[Korean Law Insights] Tie-Breaker Rule

[Published on June 10, 2025 edition of the "Korean Law Insights" column in the Korea Daily’s Economic Expert Section]

• Foreign Financial Account Reporting, Tie-Breaker Rule Not Applicable

• Penalty Reduction Possible Through Amended or Voluntary Disclosure

Individuals with residence or assets in both Korea and the U.S. often have a keen interest in the tax systems of both countries. At the core of all tax consultations lies the question of residency under each country’s tax law. Some individuals argue that they can choose their country of tax residence based on the “tie-breaker rule” in tax treaties. However, the essence of the tie-breaker rule is not that taxpayers are free to choose their country of residence, but rather that residency is determined according to a set of predefined criteria.

The tie-breaker rule is a provision in tax treaties between two countries designed to avoid double taxation by designating one of the countries as the taxpayer’s country of residence. For individuals, residency is determined based on the following order: ▶permanent home ▶center of vital interests ▶habitual abode ▶nationality. For entities, the rule is based on the place of effective management.

Recently, Korea’s Supreme Court issued an important decision on the application of the tie-breaker rule. The issue was whether the tie-breaker rule could be applied to determine the obligation to report foreign financial accounts under Korean tax law. Under Korean law, residents are required to report foreign financial accounts if the total balance exceeds a certain threshold. In this case, taxpayer “A” was considered a resident of both Korea and Singapore, and believed that under the tie-breaker rule of the tax treaty, they were ultimately a resident of Singapore. Based on this belief, they did not report their foreign accounts to the Korean tax authority.

However, the Korean National Tax Service imposed a penalty on “A” for failure to report, and the case proceeded to the Korean courts. Ultimately, the Supreme Court ruled in favor of the tax authority, upholding the penalty for non-compliance with foreign financial account reporting obligations. (Korea Supreme Court Decision 2024마6881, dated April 17, 2025). A argued that they were not a Korean tax resident based on the tie-breaker rule with Singapore, but the court held that the tie-breaker rule applies only to issues of double taxation, not to ancillary obligations like reporting. Therefore, as long as the individual is considered a Korean resident under Korean law, they are obligated to report foreign accounts, regardless of the tie-breaker rule. In short, the Supreme Court clarified that the tie-breaker rule determines where taxes must be paid, but does not exempt taxpayers from reporting obligations such as foreign account disclosures.

Under current law, any Korean tax resident who holds foreign financial accounts (including virtual asset exchanges) with a total combined balance exceeding KRW 500 million on any last day of a month during the year must report these accounts to the National Tax Service by the end of June of the following year. However, individuals who are recognized as residents of another country under the tie-breaker rule are exempt from this reporting obligation for foreign financial accounts held on or after January 1, 2025.  The Supreme Court, however, ruled that this exemption does not apply retroactively.

In conclusion, according to this Supreme Court precedent, Korean tax residents who held foreign financial accounts before 2025 are required to report them in Korea, even if they may qualify as a resident of another country under the tie-breaker rule. Failure to report based on an incorrect assumption about the rule may result in penalties. In such cases, it is advisable to review the unreported accounts and consider filing an amended or voluntary disclosure to potentially reduce penalties.

▶Inquiries: (424)218-6562

Jin Hee Lee/K-Law Consulting Korean Attorney

[Reference link in original Korean] 

https://www.koreadaily.com/article/20250610224125049