South Korea

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Flag of South Korea
System of government: democratic republic
Population: 49.04 million
Currency: South Korean won (KRW)
FX regime: free float
GDP: US$1.781 trillion (2014 est)
IGTA member: observer
FATF member: yes
Other professional financial/banking associations: Korea Association for Chief Financial Officers

Financial regulatory framework

Bank supervision

The Bank of Korea (BOK) exercises certain bank supervisory functions as stipulated in the Bank of Korea Act. The Financial Supervisory Service (FSS), under the Financial Services Commission controls day-to-day policy decisions for the financial services industry.

Exchange controls

The currency of South Korea is the Korean won (KRW), the external value of which is subject to a free-floating regime with no predetermined path. South Korea has made significant progress towards liberalising its foreign exchange controls since 1997, and continues to do so, but various restrictions remain. Any imports/exports of cash, by both residents and non-residents, exceeding US$10,000 or equivalent no longer require BOK approval, but must be reported to the customs office. Transfers of domestic and foreign currency abroad exceeding US$1m or equivalent require BOK approval. Repatriation of proceeds from capital and invisible transactions above the equivalent of US$500,000 must be made within one-and-a-half years to South Korea. Otherwise, proceeds must be held overseas for foreign transactions. Corporate entities are permitted to enter into foreign exchange derivatives transactions up to a maximum 100% of the value of their import and exports. The Ministry of Strategy and Finance (MOSF) must be notified of financial and commercial credits (other than trade credits) to residents from non-residents exceeding US$30m. Notification can be made through a company’s foreign exchange bank for amounts up to US$30m. A foreign exchange bank does not need to give prior notification for domestic currency loans to non-residents of up to KRW30bn. Rules restrict resident companies, with the exception of some small- and medium-sized manufacturers, to obtaining foreign currency loans for overseas use only. The BOK should be notified of personal loans between residents and non-residents.

Taxation framework

Corporate taxation

Resident companies are taxed on their worldwide income, after the deduction of allowable expenses, including capital gains. Non-resident companies are taxed on Korean-sourced income only. Tax is payable at the rate of 11% for the first KRW200m of taxable income (after deduction of allowable expenses) and then at 22% KRW200m – KRW20bn and 24.2% for all sums above KRW20bn. (This includes the local surtax of 10% of corporate income tax.)

Capital gains tax

Domestic companies report capital gains, together with other profits earned by the company, on their corporate tax return and there is no preferential rate for capital gains. Korean-source capital gains derived by a non-resident are taxed at the lesser of 11% of the sales proceeds received or 22% of the gains realised. Foreign companies that derive capital gains from the sale of real estate or real-estate heavy companies are required to file a tax return and are subject to tax at the regular corporate tax rate unless there is a separate article in a tax treaty. The sale of listed shares by a foreign individual shareholder is exempt from capital gains tax when the following requirements are satisfied: listed shares are transferred through the Korea Stock Exchange or KOSDAQ; the foreign individual has no permanent establishment in South Korea; and the foreign individual (and any related parties) owns less than 25% of the share capital of the Korean company during the year in which the transfer occurs, and did so during the prior five-year period.

Taxation of dividends and interest

Non-resident companies are levied a withholding tax of 22% subject to tax treaties. Resident companies are not liable for a withholding tax on dividends, but interest is subject to a withholding tax of 14–25%.

Thin capitalisation

For domestic companies, thin capitalisation applies where borrowings exceed 300% of net equity or paid-in capital, but in the case of borrowings advanced by a financial institution the limit is increased to 600%. In addition, the foreign exchange rate on the fiscal year-end date is used by general companies to convert borrowings denominated in foreign currencies for thin capitalisation purposes. Financial institutions, however, can choose one of the following two exchange rates: standard foreign exchange rate on fiscal year-end date; or standard foreign exchange rate on each day. If a foreign invested company borrows from a foreign controlling shareholder (FCS), or an FCS or head office guarantees borrowings from third parties, and such borrowing exceeds 200% (600% for financial institutions) of its net equity or paid-in capital, whichever is greater, then the interest expense on the debt exceeding 300% (600% for financial institutions) of the FCS’s share of the borrower’s net equity or paid-in capital is not a deductible expense for Korean corporate income tax purposes. Furthermore, any disallowed interest is treated as a dividend to the FCS and is subject to withholding tax. An FCS is a head office or a foreign entity owning, directly or indirectly, 50% or more of the shares of a Korean company or a foreign entity that substantially controls the Korean company. When a company borrows funds that are then used to lend to related parties, a portion of the interest expense incurred by the company, equivalent to the ratio of the loans made to the related party over the company’s total borrowings, would not be deductible for income tax purposes. This is because the loan to a related party would be considered a non-business asset under the Corporate Income Tax Law when the lender is not engaged in a financing business.

Transfer pricing

Companies are required to conduct their business on arm’s length principles. Where arm’s-length pricing is not initially applied to transactions with related parties, appropriate adjustments to profits can be made by the tax office upon an audit. In determining what constitutes an arm’s-length price, the International Tax Co-ordination Law is applied.

Sales taxes/VAT

The standard rate is 10%, but a zero-rated VAT is available on certain supplies or services.

Information provided by Deloitte Touche Tohmatsu and Deloitte Highlights 2015 (

Accounting framework

The Korea Accounting Standards Board (KASB) was created under the Korea Accounting Institute, to improve accounting standards to international best practices. In March 2007 the Korean Financial Service Commission, together with the KASB, announced that Korean GAAP would start to fully comply with International Financial Reporting Standard (IFRS). These have been adopted as Korean IFRS (K-IFRS). All listed companies operating in South Korea, as well as unlisted financial institutions and state-owned companies, have been required to report to K-IFRS since 1 January 2011. Unlisted companies can choose to report to K-IFRS or Korean Accounting Standards (KAS). The KASB is expected to adopt the IFRS for SMEs at some point in the future.

Banking service provision

South Korean financial institutions in the country are divided into commercial banks, specialised banks and non-bank financial institutions. There are currently seven nationwide commercial banks – foreign investors have controlling stakes in, and management control of, two: Standard Chartered Bank Korea and Citibank Korea. Commercial banks have adopted the branch banking system with a nationwide or province-wide network. Commercial banks account for approximately 90% of total banking assets. There are six regional commercial banks. These banks service small- and medium-sized businesses in their areas. Interconnected networks allow customers of one regional bank to access their accounts for transactions through the five others. There is a significant foreign presence in the banking sector in South Korea. The 39 foreign banks operating in the country are permitted to provide wholesale and retail banking facilities.

Clearing and payment systems

Clearing systems

The South Korean settlement system consists of a central bank-operated bilateral, multilateral and real-time gross settlement system, BOK-Wire+, and nine retail net settlement systems used for the clearing of non-urgent/low-value payments. The retail payment systems are owned and operated by the Korea Financial Telecommunications and Clearings Institute (KFTC), an organisation owned by participating member banks. The KFTC divides its operations into the Cheque Clearing System, the Bank Giro System and the Financial Information Networks Systems (FINS). In addition, the KFTC also manages a B2B and a B2C e-commerce payment service, which supports e-commerce transactions and fund transfers. FINS interconnects the computers of all banks in South Korea through its relay computers to process various electronic payments. It is divided into the following systems:

  • CDNET (Interbank Cash Dispenser/Automated Teller Machine) system;
  • IFTNET (Interbank Funds Transfer Network) system;
  • EFTPOS (Electronic Funds Transfer at the Point of Sale) system;
  • CMS (Cash Management Service) system;
  • BANKLINE (Local Banks Shared) system;
  • HOFINET (Electronic Banking/Firm Banking) System; and
  • K-Cash (E-money card).

High-value payments may be effected through BOK-Wire+. Although any payment can be effected through BOK-Wire+, retail payments are currently processed through one of KFTC retail net settlement systems, with final settlement of net obligations occurring through BOK-Wire+. There are also a few retail payment systems in South Korea that are operated by non-financial institutions. The BOK plans to migrate large-value retail payments through BOK-Wire+ in the future.


The use of paper-based payment and collection instruments (such as cheques and paper-based giros) in South Korea has declined in recent years in favour of electronic credit transfers, direct debits and payment cards. In particular credit cards have increased in popularity as a result of government deregulation and tax deductions providing incentives for their use. As a result, electronic payment cards and credit transfers are now the most common cashless payment method in terms of volume. However, cheques are still an important payment medium in terms of value. The rise in electronic payments corresponds to the rise in electronic banking in South Korea, which has one of the most advanced mobile and internet banking networks in the world.

  • Credit transfers – the electronic credit transfer is one of the most popular mediums of non-cash payment in South Korea. Though credit transfers as a whole accounted for only 18.6% of the total volume of non-cash payments processed in 2014, they represented 92% of the total value. Of this, 98% of all credit transfers are made electronically, accounting for over 99% of the value of all credit transfers.
  • Direct debits – direct debits are widely used in South Korea for regular payments. There are two types of direct debit in South Korea:
– the Bank Giro System direct debit which is widely used to effect regular low-value payments such as utility bills and insurance. The debtor transfers specified funds to a creditor through periodic transactions according to a pre-authorised agreement between the debtor, creditor and financial institution. The Giro-using institutions send the billing information to the KFTC.
– the CMS debit transfer which is mainly used to collect high-value payments for companies, such as credit card charges and tuition, which are transferred from multiple payer accounts to a collection account.
  • Payment cards – credit cards are commonly used for retail payments and their usage by both individuals and companies is increasing. In 2014 credit card transactions increased by 9% in volume and 2% in value compared with 2013. Debit cards have been less popular than credit cards in South Korea as they could only be used between 08:00 and 23:00 and are not accepted by all merchants. However, to encourage debit card use, IC cash cards, which are linked to new bank accounts, have been developed. As a result, by 2013, IC card use exceeded that of traditional debit cards.
  • Electronic money – electronic money remains a little used payment instrument.
  • Cheques – cheques are widely used in South Korea for both consumer and business transactions. However, their usage has been affected by the rise in popularity of electronic funds transfers and payment cards.

The types of cheque and bill available include cashier’s cheques, current account cheques, promissory notes and household cheques. Businesses can make high-value payments with current account cheques or promissory notes, which are post-dated. However, the banking industry has tried to discourage this practice due to the unfair advantage it gives to larger companies in negotiating deferred payment terms with smaller suppliers. It has developed alternative payment methods such as corporate purchase cards.

  • Cashier’s cheques – also known as bearer-form bank drafts, these can be used in place of regular cash for payments such as bank deposits and loan instalments. They can be printed with or without a pre-set value, the most common of which is the KRW100,000 denomination. Cashier’s cheques can be dispensed at any ATM.
  • Paper-based credit transfers – until recently the usage of paper-based credit transfers, or giros, had declined in favour of electronic credit transfers and internet giros. Only 2% of credit transfers by volume were paper-based in 2014.
  • Cross border – cross-border payments are effected through BOK-Wire+, which is connected to the CLS system via SWIFT. Most large banks have direct access to SWIFT.

Cash and bank account management

Account availability

Residents can open and maintain foreign currency accounts domestically and abroad. Domestic currency is not convertible into foreign currency. Non-residents are also allowed to maintain bank accounts in South Korea, denominated in either domestic or foreign currency. Non-resident domestic currency accounts, known as “free won” accounts, allow the conversion of domestic currency into foreign currency and the transfer of the proceeds abroad. Domestic currency current accounts are not paid interest. Short-term and demand deposit accounts, denominated in both domestic and foreign currency, are available to both residents and non-residents. Interest can be paid on foreign currency term and savings accounts at market rates.

Money laundering

South Korea has implemented anti-money laundering legislation (the Real Name Financial Transaction and Guarantee of Secrecy Act of 1997; the Financial Transaction Reporting Act of 2001 as amended 2014; the Proceeds of Crime Act 2001 and Prohibition of Financing for Offences of Public Intimidation Act 2007, as amended). The Korea Financial Intelligence Unit also issued the AML/CFT Regulation in 2010, which is legally binding. A Financial Action Task Force (FATF) member, South Korea is also a member of the Asia/Pacific Group on Money Laundering (APG). South Korea has a financial intelligence unit (FIU), the Korea Financial Intelligence Unit (KoFIU), which is a member of the Egmont Group. The KoFIU operates within the Ministry of Finance and Economy.

Information supplied by BCL Burton Copeland ( Data as at January 2015.

Cash concentration

Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:

  • Zero balancing (ZBA) – sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
  • Target balancing – also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
  • Threshold balancing – a cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.

Strict regulations have long prevented sophisticated liquidity management structures among South Korean companies. Though this is now changing, certain regulations still prevent cash concentration and pooling between different entities. Most companies use cash concentration techniques to manage their liquidity. Cash concentration usually takes the form of zero balancing or sweeping. Standard market practice entails companies holding multiple collection accounts at different local banks, allowing customers to make a payment through an internal transfer. The Cash Management System operated by the KFTC can facilitate the concentration of these balances into a nominated account. Zero-balancing or sweeping inter-company loans are subject to tax. There are no restrictions on non-residents participating in cash concentration techniques within a single legal entity. The Korean won may only be traded onshore, preventing involvement in certain regional liquidity management schemes.

Cross-border sweeping

Neither resident nor non-resident companies are permitted to participate in cross-border sweep structures via an account based in South Korea. International pooling is beginning to be developed by South Korean conglomerates through the help of international banks.

Notional pooling

Notional pooling is not permitted in South Korea.

Electronic banking

Electronic banking is common practice in South Korea with most banks offering electronic banking services. However, there is currently no national bank-independent standard. Internet banking continues to increase in South Korea. At the end of 2014, there were 6.4 million business customers subscribing to internet banking services in South Korea. This is an increase of 7.8% on the number of corporate internet banking subscribers from the previous year. Due to this rise in popularity among businesses, some local banks have phased out telephone electronic banking operations.

Liquidity management

Short-term investments

Short-term investments include:

  • Treasury bills – treasury (government) bills are issued via a regular auction through Primary Dealers for tenors of three, five, 10 and 20 years. The Bank of Korea issues Monetary Stabilisation Bonds (MSBs) by auction. MSBs are issued with maturities of two weeks and one, two, three, six and 12, 18 months and two years.
  • Time deposits – time deposits are available in local and foreign currency, subject to restrictions set by the Bank of Korea. Non-residents are not permitted to invest in KRW time deposits with maturities up to one year. Local currency deposits for terms from overnight to over a year are available. Foreign currency deposits for terms from one day to over a year are available, although these are not available to institutional banking customers.
  • Certificates of deposit (CDs) – CDs are issued by banks for periods from one month to over a year. Those with a maturity of three months are most common. Few are issued with maturities of over a year.

Short-term borrowing

Borrowing instruments include:

  • Commercial paper – commercial paper is permitted but the level of issuance has declined in recent years.
  • Overdrafts – high credit quality companies have overdraft facilities from commercial and merchant banks for up to a year. The overdraft limits may be exceeded temporarily. Banks apply higher interest charges on overdrafts than on short-term advances.
  • Bank lines of credit and loans – won and foreign currency short-term advances are available, typically for 90 days. Real estate is most often offered as collateral security.
  • Trade bills discounted – banks and non-bank financial institutions (NBFIs) discount trade bills, which are extensively used between South Korean companies to facilitate deferred payments. They are not usually permitted to exceed 60 days.
  • Supplier credit – companies usually sell on a cash payment basis with credit supplied through promissory notes (for up to 90 days), which the supplier can discount.

Corporate finance

Capital markets

  • Equity – South Korea’s stock exchange, the Korea Exchange (KRX), was created through the integration of the three existing spot and futures exchanges and Kosdaq Committee, a sub-organisation of Korea Stock Dealers Association.
  • Debt – South Korea’s bond market is well balanced amongst corporate bonds, financial institution bonds and government bonds.

The government is trying to position South Korea as an international financial hub and part of this is to energise the domestic bond market – in part by itself regularly issuing long-term bonds.

Risk management

The normal full range of currency and interest rate hedging instruments are available through the KRX.


Government website

Bank of Korea

Ministry of Strategy and Finance

Korean Customs Service

Ministry of Trade, Industry and Energy

Financial Supervisory Service

Korea National Statistical Office

Invest Korea

Korea Chamber of Commerce & Industry

Korea International Trade Association

Korea Exchange

Korea Association for Chief Financial Officers

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