real activity and treat the income as belonging to the shareholders behind them. And since the Multilateral Instrument took effect for the treaty — for Korean withholding taxes from 1 January 2024 — a principal purpose test (주요목적 기준) denies benefits where obtaining them was one of the principal purposes of an arrangement. A Hong Kong company that runs the group’s Asian trading, with staff, contracts and decisions in Hong Kong, is the beneficial owner of its dividends. One that exists to hold the Korean shares for a mainland or offshore owner is the case these rules were written for.
Royalties, interest and service fees
Royalties paid by the Korean company to Hong Kong bear 10% Korean withholding under the treaty, against 22% under domestic law. They are deductible in Korea at arm’s length if the Hong Kong company really owns and manages the brand or technology. In Hong Kong, foreign-sourced royalties received by a group entity fall within the FSIE regime and are exempt only to the extent of the nexus approach — broadly, the share of qualifying R&D done by the Hong Kong company itself. A Hong Kong company that bought the brand rather than developing it may pay 16.5% Hong Kong tax on the royalty, with a credit for the Korean 10%.
Interest on a loan from Hong Kong is capped at 10% in Korea and limited by thin capitalisation rules — debt from a foreign controlling shareholder above twice its equity share produces non-deductible interest. In Hong Kong, foreign-sourced interest received is exempt only if the economic substance requirement is met. Group loans into Korea must be reported to the Korean bank before drawdown; see Korea’s foreign exchange rules.
Service fees for regional support performed in Hong Kong are business profits: Korea does not withhold if the Hong Kong company has no permanent establishment in Korea. The Korean tax office will want an agreement, a cost-based charge and proof that the services benefit the Korean company.
Transfer pricing and customs
Most Hong Kong trading groups sell goods to the Korean company, so the purchase price decides where profit falls. Under Article 7 of the Adjustment of International Taxes Act, the Korean tax office adjusts related-party prices to the arm’s-length price; a low-risk distributor should show a stable operating margin in line with comparable Korean distributors. Large groups file a master file and local file under Article 16; all file a summary of international transactions with the tax return.
Korea Customs Service looks at the same invoices to check that the relationship has not depressed the declared value under Article 30 of the Customs Act. A year-end adjustment that cuts the price paid to Hong Kong helps corporate tax and may hurt customs, or the other way round. An advance customs valuation arrangement (과세가격 결정방법 사전심사) under Article 37 can settle the method in advance for larger importers. See Korean customs duties.
Origin: Hong Kong invoices, mainland goods
Korea has no free trade agreement with Hong Kong. That rarely matters, because tariff preferences depend on where the goods were made: goods manufactured in mainland China can use the Korea–China FTA (한·중 FTA) or RCEP when imported into Korea, even if invoiced by a Hong Kong company, provided the origin documentation follows the goods and the shipment rules on transit through Hong Kong are met. Goods actually manufactured in Hong Kong have Hong Kong origin and pay Korea’s normal rates. Customs audits of origin claims are common for electronics, textiles and household goods; keep the certificate of origin, the bill of lading and the non-manipulation evidence for transit through Hong Kong.
Hong Kong trading companies also need to watch the permanent establishment (고정사업장, gojeong saeopjang) line. If the Korean company negotiates and in practice concludes contracts with Korean customers in the Hong Kong company’s name, the Hong Kong company may have a dependent-agent permanent establishment in Korea under Article 5 of the treaty. A buy-sell model avoids that.
Hong Kong tax on what comes back
Hong Kong taxes profits arising in or derived from Hong Kong. Before 2023 a dividend from Korea was simply offshore. Since 1 January 2023, under the FSIE regime, foreign-sourced dividends, interest, IP income and disposal gains received in Hong Kong by a company in a multinational group are treated as sourced in Hong Kong — and so taxable — unless an exception applies. For dividends from a Korean subsidiary, the participation exemption () is the usual route: the Hong Kong company has held at least 5% of the Korean company for a continuous 12 months, and the dividend or the profits behind it were taxed at 15% or more — Korea’s headline rate of 25% qualifies. The alternative is meeting the economic substance requirement in Hong Kong. Anti-abuse rules switch the exemption off for arrangements whose main purpose is a tax benefit.
Dividends paid by the Hong Kong company to its own shareholders bear no Hong Kong withholding tax, and a dividend from Hong Kong to a mainland Chinese parent benefits from the reduced rates in the mainland–Hong Kong arrangement. Gains on selling the Korean shares fall within the same FSIE rules, with the same participation exemption. This is a summary; Hong Kong advice should be taken on the Hong Kong side.
Exit: Korea keeps the gain
This is where the Hong Kong treaty is weaker than many. Under Article 13 of the Korea–Hong Kong treaty, gains on shares not otherwise covered may be taxed in the country where they arise, so Korea keeps its right to tax a Hong Kong company’s gain on Korean shares, whatever the size of the holding. Korean domestic law then applies: the lower of 11% of the sale price or 22% of the gain, including local income tax, withheld by the buyer. A Singapore seller of a small minority stake would be exempt; a Hong Kong seller is not.
A capital reduction (감자, gamja) returns capital up to the shareholder’s tax cost without Korean tax and anything above as a deemed dividend; a liquidation surplus is also a deemed dividend at the treaty rate. Each is notified as a change in foreign investment and remitted through the bank. See closing a Korean company.
Korean-resident owners
If the people behind the Hong Kong company live in Korea, the structure is taxed from the other end. Korean residents must report overseas direct investment, and the controlled foreign company (특정외국법인, teukjeong oeguk beobin) rules in Article 27 of the Adjustment of International Taxes Act can attribute the Hong Kong company’s undistributed profits to its Korean shareholders where its effective tax burden is at or below 70% of Korea’s top corporate rate. With Hong Kong’s 16.5% headline rate and territorial base, many Hong Kong companies fall below that line. An active trading business with substance has defences; a passive holding does not.
A worked example
A family-owned Hong Kong group designs phone accessories and small appliances, manufactures through contract factories in Guangdong and sells across Asia from a Hong Kong trading company with forty staff. It sets up a Korean jusik hoesa with KRW 200 million of capital, owned 100% by the Hong Kong company, to import and sell to Korean retailers and online marketplaces.
The Korean company buys from Hong Kong at prices set to leave it a distributor margin within the range of Korean comparables. The goods are shipped directly from Shenzhen to Busan with Chinese certificates of origin, so the Korea–China FTA rates apply despite the Hong Kong invoice. In its third year the Korean company makes KRW 900 million of taxable profit, pays KRW 176 million of corporate and local income tax and declares a KRW 600 million dividend. With an IRD certificate of resident status and a beneficial-ownership application showing the Hong Kong company’s staff, contracts and board, Korea withholds 10%, KRW 60 million. In Hong Kong the dividend meets the FSIE participation exemption. The brand stays in Hong Kong but no royalty is charged, because the Hong Kong company did not develop it and the royalty would be taxed in both places.
Hong Kong is a fine place to run an Asian trading business from. It is an expensive place to hold Korean shares for someone else.
Voixa Korea
Mistakes we see
- Adding a Hong Kong layer above a mainland parent and paying 10% instead of 5% on dividends.
- No certificate of resident status because the Hong Kong company has no operations.
- Assuming Korean dividends are offshore in Hong Kong without checking the FSIE conditions.
- Charging royalties that are taxed in Korea and Hong Kong.
- Selling the Korean company expecting treaty protection on the gain.
- Hong Kong invoices without mainland origin documents, losing the FTA rate.
- A Korean company that concludes contracts for the Hong Kong company, creating a permanent establishment.
Korean terms you will meet
Questions readers ask
What is the Korean withholding tax on dividends to Hong Kong?
10% if the Hong Kong company directly holds at least 25% of the Korean company’s capital, 15% otherwise, under the Korea–Hong Kong treaty. Without the treaty, 22%.
What is the withholding tax on royalties and interest from Korea to Hong Kong?
10% for each under the treaty, against 22% (or 15.4% for some bond interest) under Korean domestic law.
Does Hong Kong tax dividends received from a Korean subsidiary?
Under the FSIE regime they are taxable unless an exception applies; the participation exemption covers a 5%+ holding held for 12 months where the profits were taxed at 15% or more.
Is a sale of Korean shares by a Hong Kong company taxed in Korea?
Yes. The treaty leaves Korea its taxing right; Korea charges the lower of 11% of the price or 22% of the gain.
Should a mainland Chinese group hold its Korean company through Hong Kong?
Often not for tax reasons alone: the Korea–China treaty gives 5% on dividends for a 25%+ holding, against 10% via Hong Kong.
Do Hong Kong goods get FTA rates in Korea?
Korea has no FTA with Hong Kong. Goods made in mainland China and invoiced through Hong Kong can still use the Korea–China FTA or RCEP with proper origin documents.
What does Korea need to apply the treaty rate?
An application for the reduced rate, an IRD certificate of resident status and evidence of beneficial ownership, given to the Korean payer before payment.
- Hong Kong IRD — Korea agreement signed (2014)
- Hong Kong Government — Korea agreement enters into force (2016)
- IRD — Synthesised text of the Korea agreement and the MLI
- Crowe Korea — Korea–Hong Kong treaty in force
- KPMG — Hong Kong signs DTA with Korea
- PwC — Korea: withholding taxes and treaty rates
- EY — FSIE regimes compared: Hong Kong and Singapore
- Corporate Tax Act (법인세법)
Alexander Baranov
Founder of the BCA Group · cross-border corporate and tax adviser since 2008
Alexander advises foreign founders and groups on company formation, tax structuring and corporate law in more than 40 jurisdictions across Europe, the Gulf, Asia and Latin America. He is the author of nine books on international business and tax and writes regularly for professional finance and tax journals. He works in English, German, Spanish and Russian.
This guide is based on the Korean statutes cited in the text and on our own filings. It is reviewed when the law or official rates change.