Your Taxes: Korea welcomes Israelis

The secret of success for an Israeli business in Korea is: learn the Korean culture and history, build your relationships and be tolerant and open.

First a small quiz: Which nation became independent in 1948, calls their fathers "Abba," plants new trees each year and teaches its children Talmud? What do you know about the country sometimes called "The Israel of the East" - South Korea? The Korean peninsula is located at the eastern end of Asia, half way between east China and Japan. The peninsula also borders Russia to the north. No wonder South Koreans describe themselves as "a small country surrounded by the world's biggest nations." Having no natural resources, South Koreans believe they must work harder to survive ever increasing worldwide competition by excelling in technology and related industries. Sound familiar? Well, these are not the only surprises awaiting an Israeli analyzing the world's 11th biggest economy. South Korea occupies 45% of the Korean peninsula with a population of 48 million. Communist North Korea occupies the other 55% of the peninsula with a population of 23 million. Both Koreas share the same history, culture and language. There are also family ties between the citizens of both countries. The reason for over 60 years of hostility is an understanding between the US and the Soviet Union to split the political influence over the peninsula after releasing it from Japan's domination in the Second World War. Today, South Korea is a full scale democracy, though it took some time and a lot of pressure to make it a real democracy. Not so long ago, in 1981, South Korean students died in a demonstration for democracy. Seoul is the South Korean capital, and half the country's population lives in the city and its suburbs - it is the business heart of Korea. Confucianism is not a religion, but rather a way of life ingrained in the Korean conscience, which governs relations between people. An example is the deference people show their seniors (even at work) and elders. The religious split in South Korea is: Buddhists 23%, Christians 29%, others 2% and none 48%. The economy The phenomenal economic growth of South Korea started in 1962 with the adoption of a five-year economic development plan. At that time, South Korean GDP per capita was only $82 dollars and exports were negligible. During the period 1962-1992 South Korea recorded average annual growth of 9% and totally transformed itself. According to recent reported data, gross domestic product (GDP) is growing by 5.3% per year, inflation is running at 3%, the trade balance is in surplus by $19.1 billion and the government budget is showing a small surplus of 0.4% of GDP. The unemployment rate is 3.1%. The Korean currency is the won (KRW); as of December 1, one US dollar equaled 921 won. The main factors contributing to this economic success are strong governmental leadership and support, export-oriented growth, focus on information technology and a talented work force. South Korea's main export industries are: electronics, automotive, semiconductors, steel and machinery and shipbuilding. South Korea faces growing competition from China. Consequently, the Korean economy is re-inventing itself by moving into more sophisticated technological fields while trying to build itself as a global financial center. A wave of Korean companies has relocated production centers to China to take advantage of cheaper labor When you first land in Korea everything looks modern and advanced. However, the culture is totally different from what Western businessmen are used to. It is also unlike other Asian countries they may have done business with - cultural differences are a major barrier to business with Koreans. The Korean working environment is hierarchical. Each person is referred to by his family name and his grade even after normal working hours. As for working hours, people in Seoul work 2,300 hours per year, more than in any other city in the world according to a recent report. That's well ahead of people in Paris who spend just 1,480 hours on the job - among the world's lowest. Working hours in Korea do not end when you leave the working place. Directors and managers may take their teams for dinner. Top managers will also meet their customers and vendors for dinner. Dinner is the way to build the most important business component in Korea - the Relationship. When Koreans say "Relationship" it is not the typical business relationship that western people used to. It is more personal, deeper and longer lasting. The most successful businesses with Koreans are based on the Relationship and mutual trust. Written agreements are not always the final stage in negotiations. Women traditionally have not been part of the business environment, though this is starting to change The Israel-Korea relationship Korea is one of the few places on earth where you get a warm welcome just because you are an Israeli. Most Koreans born in the 50s-60s were taught that Israel is Korea's role model for success in a hostile environment and with no natural resources. Many Koreans are familiar with the Talmud. The Israeli education system is well appreciated in Korea and education delegations visit Israel trying to ascertain the formula for creating the first Korean Nobel prize winner. Korea, though, has never had a Jewish community and you will not find a synagogue or Kosher food there. Trade volume between Israel and Korea in 2006 totaled $1.5 billion, 60% of which consisted of Israeli imports from Korea. The potential for investment, mergers and acquisitions, technological cooperation and trade between Israel and Korea is only partially fulfilled. The secret of success for an Israeli business in Korea is: learn the Korean culture and history, build your relationships and be tolerant and open. Don't expect immediate results. The tax system What about taxes in Korea? Briefly, the ordinary rate of corporate income tax is 25% but a resident surtax of 10% is levied thereon making it 27.5%. Dividends, interest and royalties are generally subject to withholding tax at a rate of 27.5% including surtax. The Tax Incentives Limitation Law offers incentives to foreign companies that invest in hi-tech businesses and foreign investment zones. Beginning in their first profitable year, these companies are exempt from corporate tax on a percentage of income for five years followed by a 50% tax reduction on such income for the following two years. For companies that do not earn a profit, the exemption begins in the sixth year. Dividends paid to foreign shareholders benefit from a similar exemption or reduction. For foreign investors in Free Economic Zones, a tax exemption may be available for five years; they involve foreign investment in manufacturing companies ($30 million), tourism ($20m.) or logistics ($10m.). The abovementioned withholding tax rates are reduced by the Israel-Korea tax treaty. The treaty withholding tax rate for dividends is 5% if the shareholder is a company holding a least 10% of the payor's capital, but 10% if the profits were subject to a lower than normal rate of corporation tax and 15% in other cases. The treaty withholding tax rate for interest is 7.5% if the recipient is a bank or financial institution and 10% in other cases. The treaty withholding tax rate for royalties is generally 5%. These Korean taxes are generally creditable in Israel according to detailed rules in the treaty and the Israeli tax law. As always, consult experienced tax and other advisers in each country at an early stage in specific cases. [email protected], [email protected] Itzik Yona has lived in South Korea for several years and is the CEO of the YONACO Group, which specializes in doing business in Korea. Leon Harris is an International Tax Partner at Ernst & Young Israel.