The Italy–Korea tax treaty: rates, rules and how to use it

Tax treaties are rarely exciting until a payment is about to leave a country. Then the difference between 22% and 10% on a dividend, or between Korea taxing a share sale and not taxing it, becomes the most interesting thing in the room. The Italy–Korea convention governs that difference for every Italian company with a Korean subsidiary, every Korean customer paying an Italian licensor, every Italian engineer working on a project in Ulsan and every Korean investor holding Italian shares.

This guide sets out what the treaty says, how each article interacts with Korean and Italian domestic law, how to claim the treaty rates in each country, and the points where taxpayers most often lose money. For the practical side of setting up in Korea from Italy, see our guide to expanding an Italian business into Korea.

The treaty at a glance

Sources: treaty text and Italian parliamentary records.

In Korea the treaty is the Korea–Italy tax treaty (한-이탈리아 조세조약, han-itallia joseo joyak); in Italy the convention against double taxation (Convenzione contro le doppie imposizioni Italia–Corea). Under Article 6 of the Korean Constitution a ratified treaty has the force of domestic law, and Korean tax law applies treaty rates to non-residents in place of the domestic ones. In Italy, treaty provisions prevail over domestic law under Article 169 of the TUIR (art. 169 TUIR) when they are more favourable to the taxpayer.

Who can use it

The treaty applies to residents (거주자, geojuja) of one or both countries (Article 1). A company is resident where its law treats it as resident; if both countries claim it, the place of effective management (실질적 관리장소, siljiljeok gwalli jangso) decides (Article 4). For an Italian S.r.l. managed from Milan that owns a Seoul subsidiary, residence is never in doubt. It becomes a question when a Korean company is in fact run by an Italian board meeting in Italy, or when an Italian holding company is managed from Seoul.

Individuals who are resident in both countries under domestic law — a common situation for an Italian founder who has moved to Korea on a D-8 visa but kept a home in Italy — are allocated to one country by the usual tie-breaker: permanent home, then centre of vital interests, then habitual abode, then nationality, then agreement between the tax authorities. Korean residence follows Article 1-2 of the Income Tax Act (domicile, or residence of 183 days or more); Italian residence follows Article 2 TUIR (art. 2 TUIR) as reformed from 2024, which now gives weight to physical presence. An Italian who moves should register with AIRE (Anagrafe degli Italiani Residenti all’Estero) and keep evidence of where life actually happens.

Withholding rates: the core of the treaty

Articles 10, 11 and 12 cap the tax the country of source may levy on dividends, interest and royalties. Without the treaty, each country applies its domestic rate:

Korean rates include local income tax. Treaty caps apply to the gross amount and require the recipient to be the beneficial owner.

One technical point: the treaty covers Korean ‘inhabitant tax’ charged by reference to income tax, the predecessor of today’s local income tax (지방소득세, jibang sodeukse). In principle the treaty cap therefore includes it; in practice payers sometimes add local income tax on top of the treaty rate. Agree with the Korean payer how it will withhold before the first payment, and keep the calculation.

Dividends (Article 10)

The 10% rate requires three things: the beneficial owner is a company, not a partnership; it holds the shares directly; and the holding is at least 25% of the capital of the paying company. An Italian S.r.l. owning 100% of a Korean Jusik Hoesa (주식회사, jusik hoesa) qualifies. An Italian individual, an Italian società semplice (società semplice), or an Italian company holding through an intermediate holding in a third country does not, and gets 15% at best.

Article 10(5) adds a useful protection: Korea cannot tax the undistributed profits of an Italian company, or dividends it pays to non-Korean shareholders, merely because the profits arose in Korea, unless the holding is connected with a Korean permanent establishment. Korean tax on dividends to foreign shareholders is levied under Article 98 of the Corporate Tax Act; our guide to dividend withholding covers the mechanics.

Interest (Article 11)

Interest arising in one country and paid to a resident of the other is taxed at no more than 10% at source. Interest paid to or by the governments, local authorities and central banks, and interest on loans by the export-credit banks named in the Protocol — the Export-Import Bank of Korea and its Italian counterpart — is exempt at source.

Where interest exceeds what independent parties would have agreed, the excess loses treaty protection and is taxed under domestic law. In Korea that interacts with the thin-capitalisation rule in Article 22 of the Adjustment of International Taxes Act: interest on borrowings from an Italian parent above twice its equity is not deductible in Korea and is treated as a dividend — taxed at the dividend rate, not the interest rate.

Royalties (Article 12)

Royalties are capped at 10%. The treaty’s definition is wide and follows the older OECD model: payments for the use of copyrights (including films and broadcast tapes), patents, trademarks, designs, models, plans, secret formulas and processes, information on industrial, commercial or scientific experience — and the use of industrial, commercial or scientific equipment. Equipment rental, removed from the royalty definition in many modern treaties, is still a royalty here, so an Italian company leasing machinery to a Korean customer faces 10% Korean withholding on the rent.

For Italian brands licensing their names to Korean distributors, and Italian design houses charging fees for Korean projects, Article 12 is the article that matters. Fees for services that do not transfer know-how or rights are business profits, not royalties, and are taxable in Korea only if the Italian company has a permanent establishment there. Drafting the contract to separate the two is worth the effort.

A licence fee is a royalty. An engineer’s day rate usually is not. Write the contract so that the tax office can tell them apart.

Voixa Korea

Business profits and permanent establishment (Articles 5 and 7)

An Italian company is taxed in Korea on business profits only if it has a permanent establishment (국내사업장, gungnae saeopjang) — stabile organizzazione (stabile organizzazione) — there, and only on profits attributable to it (Article 7). Article 5 defines a permanent establishment in the usual way: a fixed place of business such as a branch, office, factory or workshop, or a dependent agent who habitually concludes contracts in the company’s name.

Three details are worth knowing. A building site or construction or installation project is a permanent establishment only if it lasts more than twelve months, which gives Italian engineering and installation firms room to work on Korean projects without a Korean taxable presence. Purchasing, storage, display, delivery, information-gathering and other preparatory or auxiliary activities are excluded — the basis for the liaison office. And the Protocol limits the head-office expenses a permanent establishment may deduct to those connected with its activity.

In Korean domestic law the same concept appears in Article 94 of the Corporate Tax Act. Our guide to branch or subsidiary explains the choice once a presence is needed.

Capital gains (Article 13)

Gains on immovable property are taxed where the property is. Gains on movable assets of a permanent establishment are taxed where it is. Gains on ships and aircraft in international traffic are taxed in the operator’s country.

The provision that surprises sellers concerns shares. A resident of Italy who sells shares in a Korean company can be taxed in Korea if, at any time during the two years before the sale, the seller held more than 25% of the company’s capital. An Italian parent selling its Korean subsidiary is therefore within Korean tax. Under Korean domestic law the buyer withholds the lower of 11% of the price or 22% of the gain. Smaller holdings are taxable only in Italy.

On the Italian side, a company selling a qualifying holding may benefit from the 95% participation exemption of Article 87 TUIR (art. 87 TUIR); if most of the gain is exempt in Italy, little Italian tax remains to absorb a credit for the Korean tax. Plan the exit — including whether to sell the Korean company’s shares or its business — before signing.

Employees, directors and others

Articles 14–21 in summary.

Two practical consequences. An Italian engineer sent to Korea for five months, still paid by the Italian company and not recharged to a Korean entity, remains taxable only in Italy under Article 15 — but if the cost is recharged to the Korean subsidiary, Korea may tax from the first day. And an Italian resident who sits on the board of a Korean company is taxable in Korea on the director’s fees under Article 16, wherever the board meets; Korea withholds on them, and Italy gives credit.

How double taxation is eliminated (Article 23)

Italy uses the credit method. It includes the Korean-source income in the Italian tax base and deducts the Korean tax paid, up to the Italian tax attributable to that income, under the treaty and Article 165 TUIR (art. 165 TUIR). The treaty adds an important exception: no credit is given where the income is subject in Italy to a final withholding or substitute tax at the recipient’s election or by law.

For Italian companies the credit often matters less than it seems, because 95% of a foreign dividend is exempt from IRES under Article 89 TUIR (art. 89 TUIR) and the credit is reduced in proportion. Korean dividend withholding is therefore largely a final cost, and getting the 10% rate rather than 22% is real money. For Italian individuals the exception bites harder: Korean dividends are subject in Italy to the 26% substitute tax on the amount received, with no credit for Korean withholding. An individual shareholder can end up paying about 37% in combined tax on a Korean dividend — one reason to hold through an Italian company.

Korea also uses the credit method, limited to the Korean tax on the Italian-source income, under Article 57 of the Corporate Tax Act for companies. The original treaty contained tax-sparing credits — deemed Korean tax of 7.5% on dividends and interest and 10% on royalties — but they applied only for five years after entry into force and have long expired.

Claiming the treaty rate in Korea

Korea does not apply treaty rates automatically. Under Article 98-6 of the Corporate Tax Act (and Article 156-6 of the Income Tax Act for individuals), the Italian beneficial owner submits a limited tax rate application (제한세율 적용신청서, jehan seyul jeogyong sincheongseo) to the Korean payer before payment, with a certificate of tax residence (certificato di residenza fiscale) issued by the Agenzia delle Entrate. The payer withholds at the treaty rate and reports the application to the tax office.

If the documents arrive late, the payer withholds at 22% and the Italian recipient files a request for correction (경정청구, gyeongjeong cheonggu) within five years to recover the excess; Article 28 of the treaty confirms the right to a refund supported by a residence certificate. Ask the Agenzia delle Entrate for the certificate early: it is issued on request, and Korean payers expect one covering the year of payment.

Claiming the treaty rate in Italy

The reverse case — Korean residents receiving Italian dividends, interest or royalties — follows Italian procedure. The Italian payer or intermediary can apply the treaty rate directly if the Korean recipient provides the Agenzia delle Entrate’s application form for the relevant income, completed and certified by the Korean tax office, or accompanied by a Korean certificate of residence (거주자증명서, geojuja jeungmyeongseo) obtainable through HomeTax. Otherwise the payer withholds at the domestic rate and the Korean recipient applies to the Agenzia delle Entrate for a refund under Article 38 of Presidential Decree 602/1973 (art. 38 DPR 602/1973), within the deadline set there.

For Korean groups with Italian subsidiaries, the Parent–Subsidiary Directive (direttiva madre-figlia) does not apply — Korea is outside the EU — so the treaty’s 10% is the floor on Italian dividends to a Korean parent.

Disputes, information and anti-abuse

Article 24 prohibits discrimination against nationals of the other country, permanent establishments and foreign-owned companies, and applies to taxes of every kind. Article 25 provides a mutual agreement procedure (상호합의절차, sangho habui jeolcha): a taxpayer who believes it has been taxed contrary to the treaty may present its case to its own competent authority within two years of the first notification of the measure. The Protocol adds that the procedure does not replace domestic remedies — where the dispute concerns an assessment, domestic proceedings must be started as well, which in Italy means respecting the deadlines for appeals to the tax courts.

Article 26 provides for exchange of information. The 2012 amending protocol, ratified by Italy in 2014, brought the treaty’s exchange-of-information provisions closer to the current OECD standard. Both countries also exchange financial account information under the Common Reporting Standard, so Korean accounts of Italian residents and Italian accounts of Korean residents are reported automatically.

Korea applies the OECD Multilateral Instrument to its covered treaties. Whether the MLI’s principal purpose test and other changes modify this particular treaty depends on Italy’s ratification and the two countries’ notifications; check the current position before relying on a structure. Independently of the MLI, Korean law applies substance over form (실질과세, siljil gwase) under Article 14 of the Framework Act on National Taxes, and Italy applies its general anti-abuse rule in Article 10-bis of the Taxpayers’ Statute (art. 10-bis Statuto del contribuente).

Worked examples

An Italian S.r.l. and its Korean subsidiary

Officine Rossi S.r.l. owns 100% of a Seoul Jusik Hoesa that pays a dividend of KRW 300 million. With the limited tax rate application and an Italian residence certificate on file, Korean withholding is 10% — KRW 30 million — instead of KRW 66 million. In Italy only 5% of the dividend enters the IRES base. The KRW 36 million saved in Korea is close to a final saving.

A Korean distributor paying an Italian brand

A Korean fashion distributor pays an Italian maison a licence fee of KRW 500 million for the use of its trademark. The fee is a royalty under Article 12: Korean withholding is capped at 10%, KRW 50 million, if the forms are in place. The maison includes the royalty in its Italian income and credits the Korean tax against IRES on it.

An Italian individual shareholder

An Italian resident holds 40% of a Korean company personally and receives a dividend of KRW 100 million. Korea withholds 15%; the individual receives KRW 85 million and pays the 26% Italian substitute tax on it, KRW 22.1 million, with no credit. Combined tax on the dividend: about 37%, before Korean corporate tax on the profit.

Selling the Korean company

The same S.r.l. sells its Korean subsidiary to a Korean buyer. Because it held more than 25% within the previous two years, Korea may tax the gain under Article 13; the buyer withholds the lower of 11% of the price or 22% of the gain. In Italy, if the participation exemption applies, 95% of the gain is exempt, so the Korean tax is largely a final cost and the structure of the sale deserves planning.

Mistakes we see

1. No residence certificate before the first dividend or royalty, so 22% is withheld.
2. Holding through a partnership or indirectly and expecting the 10% dividend rate.
3. Individuals holding Korean companies directly without realising there is no Italian credit for Korean withholding.
4. Equipment leases treated as rentals rather than royalties, and withholding missed.
5. Secondees whose cost is recharged to the Korean entity, losing the 183-day exemption.
6. Selling a Korean subsidiary without planning for Korean tax on the gain.
7. Missing the two-year window for the mutual agreement procedure.

Korean terms you will meet

Italian terms you will meet

Questions readers ask

About the author

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.

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