Corporate Treasury & Cash Management in South Korea
Corporate Treasury & Cash Management in South Korea
About South Korea
South Korea has the fourth-largest economy in Asia and the 10th largest in the world, according to the International Monetary Fund (IMF). Following the Korean War, South Korea was one of the world’s poorest nations, but strong technological advancements brought about by its skilled labour force propelled it to become one of the most developed economies in the world within a generation.
The South Korean economy is characterised by its heavy reliance on exports, which account for 50% of gross domestic product (GDP). Key exports include machinery, electronics and automobiles. South Korea’s largest export partners are China, the US and Vietnam.
South Korea has 15 free trade agreements, which cover a significant portion of the world's economy, making South Korea a world leader in international trade. Along with its neighbours, China and Japan, which are the world’s second- and third-largest economies, respectively, South Korea is a vital member of the East Asian economic region.
Through the Financial Services Commission (FSC), South Korea has been actively supporting financial innovation and digital finance. Open banking, digital sandboxes, MyPayment and MyData are some of the main government-led initiatives. Other top priorities for 2021 include authentication technology, financial technology (fintech) start-up financing, green finance and insurance innovation.
With its competitive regulatory framework and culture of innovation, entrepreneurial activities can be carried out in South Korea with relative ease. As ranked by the World Intellectual Property Organisation, the country is 5th in its Global Innovation Index 2021. Moreover, South Korea boasts one of the most literate workforces in the world, with relatively competitive wages compared with most other developed nations.
Corporate Treasury in South Korea
South Korea is one of the world's most dynamic economies. Its high level of foreign trade and continued deregulation make it an attractive market. In this section, we highlight some of the key factors relevant to treasury and cash management in South Korea.
Financial Market Development
- Seoul is ranked 16th in the 2021 Global Financial Centres Index by Z/Yen Group, nine places higher than in 2020.
- South Korea has world-class business infrastructure, a highly skilled workforce, and an efficient legal system, although the region’s geopolitical situation creates uncertainty.
- South Korea has some foreign exchange (FX) controls in place, but the majority of foreign exchange transactions do not require approval or reporting under the Foreign Exchange Transactions Act.
- Companies can receive foreign exchange from outside of Korea and there is no regulation governing payments to foreign companies. They are, however, required to report most capital transactions in advance, such as foreign currency loans. Remittance of profits from a Korean branch to a head office must be reported to a designated foreign exchange bank.
Sophistication of Banking Systems
- South Korea has around 20 commercial banks and specialised banks.
- There are more than 35 branches of foreign banks operating in the country.
- South Korea has one of the largest bond markets in Asia, with both government and corporate bonds available. The local currency bond market was valued at KRW2,695.5 trillion at the end of March 2021.
- The banking sector in South Korea is regulated by the FSC, which is responsible for rule making and licensing, and the Financial Supervisory Service (FSS), which conducts prudential supervision.
- The central bank, the Bank of Korea (BoK), also carries out some supervisory functions, including overseeing foreign exchange controls, which it manages with the Ministry of Strategy and Finance (MOSF).
- Corporate income tax (CIT) is charged at:
- 10% on the first KRW200 million of taxable income (plus surcharge of 1%);
- 20% on taxable income between KRW200 million and KRW20 billion (plus surcharge of 2%);
- 22% on taxable income between KRW20 billion and KRW300 billion (plus surcharge of 2.2%); and
- 25% on taxable income above KRW300 billion (plus surcharge of 2.5%).
- Resident companies are taxed on their worldwide income whilst non-resident companies with permanent establishments in South Korea are taxed on Korean-sourced income.
- Companies are charged an additional tax of 20% if their net assets exceed KRW50 billion (excluding small- and medium-sized enterprises), and companies belonging to business groups are subject to restrictions on cross-shareholding under the Act on Monopoly Regulation and Fair Trade. This tax is scheduled to expire in December 2022.
- Companies are liable for a minimum tax, which is the greater of (10%, 12% or 17% depending on the size of their tax base) their taxable income before certain tax deductions or credits, or the actual CIT liability after deductions and credits.
- There is no branch-profit remittance tax on the remittance of profits to the head office by a branch of a foreign company. However, if the tax treaty between Korea and the respective country allows for Korea to impose branch-profit remittance tax, the branch-remittance tax will be 20% on the adjusted taxable income.
- The standard rate for Value Added Tax (VAT) is 10%, with certain goods and services being zero-rated whilst others are exempted.
- A securities transaction tax of 0.23% (for shares of Korean-listed companies) or 0.43% is charged on the transfer of shares or interest.
- Interest income is typically included in taxable income and subject to CIT.
- Interest expenses that are used for business purposes are generally tax-deductible, subject to thin capitalisation rules.
- Companies are allowed to recognise unrealised gains and losses on foreign currency transactions.
- There is no withholding tax (WHT) on dividends for resident companies but WHT of 14% or 25% is charged on interest. For non-resident companies where no tax treaty is in place, WHT of 20% is charged on dividends and 14% or 20% is charged on interest. Where tax treaties are in place and the non-resident company can provide a Certificate of Residence, rates range from 5% to 25% for dividends and 0% to 15% on interest.
- Tax credits are available for the funding of research and development (R&D) activities as well as for qualified investment in facilities or companies that increase productivity or safety, boost environmental protection or create jobs.
- South Korea has tax treaties with more than 90 countries and territories.
- South Korea is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.
Benefits for Regional Treasury Centres
- South Korea is a leading financial services hub in Asia.
- Cash concentration is permitted amongst participating accounts that belong to the same entity, however zero-balancing is more commonly used. Notional pooling is generally not permitted.
- South Korea is a member of the Asian Payment Network.
- Foreign banks have a significant presence in South Korea and offer the widest range of cash-management services.
- Residents may hold foreign-exchange accounts domestically and overseas, although the Ministry of Strategy and Finance must be notified before the opening of an overseas foreign-exchange account. Domestic currency accounts are not permitted overseas.
- Non-residents may hold foreign and domestic currency accounts, and domestic currency accounts are freely convertible into foreign currency. Non-residents may hold two types of domestic currency accounts: a non-resident KRW account (whereby overseas remittances may be made without supporting documents but local transactions are restricted); or a non-resident KRW account (whereby local transactions can be carried out freely but overseas remittances are restricted).
- Interest: Interest-bearing currency accounts are not available.
Legal and Regulatory
- The FSC, under which the FSS operates, oversees the banking sector, while the Bank of Korea (BoK) enacts various other supervisory functions in accordance to the Banking Act.
- A resident company is one in which its headquarters, main office or central management operates as a domestic company.
- Transactions between residents and non-residents have to be carried out at foreign-exchange banks in South Korea. Foreign exchange is managed by the Bank of Korea and the Ministry of Strategy and Finance.
- South Korea has anti-money laundering and counter-terrorism financing regulations in place.
- South Korea has set up a financial intelligence unit, the Korea Financial Intelligence Unit, which is operated through the FSC and is a member of the Egmont Group.
|Korea's Real-time Gross Settlement (RTGS) system|| |
(Korea Financial Telecommunications & Clearings Institute)
|Multilateral net settlement system|| |
Cheque Clearing System
|Cheque- and paper-based truncation system|| |
Bank Giro System
|Korea's giro system|| |
(Interbank Funds Transfer Network)
(Housing Finance Information Network)
|Electronic banking/firm banking system|| |
(Interbank Cash Dispenser/ATM) system
(Electronic Funds Transfer at the Point of Sale)
(Cash Management Service)
|Local Bank Information Network|| |
|Online credit-transfer system|| |
|E-money card system|| |
|Business-to-business system|| |
(Asian Payment Network)
|Asia-wide retail payment settlement system|| |
- The most popular form of cashless payment, in terms of value.
- Credit transfers may be paper-based or automated, although automated is by far the most common.
- High-value and urgent interbank transfers settled through BOK-Wire+ within the same day.
- Low-value, non-urgent and bulk transfers processed through any of the nine retail payment systems operated through the KFTC the next day.
Direct Debits (auto debits)
- Another popular form of payment.
- There are two types of direct debit systems: bank giro system direct debit for low-value transactions and CMS debit transfer for high-value commercial transactions.
- Processed through the bank giro system, with final settlement done using BOK-Wire+.
- By volume, credit cards are the most popular form of cashless payment in South Korea, with 110.98 million in circulation from 35 domestic card-issuing companies as well as Visa and Mastercard, all Europay, MasterCard® and Visa® (EMV)-compliant. With most consumers using debit and credit cards for daily expenses such as dining and transportation, South Korea’s rate of cash payments now ranks as one of the lowest in the world.
- Shinhan card is one of the largest credit card companies in Korea. There are 21.5 million Shinhan debit or credit cards in circulation. The LG Pay White Card can be used as a credit card as well as for ATM withdrawals and for payments in shops.
- There is no credit card interbank-settlement system. Therefore, each bank determines what settlement system it uses. Visa and Mastercard use their own international bank schemes.
- E-money cards are a minor player in the cashless payment industry, partly due to the ubiquity of credit cards. There are many stored-value e-money cards available, which are reloadable online, by credit card, bank transfer or at selected outlets.
- The brands Cashbee and T-money currently dominate the pre-payment market and are used throughout South Korea for small payments, such as at shops and on transportation networks.
- The FSC has adopted a ‘sandbox’ approach for fintech companies, giving a two-year exemption from regulations if technology is shown to be ‘innovative’. Other fintech regulations are due to be introduced.
- Korea is one of the biggest e-commerce markets in Asia, with an annual e-commerce growth rate of 16% and revenue of KRW71 trillion. This is largely due to high internet and smartphone penetration – by some estimates the highest in the world – and a developed electronic payment infrastructure.
- Two in three Koreans have used mobile apps to shop for goods and services, and the recent development of simplified payment systems has only increased its usage in the sector. Popular digital wallets are Samsung Pay, Naver Pay and Kakao Pay. Local retailers have also launched their own mobile apps.
- Similarly, mobile banking is very common, with 47% of banking customers conducting banking transactions using a mobile banking app at least once a week.
- With the highest digital-banking penetration in the Asia-Pacific region, South Korea welcomed two online-only banks to its banking sector in 2017 – the first new arrivals in banking in over two decades. The response to internet specialists K-bank and Kakaobank has been significant, as hundreds of thousands of new accounts were opened within the first few days of launching.
- There has been a very active market in cryptocurrencies in Korea. However, in the wake of several high-profile heists on Korean exchanges, the government continues to tighten rules and formulate regulations for greater monitoring of cryptocurrency activity.
- Cryptocurrencies are not legal tender.
Cash, Cheques and Money Orders
- The use of cash and cheques is in significant decline, overtaken by alternative forms of electronic payments. Cash transactions currently account for no more than 20% of all transactions.
- Cheques are truncated and cleared through the KFTC Cheque Clearing system, with final settlement done the next day through BOK-Wire+. There are two types of cheques: cashier's cheques and current account cheques (corporate cheques).
- Cashier's cheques (similar to bearer-form bank drafts) do not require a preset value to be issued and can be issued by ATMs. They may be used as an alternative for cash transactions.
- Current account cheques are used for high-value commercial transactions.
- Domestic and international money orders can be purchased in South Korea through well-known vendors such as Western Union and MoneyGram.
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Sources (Intro & Corporate Treasury):
IMF, World Bank, World Economic Forum, PwC, US Department of Commerce, Korean Federation of Banks, The Korean Herald, Financial Times, Bank for International Settlements (BIS), Bank of Korea, Financial Supervisory Services, Financial Services Commission, McKinsey, Asian Development Bank, OECD, DBS, Financial Statistics Information Service, Trading Economies, CEIC.
Sources (Banking & Payments):
Korean Federation of Banks, The Korean Herald, Financial Times, Bank for International Settlements, Bank of Korea, Financial Supervisory Services, McKinsey, Asian Development Bank, OECD, DBS, Financial Statistics Information Service, The Association for Financial Professionals, Yonhap News Agency, Business Finland, Trading Economies, CEIC.