About South Korea
South Korea has the fourth-largest economy in Asia and the 11th largest in the world. 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. South Korea has been identified as one of the “Next Eleven” countries (those with the potential to become important players in the world economy in the 21st century).
The South Korean economy is characterised by its heavy reliance on exports, which accounted for 44% of GDP in 2018. Key exports include machinery, electronics and automobiles. Countries with which South Korea has free trade agreements together make up three-quarters of the world's economy, making South Korea a world leader in international trade.
Along with its neighbours China and Japan, respectively the world’s second- and third-largest economies, South Korea is a vital member of the East Asian economic region, which accounts for more than one-third of international economic growth. China is also South Korea's largest trading partner.
With its competitive regulatory framework and culture of innovation, entrepreneurial activities can be carried out in South Korea with relative ease. Moreover, South Korea boasts one of the most literate workforces in the world, with relatively competitive wages compared with most other developed nations. The South Korean financial services sector has become increasingly stable and competitive as further regulatory reforms have improved FDI inflow.
What solutions are available in South Korea?
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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. Here, we highlight some of the key benefits relevant to treasury and cash management in South Korea.
Financial Market Development
- The World Economic Forum (WEF) ranks South Korea 19th in the world for its financial systems in the Global Competitiveness Report 2018.
- The WEF ranks South Korea 74th in the world for the soundness of its banks, although it comes second for non-performing loans and 13th for domestic credit to the private sector.
- 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 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 foriegn exchange from outside of Korea and there is no regulation governing payments to foreign companies. They are, however, required to report most capital transactions, such as foreign currency loans, in advance.
Sophisitcation of Banking Systems
- The domestic banking sector in South Korea can be divided into two categories: commercial, which is further subdivided into nationwide and regional banks, and specialised (as structured in the Banking Act). As per the government’s Financial Supervisory Services listing, there are eight nationwide banks, six regional and five specialised banks.
- There are 38 branches of foreign banks operating in the country.
- South Korea also supports thousands of ‘nonbank financial institutions’ that provide limited and/or specialised banking and credit services. For supervisory purposes, each institution is classified as one of the following: a mutual savings bank, specialised credit finance company or mutual credit cooperative.
- South Korea's foreign-exchange market has an average daily turnover of USD40 billion, accounting for 0.3% of global turnover (Bank for International Settlements Triennial Central Bank Survey 2019).
- 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 KRW2,278 trillion at the end of March 2019.
- The banking sector in South Korea is regulated by the Financial Services Commission, which is responsible for rule-making and licensing, and the Financial Supervisory Service, 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 the 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 Korea-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 subject to restrictions on cross-shareholding under the Act on Monopoly Regulation and Fair Trade. This tax is scheduled to expire in December 2020.
- 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 0.3% (for shares of Korean-listed companies) or 0.5% 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 R&D activities as well as 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.
- It has one of the largest bond markets in Asia.
- South Korea has an extensive tax-treaty network.
- Cash concentration is permitted amongst participating accounts that belong to the same entity, and zero-balancing is more commonly used. Notional pooling is generally not permitted.
- South Korea has a real-time gross settlement system, the Bank of Korea Financial Wire Network, which is used for high-value and urgent electronic payments.
- 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.
- The domestic banking sector in South Korea can be divided into two categories: commercial, which is further subdivided into national and regional banks, and specialised (as structured in the Banking Act). Under the government’s Financial Supervisory Services (FSS) listing, there are eight national banks – including two online-only banks – six regional and five specialised banks.
- While national banks operate nationwide, regional bank operations are subject to certain geographical restrictions.
- Specialised banks were established as niche providers under a different banking act and include the Korea Development Bank, the Export-Import Bank of Korea, Industrial Bank of Korea, Nonghyup Bank and Suhyup Bank.
- There are 38 branches of foreign banks operating in the country.
- South Korea also supports thousands of ‘nonbank financial institutions’ that provide limited and/or specialised banking and credit services. For FSS supervisory purposes, each institution is classified as one of the following: mutual savings bank, specialised credit finance company or mutual credit cooperative.
- Since the widespread domestic banking reforms of the 1990s, South Korea has been working towards becoming a leading Asian and global financial hub by developing its financial infrastructure, instituting deregulation, fine-tuning government supervision and improving the sector’s overall efficiency.
- Historically, the government has had controlling stakes in many of its financial institutions, however, it is scaling back and working towards greater privatisation of its financial sector.
- 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 won (KRW) account (whereby overseas remittances may be made without supporting documents but local transactions are restricted) or a non-resident won 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 Financial Services Commission (FSC), under which the FSS operates, oversees the banking sector, while the Bank of Korea (BoK) enacts various other supervisory functions in accordance with the Banking Act.
- A resident company is one in which its headquarters, main office or central management operate as a domestic company.
- Transactions between residents and non-residents have to be carried out at foreign-exchange banks in South Korea.
- South Korea has anti-money laundering and counter-terrorism financing regulations in place.
- Foreign exchange is managed by the Bank of Korea and the Ministry of Strategy and Finance.
- 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
(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+ same day.
- Low-value, non-urgent and bulk transfers processed through any of the nine retail payment systems operated through the KFTC 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 35 domestic card-issuing companies as well as Visa and Mastercard, all 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.
- Credit card transaction volume and value increased year-on-year by 10.4% and 5.5% respectively in 2018, while debit card transactions decreased by 57.5% and 60%.
- 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 in part 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 Financial Services Commission has adopted a ‘sandbox’ approach to financial technology (fintech) companies, giving a two-year exemption from regulations if technology is shown to be ‘innovative’. Other fintech regulations are due to be introduced.
- The government has set a target to phase out the use of coins by 2020.
- Korea is one of the biggest e-commerce markets in Asia, with an annual e-commerce growth rate of 22% (2019, ft.com). This is due largely to high internet and smartphone penetration – by some estimates the highest in the world – and a developed electronic payment infrastructure.
- Mobile transactions are the dominant driver of e-commerce. Two in three Koreans have used mobile apps to shop for goods and services (McKinsey), and the recent development of simplified payment systems has only increased 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 one or more times a week (2017; RFi Group).
- As of Q3 2018, there were 17.3 million payment cards in circulation with e-money function.
- With the highest digital-banking penetration in 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, with hundreds of thousands of new accounts 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 oversight 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 electronic forms of payment. Cash transactions currently account for no more than 20% of all transactions. Cheques saw a year-on-year decrease in volume and value of 23.8% and 13.9% respectively in 2018.
- Cheques are truncated and cleared through the KFTC Cheque Clearing system, with final settlement done next day through BOK-Wire+. There are two types of cheque: cashier's cheque and current account cheque (corporate cheque).
- Cashier's cheques (similar to bearer-form bank drafts) do not require a preset value to be issued and can be issued by ATMs. 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 Western Union and MoneyGram.
1 (Progressive) max rate on taxable income over KRW300 billion
2 (Progressive) max rate for incomes over KRW500 million
All-in-One Online ID Verification Planned
Mobile phone carriers, handset makers and financial services firms in Korea are working together to create an online ID verification app. The new system, which is called Initial, will be launched on a trial basis later this year. Using blockchain technology, it will enable people to prove their identity by connecting them to an organisation of their choice and enabling them to download a document, such as a birth certificate or graduation certificate. The service can be used to prove identity for purposing ranging from financial transactions to job applications.
Read more about the development here.
Three Consortia Apply for Internet Bank Licence
Three consortia have applied to financial regulator the Financial Services Commission (FSC) for a licence to set up an internet-only bank. One of the consortia is being led by fintech firm Viva Republica and includes KEB Hana Bank, Hanwha Investment & Securities and the Korean arm of Standard Chartered Bank. The second consortium is led by an industry association for small businesses and the third is made up of five individuals, according to the regulator The FSC will announce in December if it has given initial approval to the applications.
Read more about the development here.
Open Banking Pilot Launched
A pilot has been launched to test an open banking system in Korea which could reduce costs and boost competition and innovation. A total of ten banks are taking part in the pilot, which is being monitored by regulator the Financial Services Commission. If the pilot is successful, open banking will be rolled out to a further eight banks and fintech companies on 18 December. Open banking will reduce transaction fees from their current level of KRW400 to KRW500 per transaction to just KRW40 to KRW50 for large service providers and KRW20 to KRW30 for smaller ones.
Read more about the development here.
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Sources: IMF, World Bank, World Economic Forum, PwC, US Department of Commerce, Korean Federation of Banks, The Korean Herald, Financial Times, Bank for International Settlements, Bank of Korea, Financial Supervisory Services, McKinsey, Asian Development Bank, OECD, Financial Statistics Information Service, The Association for Financial Professionals
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