In order to promote internationalization of Korean financial markets, Korea Exchange (KRX) has been actively advancing the listing of foreign companies, especially Chinese companies, in Korea. This process demands much effort across different domains. In terms of taxation, if investing in the stocks of Korea-listed Chinese companies would cause more tax than investing in the stocks of (Korea-listed) Korean companies, it might discourage investors from doing so. This might consequently discourage Chinese companies from listing in Korea. This paper attempts to propose a solution to this issue, through detailed examinations on the taxation on stock investment incomes (dividends and capital gains) of related countries.
Due to the restrictions on direct overseas listing of Chinese companies imposed by the Chinese government, many Chinese companies choose to list overseas indirectly via offshore holding companies which may be treated as Chinese resident companies. When investors invest in the stocks of Chinese companies listed in Korea, the taxation on stock investment incomes of different countries are involved, including those of China, Korea, the countries where the offshore holding companies are established, and the countries of residence of the investors. Since it is virtually impractical to check the taxation of every investor’s country of residence, this paper only focuses on the taxation of China, Korea and the countries where the offshore holding companies are established.
This paper finds that compared to investing in the stocks of Korean companies, when investing in the stocks of Korea-listed Chinese companies, investors would incur no more dividend tax, while foreign entities would possibly incur more tax on capital gains because that both China and Korea can claim the capital gains as their source income. This paper thus suggests that Korea excludes capital gains on stocks of Korea-listed foreign companies from the scope of source incomes, based on the following grounds: (i) as the majority of the Korea-listed foreign companies are Chinese companies, this initiative could encourage investors to invest in the stocks of Korea-listed Chinese companies, which as a result would attract more Chinese companies to list in Korea; (ii) although ceding certain taxing right, this initiative will not conflict with the purposes towards which the system of source rules of Korea might be directed; (iii) this initiative will not violate the principle of tax equality; (iv) this initiative supplements the loop-hole in the existing source rules of Korea.