South Korea: New tax procedure for Korean Government Bonds (KGB) and Monetary Stabilisation Bonds (MSB)
Clearstream Banking1 informs clients that effective
1 July 2024
Eligible clients can benefit from tax exemption on income payments from South Korean Government Bonds (KGB) and Monetary Stabilisation Bonds (MSB) in Clearstream Banking.
Background
A new direct link to the South Korean market has been introduced for the purpose of settling and safekeeping South Korean government bonds, including Korean Treasury Bonds (KTBs), and Monetary Stabilisation Bonds (MSBs) in an omnibus account structure with the local Korean Central Securities Depository (CSD), Korean Securities Depository (KSD).
Holding restrictions
South Korean nationals and residents of South Korea are not allowed on the link to the South Korean market.
Beneficial owners that are individuals are also not allowed on the link.
Trading prerequisites
In order to access the South Korean market, Clearstream Banking clients must be in possession of an Investment Registration Certificate (IRC) or a Legal Entity Identifier (LEI).
Exemption from withholding tax on income payments from South Korean securities is only available to eligible IRC or LEI holders.
Note: Effective 14 December 2023, the Financial Supervisory Services (FSS) in South Korea stopped issuing new IRCs. Foreign investors who already have an IRC must continue to use this number in the market and cannot substitute it with the LEI.
Impact on clients
Only tax-exempt beneficial owners are eligible to hold South Korean KGB and MSB in Clearstream Banking. The standard rate of withholding tax on income payments from South Korean KGB and MSB is therefore 0% in Clearstream Banking and, consequently, no relief and reclaim procedures apply.
The documentation to be submitted in order to qualify to hold KGB and MSB in Clearstream Banking vary depending on whether the client is to hold KGB and MSB as proprietary assets or as an intermediary. Clients acting as an intermediary who want to hold KGB and MSB on behalf of their final beneficial owner must first obtain the Qualified Foreign Intermediary (QFI) status from the National Tax Service (NTS) through their agent or Clearstream Banking before holding KGB and MSB for third parties.
Important Note: Clients may hold proprietary assets and assets for third parties but the respective holdings must be held in strictly separate accounts. For clients holding third party assets, the holding in each account may strictly be held on behalf of one single beneficial owner only.
Clearstream Banking only allows one QFI (the Clearstream Banking client) in the custody chain, therefore the Clearstream Banking client’s client must be the final beneficial owner.
Clearstream Banking S.A. and Clearstream Banking AG have been approved as QFI by the NTS on 28 March 2023 and 15 April 2024 respectively.
Documentation requirements
For clients to hold KGB and MSB as proprietary assets
Beneficial owners eligible to hold KGB and MSB are non-residents and foreign corporations including:
- Overseas Investment Vehicles (OIV) (public and private, deemed as beneficial owners),
- central or local government or public institutions,
- pension funds,
- financial institutions (investment companies, insurers, banks, other financial institutions),
- other corporate entities.
Clearstream Banking does not assist in this regard. Please consult your tax advisor for further information.
To hold KGB and MSB as proprietary assets in a Clearstream Banking account, clients must submit the following documentation depending on their status:
For all eligible beneficial owners
- One-Time Certificate for South Korea Government Bonds (KGB) and Monetary Stabilisation Bonds (MSB);
- Form 72-7: Application for tax exemption on interest income and capital gains from investment in Government Bonds and Monetary Stabilisation Bonds (for foreign corporations);
- Power of Attorney (POA) to Clearstream Banking;
- Certificate Of Residence (COR). It should be issued by the competent authority of the beneficial owner’s country of residence and within 6 months of the tax exemption application.
Note: COR is not needed for OIVs (public and private deemed as beneficial owners).
For the other beneficial owner types, if a certificate of residence is not available, the following alternative documents can be provided:- For corporations: certificate of incorporation; or government-issued document with corporation name and address; or IRC.
- For central or local governments or public institutions, pension funds: government-issued document; or equivalent document that can verify the actual investor; or IRC.
In addition, for Overseas Investment Vehicles (public or private, deemed as beneficial owner)
Overseas public investment vehicles (deemed as beneficial owners)
In the case of public fund in country of establishment:
- Fund establishment certificate; or
- Fund registration certificate; or
- Document issued by supervisory authority; or
- Other equivalent document.
In the case of other public funds:
- Fund establishment certificate; or
- Fund registration certificate; or
- IRC; and
- Document that can verify that the fund qualifies for overseas investment vehicle equivalent to overseas public investment vehicle.
Overseas private investment vehicles (deemed as beneficial owners)
- Fund establishment certificate; or
- Fund registration certificate; or
- Document issued by supervisory authority; or
- Other equivalent document, or
- IRC; and
- Confirmation Letter of Private OIV’s Failure of Investor Verification. The letter must be submitted when the OIV is unable to verify the investors investing in the OIV (applicable only when the OIV is treated as the beneficial owner pursuant to Article 93-2 (1) 3 of the Corporate Tax Act of the Republic of Korea).
The tax forms are valid until revoked (unless there is a change in the Clearstream Banking client's details). Originals are required.
For clients to hold KGB and MSB as an intermediary
Clients acting as an intermediary wishing to hold KGB and MSB on behalf of their final beneficial owner must first obtain the QFI status from the NTS through their agent or Clearstream Banking before holding KGB and MSB for third parties.
Intermediaries requesting the QFI status must ensure to fulfil all below criteria in order to be eligible:
- Be a foreign corporation with its headquarters or main office located in a country where a tax treaty has been signed with the Republic of Korea; and
- Be a foreign corporation, that is engaging in business similar to that of the Korea Securities Depository under Article 294 of the Capital Markets and Financial Investment Business Act or has the capacity to perform custody business of securities issued abroad (outside the country they are located).
Clearstream Banking does not assist in this regard. Please consult your tax advisor for further information.
Clearstream Banking only allows one QFI (the Clearstream Banking client) in the custody chain, therefore the Clearstream Banking client’s client must be the final beneficial owner. Clients are responsible for ensuring compliance with this requirement.
QFI status application
Eligible clients wishing to apply for the QFI status through Clearstream Banking must submit the following documentation:
- Form 19-12: Application Form for Approval as Qualified Foreign Intermediary, etc. (QFI) and Statement of Approval;
- Statement of Requirements for Approval as a Qualified Foreign Intermediary etc. (QFI) and its attachments (when applicable; Proof of statistics related to custody volumes, Proof of financial soundness and credit ratings, Certificate of acquisition of status similar to QFI overseas);
- Certificate Of Residence (COR). It should be issued by the competent authority of the investor’s country of residence.
Note: The certificate of residence shall be either 1) a valid document within the validity period stated on the certificate at the date of the QFI application or 2) a document issued within six months from the date of the QFI application. However, in case of ‘2)’, the applicant may be allowed to submit a certificate issued over six months from the date of the QFI application if it includes the signatory’s signature and a written statement stating that there have been no changes to the certificate’s content and therefore the certificate needs no updates.
If a certificate of residence is not available, the client cannot proceed with the QFI status application. There is no alternative document to the COR. - Power of Attorney (POA) to Clearstream Banking;
- Corporation register (certificate of incorporation, certificate of good standing, commercial register). The corporate register (or certificate of incorporation) shall be either 1) a valid document within the validity period stated on the register (or certificate) at the date of the QFI application or 2) a document issued within six months from the date of the QFI application. However, in case of ‘2)’, the applicant may be allowed to submit a register issued over six months from the date of the QFI application if it includes a written and signed statement stating that there have been no changes to the corporate register’s content and therefore, the register needs no updates.
- Articles of association. The applicant can submit its most recent articles of association as long as they are up to date regardless of the date of issuance.
- List of authorised signatories;
- Any additional documents requested by NTS.
The tax forms are valid until revoked (unless there is a change in the Clearstream Banking client's details). Originals are required.
Note: If the QFI status has been requested and approved through another entity (not through Clearstream Banking), the QFI must submit a copy of the QFI approval form to Clearstream Banking together with the QFI tax exemption application.
QFI tax exemption application
Clients who are QFI must submit the following documentation to apply for the QFI tax exemption:
- One-Time Certificate for South Korea Government Bonds (KGB) and Monetary Stabilisation Bonds (MSB);
- Form 19-13(3): Application for tax exemption on interest income and capital gains from investment in Government Bonds and Monetary Stabilisation Bonds;
- Power of Attorney (POA) to Clearstream Banking (if not already provided for the QFI status application though Clearstream Banking).
- Copy of the QFI approval form (only if the QFI status has been requested and approved through another entity – not through Clearstream Banking).
The tax forms are valid until revoked (unless there is a change in the Clearstream Banking client's details). Originals are required.
Beneficial owners tax exemption application
Beneficial owners eligible to hold KGB and MSB are non-residents and foreign corporations, including:
- Overseas Investment Vehicles (OIV) (public and private, deemed as beneficial owners),
- central or local governments or public institutions,
- pension funds,
- financial institutions (investment companies, insurers, banks, other financial institutions),
- other corporate entities.
Clearstream Banking does not assist in this regard. Please consult your tax advisor for further information.
To hold KGB and MSB as an intermediary in a Clearstream Banking account, clients must submit electronic copies of the following documentation received from the final beneficial owner. The Clearstream Banking client that is QFI keeps the tax form(s) and supporting document(s) hereunder, received from the final beneficial owner, and will provide Clearstream Banking with electronic copies. Originals have to be submitted promptly to Clearstream Banking, upon request at any time, from the local depository or the NTS.
For all eligible beneficial owners
- Form 72-7: Application for tax exemption on interest income and capital gains from investment in Government Bonds and Monetary Stabilisation Bonds (for foreign corporations);
- Certificate Of Residence (COR). It should be issued by the competent authority of the beneficial owner’s country of residence and within 6 months of the tax exemption application.
Note: COR is not needed for OIVs (public and private deemed as beneficial owners).
For the other beneficial owner types, if a certificate of residence is not available, the following alternative documents can be provided:- For corporations: certificate of incorporation; or government-issued document with corporation name and address; or IRC.
- For central or local governments or public institutions, pension funds: government-issued document; or equivalent document that can verify the actual investor; or IRC.
In addition, for Overseas Investment Vehicles (public or private, deemed as beneficial owners)
Overseas public investment vehicles (deemed as beneficial owners)
In the case of public fund in country of establishment:
- Fund establishment certificate; or
- Fund registration certificate; or
- Document issued by supervisory authority; or
- Other equivalent document.
In the case of other public funds:
- Fund establishment certificate; or
- Fund registration certificate; or
- IRC; and
- Document that can verify that the fund qualifies for overseas investment vehicle equivalent to overseas public investment vehicle.
Overseas private investment vehicles (deemed as beneficial owners)
- Fund establishment certificate; or
- Fund registration certificate; or
- Document issued by supervisory authority; or
- Other equivalent document, or
- IRC; and
- Confirmation Letter of Private OIV’s Failure of Investor Verification. The letter must be submitted when the OIV is unable to verify the investors investing in the OIV (applicable only when the OIV is treated as the beneficial owner pursuant to Article 93-2 (1) 3 of the Corporate Tax Act of the Republic of Korea).
The tax forms are valid until revoked (unless there is a change in the final beneficial owner’s details).
QFI status application fee
KSD charges a fee for any QFI status application. This fee will be passed on to clients.
Deadlines
Clients must ensure that the required documentation is provided before they or any underlying beneficial owner makes a first investment.
Further information
The Market Taxation Guide – South Korea will be updated in due course.
For further information, please contact the Clearstream Banking Tax Help Desk or Clearstream Banking Client Services or your Relationship Officer.
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1. Clearstream Banking refers collectively to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248, and Clearstream Banking AG (for Clearstream Banking AG clients using Creation accounts), registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500.