The treaty says 15%, so why am I told to withhold 16.5%?

"The treaty clearly says 15%, so why are they telling me to withhold 16.5%? Where did that 1.5% come from?" A finance manager at a Korean subsidiary that was about to pay trademark royalties to its U.S. parent put this question to us recently. She had assumed that because the treaty sets the reduced rate on royalties at 15%, she could simply withhold 15%.

The short answer: you did not misread the rate table. Under the Korea-U.S. treaty, the reduced rate of 15% applies only to corporate income tax, and local income tax is added on top, bringing it to 16.5%. The treaty-reduced rate does not reach local income tax.

A treaty covers only the taxes it names

A treaty-reduced rate applies only to the taxes that fall within the treaty's scope. Each treaty specifies "the taxes to which this Convention applies," and if local income tax is included there, that one reduced rate settles both national and local tax together. If local income tax is left out, the reduced rate lowers only the national tax, and local income tax is imposed separately under domestic law.

The Korea-U.S. treaty leaves local income tax out

The Korea-U.S. tax treaty is the latter case. The article setting out the taxes covered lists only income tax and corporation tax on the Korean side; local income tax is not among them. When this treaty entered into force in 1979, the tax was called the resident tax, and it has been outside the treaty's scope from the start.

So when you pay royalties to a U.S. parent and withhold at the reduced rate of 15%, that 15% is the corporate income tax, and local income tax is added at 10% of the corporate tax amount. Adding that 10%, which is 1.5%, to the 15% brings the actual figure to 16.5%. The same holds not only for royalties but also for dividends and interest. If the treaty interest rate is 12%, the actual figure is 13.2%. (For dividends, the reduced rate itself may drop to 10% depending on the shareholding, but whatever the rate, the structure of local income tax sitting on top of it is the same.)

Most treaties do not work this way

This applies to the Korea-U.S. treaty and only a small number of others. Based on the National Tax Service's guidance, the treaties that leave local income tax out of the taxes covered are those with the United States, the Philippines, South Africa, and Colombia. Rather than treating this as a closed list, though, it is safer to check the taxes-covered article of the relevant treaty each time. The treaty with Japan, for instance, includes local income tax in its scope, so the reduced rate is itself the final combined rate of national and local tax. When you pay to Japan, no local income tax is added on top.

So the actual burden of the same reduced rate differs depending on which country you are paying. If you withhold based only on the figure in the rate table, you may miss the local income tax for some countries or, conversely, withhold a tax that does not apply.

One more thing worth noting

A reduced rate is a ceiling, not a rate you are required to apply. If the domestic withholding rate is lower than the treaty-reduced rate, the lower one applies. Paying to a treaty country does not automatically mean the reduced rate plus local income tax; you withhold at whichever is lower once you compare it against the domestic rate.

And this article focuses on whether local income tax is added on top. To claim the reduced rate, you also need to meet separate conditions such as the beneficial-owner requirement and the required application documents. The procedure for filing that application with the tax office was covered in an earlier article.

Before you reach for the rate table, check whether the treaty with the country you are paying treats local income tax as a covered tax. If anything is unclear, it is safer to consult a professional before you withhold.

Legal basis

Korea-U.S. Tax Treaty art. 1: defines the taxes covered on the Korean side as income tax and corporation tax (local income tax not included)

Local Tax Act art. 103-52: special collection of local income tax on the domestic-source income of foreign corporations (10% of the corporate tax withheld)

Local Tax Act art. 103-18: special collection of local income tax on the domestic-source income of non-residents

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By JH Kim, Korean CPA (KICPA) · July 2026

This article is for general information only and is not tax or legal advice on any specific matter. Tax outcomes depend on the particular facts of each case. Accounting Corporation YOON accepts no liability for any action taken in reliance on this article. Always obtain individual professional review before acting. Based on Korean law in force as of July 2026; subsequent amendments may affect its accuracy.