# US-Korea Income Tax Treaty (Convention) — Law Reference

**Treaty:** Convention Between the United States of America and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income
**Signed:** June 4, 1976 (Seoul)
**Entered into Force:** October 20, 1979
**Amendments/Protocols:** None. The treaty has never been amended. No protocol has ever been signed. It remains in its original 1976 form.
**IRS Full Text:** https://www.irs.gov/pub/irs-trty/korea.pdf
**IRS Technical Explanation:** https://www.irs.gov/pub/irs-trty/koreatech.pdf

---

## Treaty Article Structure (Key Articles)

| Article | Title |
|---------|-------|
| 1 | Scope |
| 2 | Taxes Covered |
| 3 | Definitions |
| 4 | General Rules of Taxation (incl. Saving Clause, LOB) |
| 5 | Relief from Double Taxation |
| 6 | Source of Income |
| 7 | Non-Discrimination |
| 8 | Business Profits (Industrial or Commercial Profits) |
| 9 | Permanent Establishment |
| 10 | Income from Real Property |
| 11 | Related Persons (Associated Enterprises) |
| 12 | Dividends |
| 13 | Interest |
| 14 | Royalties |
| 15 | Pensions, Annuities, Alimony, Child Support |
| 16 | Capital Gains |
| 17–18 | Personal Services (Dependent/Independent) |
| 19–22 | Government, Teachers, Students, Governmental Functions |
| 23 | Pensions / Social Security |
| 24 | Social Security Payments |
| 25 | Guam Provisions |
| 26 | Diplomatic/Consular |
| 27 | Mutual Agreement Procedure |
| 28 | Exchange of Information |
| 29–31 | Miscellaneous / Entry into Force / Termination |

**Important Note on Article Numbering:** This treaty uses non-standard article numbering compared to the OECD Model. "Business Profits" is Article 8 (not 7 as in OECD Model); "Dividends" is Article 12 (not 10); "Interest" is Article 13 (not 11); "Capital Gains" is Article 16 (not 13). The treaty predates the modern OECD Model Convention.

---

## Article 4 — General Rules of Taxation (Saving Clause + LOB)

### Paragraph 1 — General Taxing Right
"A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention."

Source of income is determined under Article 6.

### Paragraph 4 — Saving Clause
"Notwithstanding any provisions of this Convention except paragraph (5) of this Article, a Contracting State may tax a citizen or resident of that Contracting State as if this Convention had not come into effect."

This preserves each country's right to tax its own citizens and residents under domestic law regardless of treaty provisions.

### Paragraph 5 — Limitation on Benefits (LOB)

The US-Korea treaty has **limited LOB rules** — one of only 5 US treaties with limited (not comprehensive) LOB. The other 4: Egypt, Morocco, Norway, Trinidad & Tobago.

The LOB provisions include multiple qualification pathways:

**Automatic Qualification:**
- Individual residents and governmental units of the treaty countries
- Publicly traded companies with shares regularly traded on recognized stock exchanges
- Tax-exempt organizations and qualified pension funds

**Ownership and Base Erosion Test (dual requirement):**
- At least 50% beneficial interest owned by qualified US or Korean residents for at least half the taxable year
- Less than 50% of gross income paid or accrued to persons who are not qualified residents of either Contracting State (base erosion)

**Active Trade or Business Test:**
- Income must be connected with or incidental to the active conduct of a substantial trade or business in the treaty country of residence

**Discretionary Benefits:**
- Competent authorities may grant treaty benefits if the entity was not established or operated primarily to obtain treaty benefits

### Practical Impact for Palace Fund

Because the LOB is limited (not comprehensive like post-2006 US treaties), it is less restrictive. A Korean LP individual automatically qualifies as a "qualified person" under the LOB. The more relevant question is whether treaty benefits are available at all given the entity classification mismatch (see Section on IRC 894(c) below).

---

## Article 5 — Relief from Double Taxation

### For Korean Residents (Korean LP receiving US-source income):
Korea shall allow a credit against Korean tax for the amount of US tax paid on US-source income. The credit is limited to the portion of Korean tax attributable to that US-source income.

### For US Residents:
The US shall allow a credit against US tax for Korean tax paid, subject to the limitations of US law (IRC Sections 901-909 foreign tax credit rules).

### Technical Explanation — Resourcing Rule
The Technical Explanations to Article 5 state: "an item of gross income of a U.S. resident that 'may be taxed' in Korea under the terms of the treaty is treated as gross income from sources within Korea." This resourcing rule is critical for foreign tax credit calculations.

### For US Corporations:
A US corporation receiving dividends from a Korean subsidiary may credit the underlying Korean corporate tax attributable to those dividends (indirect credit / deemed-paid credit).

### Practical Impact for Korean LP
The Korean LP pays US tax on ECI (through the partnership) and can then claim a foreign tax credit against Korean tax liability for the US taxes paid. This is the primary mechanism to avoid double taxation. Korea taxes worldwide income; the credit prevents the same income from being taxed twice.

---

## Article 6 — Source of Income

Article 6 establishes which country is the "source" of different types of income. This is foundational because Article 4(1) limits taxation to income "from sources within" the other Contracting State.

Key source rules:
- **Dividends:** Source = country where the paying company is incorporated/organized
- **Interest:** Source = country where the borrower is a resident
- **Royalties:** Source = country where the IP is used
- **Real property income:** Source = country where the property is located
- **Business profits:** Source = country where the PE is located (if attributable to PE)
- **Personal services:** Source = country where services are performed

---

## Article 8 — Business Profits (Industrial or Commercial Profits)

### Paragraph 1 — General Rule
Industrial or commercial profits of a resident of one Contracting State shall be exempt from tax by the other Contracting State **unless** the resident is engaged in industrial or commercial activity in the other State through a permanent establishment situated therein. If engaged through a PE, tax may be imposed only on the profits attributable to that PE.

### Paragraph 8 — Attribution to PE
Industrial or commercial profits attributable to a PE include income from real property, natural resources, dividends, interest, royalties, and capital gains — provided the rights or property giving rise to such income are effectively connected with that PE.

### Practical Impact for Korean LP
If the US LLC constitutes a PE of the Korean LP (or if the LLC itself is engaged in a US trade or business under IRC 875), then business profits attributable to that PE/US activity are taxable by the US. The LLC's investment activities determine whether a PE exists. **Pure investment activities (portfolio management, securities trading)** generally do NOT create a PE. Active business operations in the US DO create a PE.

---

## Article 9 — Permanent Establishment (PE)

### Definition
A PE is "a fixed place of business through which a resident of one country carries out business in the other." Includes:
- Branches, offices, factories, warehouses
- Construction projects exceeding 6 months

### Exclusions (NOT a PE):
- Storage or delivery facilities
- Maintenance of stock of goods for storage/display/delivery
- Preparatory or auxiliary activities
- Construction projects under 6 months

### Practical Impact for Korean LP
The Korean LP's PE status depends on the LLC's activities. An LLC that only holds investments (stocks, bonds, real estate) and has no fixed US business office with employees likely does NOT constitute a PE. However, if the LLC has a US office, US employees, and conducts active business operations, it may constitute a PE.

**Critical distinction:** Even without a PE, if the LLC is engaged in a US trade or business, IRC Section 875 treats the Korean LP as also engaged in that US trade or business, making the LP's share of ECI subject to US tax regardless of PE status.

---

## Article 10 — Income from Real Property

### Paragraph 1 — Taxing Right
"Income from real property, including royalties and other payments in respect of the exploitation of natural resources and gains derived from the sale, exchange, or other disposition of such property or of the right giving rise to such royalties or other payments, may be taxed by the Contracting State in which such real property or natural resources are situated."

### Paragraph 2 — Scope
Applies to income derived from direct use, letting (rental), or use in any other form of real property. Also applies to income from real property of an enterprise and real property used for independent personal services.

### Paragraph 3 — Interest on Real Property Debt
Interest on indebtedness secured by real property shall NOT be regarded as "income from real property" — it falls under Article 13 (Interest) instead.

### Practical Impact for Korean LP
If the LLC invests in US real estate, rental income and gains from sale of US real property are taxable by the US under Article 10. This is consistent with FIRPTA (IRC Sections 897, 1445). The treaty does NOT override FIRPTA — both the treaty and domestic law give the US full taxing rights on real property income.

The US has **unlimited taxing rights** on income from US real property. No rate reduction, no exemption. The Korean LP will pay US tax at regular rates on all US real property income flowing through the LLC.

---

## Article 12 — Dividends

### Paragraph 1 — General Rule
Dividends derived from sources within one Contracting State by a resident of the other may be taxed by both Contracting States.

### Paragraph 2 — Maximum Withholding Rates

| Recipient | Maximum Rate | Condition |
|-----------|-------------|-----------|
| Corporation owning >= 10% voting stock | **10%** | Must own at least 10% of the voting stock of the paying company |
| All other recipients (individuals, corps < 10%) | **15%** | Portfolio dividends |

### Paragraph 3 — PE Exception
The reduced rates in Paragraph 2 do NOT apply if the recipient has a PE in the source country and the shares are effectively connected with that PE. In that case, Article 8 (Business Profits) applies instead, and the dividends are taxed as part of PE profits (at regular rates).

### Practical Impact for Korean LP
If the LLC receives dividends from US companies (or if the LLC itself makes distributions characterized as dividends):
- **LLC distributions to Korean LP**: If the LLC is treated as a partnership (pass-through) for US tax purposes, distributions are NOT dividends — they are partnership distributions. No Article 12 withholding applies.
- **Portfolio dividends received BY the LLC**: If the LLC (as pass-through) receives dividends from US stocks, the Korean LP's share is subject to 30% FDAP withholding (for NRAs) unless reduced by treaty. Treaty reduces to 15% (or 10% if the LP holds >= 10% of the paying company through the LLC).
- **Classification mismatch issue**: If Korea treats the LLC as a corporation, distributions FROM the LLC to the Korean LP may be treated as dividends under Korean tax law — but for US purposes, they are not.

---

## Article 13 — Interest

### Paragraph 1 — Maximum Rate
Interest derived from sources within one Contracting State by a resident of the other may be taxed by both States, but the tax shall not exceed **12%** of the gross amount of the interest.

### Paragraph 2 — Government Exemption
Interest paid to the government of the other Contracting State, its political subdivisions, or instrumentalities may be exempt.

### Paragraph 3 — PE Exception
The 12% limitation does NOT apply if the recipient has a PE and the indebtedness is effectively connected with that PE. In that case, Article 8 applies.

### Practical Impact for Korean LP
If the LLC earns interest income (from bonds, loans, bank deposits), the Korean LP's allocable share is subject to:
- **ECI interest** (if connected to US trade or business): Taxed at graduated US rates, no flat withholding cap
- **FDAP interest** (not connected to US business): Subject to 30% NRA withholding, reduced to **12%** under the treaty

The 12% rate is notably higher than many modern US treaties (which typically provide 0-10% on interest). This reflects the treaty's 1976 vintage.

---

## Article 14 — Royalties

### Maximum Rates

| Type | Maximum Rate |
|------|-------------|
| Industrial/commercial royalties | **15%** |
| Literary, artistic, or motion picture royalties | **10%** |

"Royalties" means payments for use of copyrights, patents, designs, models, plans, secret processes, trademarks, know-how, or ships/aircraft.

---

## Article 16 — Capital Gains

### Paragraph 1 — General Exemption
A resident of one Contracting State shall be exempt from tax by the other State on gains from the sale, exchange, or other disposition of capital assets.

### Exceptions (gains that ARE taxable by the source country):

**Exception (a) — Real Property:**
Gains from the sale of real property situated in the other State may be taxed by that State. (Consistent with Article 10 and FIRPTA.)

**Exception (b) — PE-Connected Assets:**
Gains from property effectively connected with a PE in the other State may be taxed by that State.

**Exception (c) — 183-Day Rule for Individuals:**
An individual who maintains a fixed base in the other State for 183+ days during the taxable year is taxable on gains from property effectively connected with that fixed base.

### Practical Impact for Korean LP

| Gain Type | US Taxable? | Authority |
|-----------|-------------|-----------|
| Gain on US real property | YES | Art. 16(a) + FIRPTA |
| Gain on US stocks/securities (no PE) | NO (treaty exempt) | Art. 16(1) general rule |
| Gain on assets connected to PE | YES | Art. 16(b) |
| Gain on sale of LLC/partnership interest | Complex — see IRC 864(c)(8) below | |

**Critical issue — Sale of partnership interest:** The treaty's capital gains article was written in 1976 and does not address gains from the sale of a partnership interest in a partnership engaged in US business. IRC Section 864(c)(8) (enacted 2017, TCJA) now treats such gains as ECI. Whether the treaty overrides 864(c)(8) is debatable — the IRS position is that 864(c)(8) applies regardless, since the gain is treated as attributable to US business assets (effectively, a look-through to the PE-connected assets under Exception (b)).

---

## Article 4(4) — Saving Clause (Repeated for Emphasis)

"Notwithstanding any provisions of this Convention except paragraph (5) of this Article, a Contracting State may tax a citizen or resident of that Contracting State as if this Convention had not come into effect."

This means: The US can always tax its own citizens and residents under domestic law even if the treaty would otherwise exempt them. Korea can do the same for Korean citizens/residents.

**For the Korean LP:** The saving clause means Korea retains the right to tax the Korean LP on worldwide income (including US-source income flowing through the LLC) under Korean domestic law. The treaty does NOT prevent Korea from taxing its own residents — it only provides a credit mechanism (Article 5) to avoid double taxation.

---

## The 2019 Protocol / Transparent Entity Amendment — DOES NOT EXIST

There is no 2019 Protocol amending the US-Korea tax treaty. The treaty has **never been amended** since its signing in 1976.

What DOES exist is a **Korean domestic law change** in 2022:

### Korean Special Taxation Act Amendment (2022.12.23)

**Law:** 국제조세조정에 관한 법률 (Adjustment of International Taxes Act), Article 34-2 (제34조의2)
**Effective:** January 1, 2023

This Korean domestic law allows Korean taxpayers who invest through foreign pass-through entities to elect to treat those entities as fiscally transparent for Korean tax purposes. This is NOT a treaty amendment — it is a unilateral Korean law change that resolves the IRC Section 894(c) classification mismatch problem from the Korean side.

See detailed analysis in: `국외투과단체-과세특례.md` (in this same directory).

---

## IRC Section 894(c) — The Classification Mismatch Problem

### The Problem
- **US classification:** US LLC (electing partnership treatment) = fiscally transparent. Income flows through to members.
- **Korean classification (default):** US LLC = foreign corporation (외국법인). Distributions = dividend income.
- **Mismatch:** The US sees the Korean LP as directly earning the LLC's income. Korea sees the LLC as a separate entity paying dividends.

### IRC Section 894(c)(1) — Anti-Hybrid Rule
"A foreign person shall not be entitled under any income tax treaty of the United States with a foreign country to any reduced rate of any withholding tax imposed by this title on an item of income derived through an entity which is treated as a partnership (or is otherwise treated as fiscally transparent) for purposes of this title if—
(A) such item is not treated for purposes of the taxation laws of such foreign country as an item of income of such person,
(B) the treaty does not contain a provision addressing the applicability of the treaty in the case of an item of income derived through a partnership, and
(C) the foreign country does not impose tax on a distribution of such item of income from such entity to such person."

### Application to Korean LP in US LLC

**Without the 2022 Korean law election:**
- The US LLC is transparent under US law but opaque under Korean law
- The Korean LP does NOT treat the LLC's income as their own income (Korea sees it as LLC income)
- The US-Korea treaty does NOT contain a specific provision addressing income derived through partnerships/transparent entities (it's a 1976 treaty)
- Therefore, under 894(c), the Korean LP may be **denied treaty benefits** on FDAP income (dividends, interest, royalties) received through the LLC
- This means: 30% US withholding on FDAP income instead of the treaty-reduced rates (15% dividends, 12% interest)

**With the 2022 Korean law election (제34조의2):**
- Korean LP elects to treat the LLC as fiscally transparent under Korean law
- Now Korean law DOES treat the LLC's income items as income of the Korean LP directly
- This satisfies 894(c)(1)(A) — the income IS treated as the LP's income under Korean law
- Therefore, treaty benefits ARE available
- Result: Reduced withholding rates apply (15% dividends, 12% interest, etc.)

### Conclusion
**The 2022 Korean election is essential** for the Korean LP to claim treaty-reduced withholding rates on FDAP income received through the US LLC. Without it, IRC 894(c) blocks treaty benefits.

---

## IRC Section 875 — NRA Partner Treated as Engaged in US Trade or Business

### Full Text (26 U.S.C. Section 875)

"For purposes of this subtitle—

(1) A nonresident alien individual or foreign corporation shall be considered as being engaged in a trade or business within the United States if the partnership of which such individual or corporation is a member is so engaged, and

(2) A nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States."

### What This Means

If the US LLC is engaged in a US trade or business at ANY time during the tax year, then the Korean LP is automatically deemed to be engaged in that same US trade or business. This applies regardless of:
- Whether the Korean LP is a general or limited partner
- Whether the Korean LP has any direct involvement in the business
- Whether the Korean LP has ever set foot in the US
- The amount of the Korean LP's share of income

### Consequences of Being "Engaged in US Trade or Business"

1. The Korean LP's allocable share of the LLC's effectively connected income (ECI) is taxed at **graduated US tax rates** (10%-37% for individuals), not flat withholding rates
2. The Korean LP must file **Form 1040-NR** (US Nonresident Alien Income Tax Return)
3. The LLC must withhold tax under **IRC Section 1446** on the Korean LP's share of ECI
4. The Korean LP may have a US filing obligation even if total income is minimal

### When Is a Partnership "Engaged in US Trade or Business"?

Activities that generally create a US trade or business:
- Operating a business with US employees/office
- Active management of US real estate (rental operations, development)
- Regular trading in securities for customers (dealer activity)

Activities that generally do NOT create a US trade or business:
- Trading in stocks/securities for the partnership's own account (safe harbor under IRC 864(b)(2))
- Passive investment in US stocks, bonds, bank deposits
- Holding US real estate through a REIT

**For an investment fund (Palace Fund):** If the LLC's activity is limited to portfolio investing (buying/selling securities, holding real estate through REITs), it may NOT be engaged in a US trade or business. This is crucial — if there is no US trade or business, Section 875 is not triggered, and the Korean LP's income may be subject to FDAP withholding rather than graduated tax rates on ECI.

---

## IRC Section 864(c)(8) — Gain on Sale of Partnership Interest

### Enacted: Tax Cuts and Jobs Act (TCJA), December 2017
### Effective: Sales/exchanges on or after November 27, 2017

### Rule
Gain or loss from the sale or exchange of a partnership interest by a nonresident alien or foreign corporation is treated as effectively connected income (ECI) to the extent the gain would have been ECI if the partnership had sold all its assets at fair market value.

### Calculation (Two Steps)
1. **Outside gain:** Sale price minus the foreign partner's adjusted basis in the partnership interest
2. **Deemed sale ECI:** The foreign partner's distributive share of gain/loss that would be ECI if the partnership sold all assets at FMV
3. **ECI gain = lesser** of outside gain and deemed sale ECI

### Withholding Under Section 1446(f)
The transferee (buyer) must withhold **10% of the amount realized** on the sale. "Amount realized" includes cash, property received, AND partnership liabilities deemed assumed.

| Item | Requirement |
|------|-------------|
| Withholding rate | 10% of amount realized |
| Forms | Form 8288 + Form 8288-A |
| Filing deadline | 20 days after the transfer date |
| Backup withholding | If transferee fails, partnership must withhold from all distributions to transferee |

### Coordination with FIRPTA (Section 897)
If both 864(c)(8) and FIRPTA apply (partnership holds US real property interests), Section 864(c)(8) takes priority. FIRPTA applies only to the extent the real property gain exceeds the 864(c)(8) gain.

### Coordination with Treaty Article 16 (Capital Gains)
The treaty generally exempts capital gains from source-country taxation (Article 16(1)). However, Exception (b) allows taxation of gains from PE-connected assets. The IRS position is that 864(c)(8) effectively looks through the partnership to its underlying assets — if those assets are PE-connected or real property, the US retains taxing rights. This is an area of potential treaty override controversy.

---

## Form 1040-NR Filing Requirements for Foreign Partners

### Who Must File
A nonresident alien who is a partner in a partnership engaged in a US trade or business must file Form 1040-NR. This is mandatory under Treas. Reg. Section 1.6012-1(b)(1).

### No Minimum Income Threshold
There is **no minimum income threshold** for filing. Even $1 of ECI from a partnership triggers the filing obligation. Per the regulation: "it is immaterial that the gross income for the taxable year is less than the minimum amount specified in section 6012(a)."

This applies to both general and limited partners.

### Required Tax ID
The Korean LP needs either an SSN or an **ITIN (Individual Taxpayer Identification Number)**. Apply using Form W-7, which can be filed simultaneously with Form 1040-NR.

### Filing Deadlines

| Situation | Deadline |
|-----------|----------|
| Had US wages subject to withholding | April 15 |
| No US wages (partnership income only) | June 15 |
| Extension available via Form 4868 | October 15 |

**Note:** Extensions provide more time to file, NOT more time to pay. Tax owed is still due by the original deadline.

### Key Forms and Schedules

| Form | Purpose |
|------|---------|
| **Form 1040-NR** | Main NRA income tax return |
| **Schedule NEC** | Tax on income not effectively connected with US business |
| **Schedule P** | Partnership interest disposition gain/loss |
| **Form 8833** | Treaty-Based Return Position Disclosure (required when claiming treaty benefits) |
| **Form W-7** | ITIN application (if no SSN) |

### Penalties for Non-Filing
Failure to file penalties apply. Also, the foreign partner may lose the ability to claim deductions against ECI if the return is not timely filed (IRC Section 874(a)).

---

## Section 1446 Partnership Withholding — Complete Requirements

### Section 1446(a) — Withholding on ECI

| Partner Type | Withholding Rate |
|-------------|-----------------|
| Non-corporate foreign partner (individual) | **37%** |
| Corporate foreign partner | **21%** |

The rates represent the highest marginal rate for each partner type. Reduced rates may apply for:
- Long-term capital gains: 20% (with proper documentation from partner)
- Section 1250 unrecaptured gain: 25%
- Collectibles gain: 28%

### Estimated Payment Schedule (Form 8813)
Payments are due by the 15th day of the:
- 4th month (April 15 for calendar year)
- 6th month (June 15)
- 9th month (September 15)
- 12th month (December 15)

### Annual Return (Form 8804)
Due by the 15th day of the 3rd month after the close of the partnership's tax year (March 15 for calendar year partnerships). 6-month extension available via Form 7004.

### Forms Summary

| Form | What | Who Files | When |
|------|------|-----------|------|
| Form 8813 | Payment voucher for quarterly estimated withholding | Partnership | Quarterly |
| Form 8804 | Annual partnership withholding return | Partnership | March 15 (+ extension) |
| Form 8805 | Foreign partner's statement of 1446 withholding | Partnership (sends to each foreign partner + IRS) | Attached to 8804 |
| Form 8804-C | Certificate to reduce withholding based on partner-level deductions | Foreign partner submits to partnership | Before withholding period |

### How the Foreign Partner Claims Credit
The Korean LP attaches their copy of Form 8805 to their Form 1040-NR to claim a credit for the Section 1446 tax already withheld by the partnership.

### Section 1446(f) — Withholding on Partnership Interest Transfers
Separate from 1446(a). When a foreign partner sells their partnership interest:
- Transferee withholds **10% of amount realized**
- Filed on Forms 8288 / 8288-A
- Due within **20 days** of transfer
- If transferee fails to withhold, partnership must withhold from all distributions to transferee until obligation is satisfied

---

## Comprehensive Tax Flow for Korean LP in US LLC

### Scenario: Korean citizen is LP in a US LLC investment fund

**Step 1 — US Tax on Fund Income**

| Income Type | US Tax Treatment | Rate/Withholding |
|------------|-----------------|-----------------|
| Capital gains on US stocks (no USTB) | FDAP — flat withholding | 30% (treaty may exempt under Art. 16) |
| Capital gains on US real property | ECI — graduated rates via FIRPTA | 10-37% |
| Dividends from US companies | FDAP — flat withholding | 30%, reduced to 15% by treaty (Art. 12) |
| Interest from US sources | FDAP — flat withholding | 30%, reduced to 12% by treaty (Art. 13) |
| Business profits (if USTB exists) | ECI — graduated rates | 10-37% (Section 875 + 1446 withholding) |
| Rental income from US real estate | ECI (if net election under 871(d)) | 10-37% |

**Step 2 — Korean Tax on Worldwide Income**

The Korean LP reports all income on Korean tax return.

Without 제34조의2 election:
- LLC distributions = dividend income (배당소득) under Korean law
- Subject to financial income comprehensive taxation (금융소득종합과세) if > KRW 20M

With 제34조의2 election:
- Income retains original character (양도소득, 배당소득, 이자소득, etc.)
- Capital gains = 양도소득 (~22% separate taxation, NOT subject to 금융소득종합과세)
- Much more favorable tax treatment

**Step 3 — Foreign Tax Credit (Article 5)**

Korean LP claims credit against Korean tax for US taxes paid (both withholding and any 1040-NR tax). This prevents double taxation.

---

## Key Risks and Open Issues

### 1. No Transparent Entity Provision in Treaty
The 1976 treaty has no article addressing income derived through transparent/pass-through entities. This is a major gap that causes the IRC 894(c) problem.

### 2. Treaty Override Risk (864(c)(8))
IRC 864(c)(8) was enacted in 2017, decades after the treaty. Whether the treaty's capital gains exemption (Article 16) overrides 864(c)(8) on the sale of a partnership interest is unsettled law. The IRS position is that it does not override, but some practitioners argue otherwise.

### 3. High Interest Withholding Rate
The 12% treaty rate on interest is among the highest in any US treaty. Modern treaties typically provide 0-10%. This reflects the treaty's age.

### 4. No Protocol Modernization
The US and Korea have discussed negotiating a new treaty, but no action has been taken. The current treaty lacks modern provisions found in post-2006 US treaties (comprehensive LOB, arbitration, beneficial ownership standards).

### 5. ITIN Requirement
The Korean LP must obtain a US ITIN to file Form 1040-NR. This requires submitting Form W-7 with the tax return and supporting identification documents.

---

## Sources

- [IRS — Korea Tax Treaty Documents](https://www.irs.gov/businesses/international-businesses/korea-tax-treaty-documents)
- [IRS — Full Treaty Text (PDF)](https://www.irs.gov/pub/irs-trty/korea.pdf)
- [IRS — Technical Explanation (PDF)](https://www.irs.gov/pub/irs-trty/koreatech.pdf)
- [26 U.S.C. Section 875](https://www.law.cornell.edu/uscode/text/26/875)
- [26 U.S.C. Section 894](https://www.law.cornell.edu/uscode/text/26/894)
- [26 U.S.C. Section 1446](https://www.law.cornell.edu/uscode/text/26/1446)
- [26 U.S.C. Section 864(c)(8)](https://www.law.cornell.edu/uscode/text/26/864)
- [IRS — Partnership Withholding](https://www.irs.gov/individuals/international-taxpayers/partnership-withholding)
- [IRS — Instructions for Form 1040-NR (2025)](https://www.irs.gov/instructions/i1040nr)
- [IRS — Instructions for Forms 8804, 8805, 8813](https://www.irs.gov/pub/irs-pdf/i8804.pdf)
- [Mayer Brown — Korean Law Change Eases Treaty Eligibility Concerns (2023)](https://www.mayerbrown.com/en/insights/publications/2023/03/korean-law-change-eases-treaty-eligibility-concerns-for-korean-investors-in-us-funds)
- [HCO — US-South Korea Income Tax Treaty](https://www.hco.com/insights/united-states-south-korea-income-tax-treaty)
- [SF Tax Counsel — US-Korea Treaty Analysis](https://sftaxcounsel.com/blog/unraveling-the-united-states-republic-of-korea-income-tax-treaty/)
- [Blue J — NRA Filing Threshold Analysis](https://www.bluej.com/answer/is-there-a-minimum-income-threshold-below-which-a-non-resident-alien-with-limited-partnership-income-reported-on-a-k-1-is-not-required-to-file-form-1040nr)
- [Andrew Mitchel — US Treaty LOB Status Map](https://www.andrewmitchel.com/blog/2021_04_us-treaty-limitation-on-benefits-status-map)

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## Research History

- 2026-03-07: Ace researched and compiled this reference. The 1976 treaty PDF was not machine-readable (compressed binary), so article text was reconstructed from IRS Technical Explanations, secondary sources, and cross-referenced against multiple practitioner analyses.
- Key finding: There is NO 2019 Protocol. The "transparent entity fix" is a 2022 Korean domestic law change (제34조의2), not a treaty amendment.