The Double Taxation Relief (Taxes on Income) (Republic of Korea) Order 1996

PART II EXCHANGE OF NOTES

Your Excellency

Seoul

25th October 1996

I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which has been signed today and to propose on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland that:

(1) in relation to paragraph (2) of Article 8:

• for the purposes of the Convention, when during an accounting period profits from rental or use, maintenance or rental referred to in paragraph (2) of Article 8 exceed in aggregate 20 per cent. of total profits of an enterprise, such rental or such use, maintenance or rental shall not be regarded as incidental to the operation of ships or aircraft in international traffic.

(2) in relation to paragraph (3) of Article 10 and paragraph (5) of Article 11:

• the United Kingdom legislation concerning thin capitalisation has been designed and is operated in conformity with the arm's-length principle reflected in Article 9 of the Convention. The special relationship provision in Article 11 of the Convention in conjunction with the definition of interest in that Article and the extended definition of dividends in Article 10 of the Convention ensures that interest re-characterised as a distribution under the thin capitalisation legislation is treated for the purposes of the Convention in the hands of the beneficial owner of the income as if it were a dividend.

(3) in relation to paragraph (9) of Article 11:

• the paragraph applies to bodies such as pension funds and charities, and is concerned with transactions in interest bearing securities such as corporate bonds and government securities.

(4) in relation to paragraph (1) of Article 22:

• the purpose of the exclusion from the paragraph for income paid out of trusts or the estates of deceased persons in the course of administration is to allow the recipient of the income the relief that would have been available to him under the provisions of the Convention had he received the income direct instead of through the trust or estate.

If the foregoing proposals are acceptable to the Government of the Republic of Korea, I have the honour to suggest that the present Note and Your Excellency’s reply to that effect should be regarded as constituting an agreement between the two Governments in this matter, which shall enter into force at the same time as the entry into force of this Convention.

I avail myself of this opportunity to extend to Your Excellency the assurances of my highest consideration.

Thomas George Harris

Ambassador Extraordinary and Plenipotentiary of the United Kingdom of Great Britain and Northern Ireland to the Republic of Korea

Your Excellency

Seoul

25th October 1996

I have the honour to acknowledge receipt of Your Excellency’s Note of today which reads as follows:

“I have the honour to refer to the Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains which has been signed today and to propose on behalf of the Government of the United Kingdom of Great Britain and Northern Ireland that:

(1) in relation to paragraph (2) of Article 8:

• for the purposes of the Convention, when during an accounting period profits from rental or use, maintenance or rental referred to in paragraph (2) of Article 8 exceed in aggregate 20 per cent. of total profits of an enterprise, such rental or such use, maintenance or rental shall not be regarded as incidental to the operation of ships or aircraft in international traffic.

(2) in relation to paragraph (3) of Article 10 and paragraph (5) of Article 11:

• the United Kingdom legislation concerning thin capitalisation has been designed and is operated in conformity with the arm's-length principle reflected in Article 9 of the Convention. The special relationship provision in Article 11 of the Convention in conjunction with the definition of interest in that Article and the extended definition of dividends in Article 10 of the Convention ensures that interest re-characterised as a distribution under the thin capitalisation legislation is treated for the purposes of the Convention in the hands of the beneficial owner of the income as if it were a dividend.

(3) in relation to paragraph (9) of Article 11:

• the paragraph applies to bodies such as pension funds and charities, and is concerned with transactions in interest bearing securities such as corporate bonds and government securities.

(4) in relation to paragraph (1) of Article 22:

• the purpose of the exclusion from the paragraph for income paid out of trusts or the estates of deceased persons in the course of administration is to allow the recipient of the income the relief that would have been available to him under the provisions of the Convention had he received the income direct instead of through the trust or estate.”

The foregoing proposals being acceptable to the Government of the Republic of Korea, I have the honour to confirm that Your Excellency’s Note and this reply shall be regarded as constituting an agreement between the two Governments in this matter which shall enter into force at the same time as the entry into force of the Convention.

I take this opportunity to renew to Your Excellency the assurances of my highest consideration.

Lee Ki-choo

Acting Minister of Foreign Affairs of the Republic of Korea