Groups usually treat this as a treasury decision and settle it after incorporation. In Korea both routes carry a tax consequence that is fixed at the moment the money moves — and one of them is triggered by a guarantee alone, without a won leaving head office.
A newly established Korean entity needs money in it. The obvious options are to subscribe for more shares or to lend, and the obvious reasoning is that interest is deductible while dividends are not. That reasoning is right in principle and frequently wrong in practice, because the deduction is precisely what Korea's thin capitalisation rule takes away — and the rule reaches further than most groups expect.
Where a Korean company's borrowings exceed twice the amount contributed by its foreign controlling shareholder, the interest on the excess is not deductible.
The threshold itself is not the surprising part. What catches groups out is what counts as borrowing for this purpose. Three categories are aggregated:
| Counted | Comment |
|---|---|
| Borrowed from the foreign controlling shareholder | The expected case |
| Borrowed from that shareholder's related parties | Group finance companies, affiliates |
| Borrowed from a third party under the shareholder's guarantee | Including the provision of security or anything that substantively guarantees payment |
“We are borrowing from a Korean bank, so this does not apply to us.”
It usually does. A domestic project loan supported by a parent guarantee sits squarely in the third category — the rule is engaged even though no money came from the parent and the lender is entirely unrelated. In property and project structures, where a parent guarantee is standard practice and bank financing is unavoidable, this is the normal case rather than the exception.
Three features make it more expensive than a simple loss of deduction.
The rule does not apply where the company demonstrates that the amount and terms of the borrowing are the same as, or similar to, what would apply between unrelated parties.
That is a genuine exit, but it is an evidential one. Proving it after the fact, from a loan that was never documented with this in mind, is difficult and expensive. Designing the terms before drawdown is not. This is the clearest example we encounter of a problem that costs almost nothing to prevent and a great deal to repair.
A capital increase attracts registration licence tax on the amount paid in. The headline rate is modest. Two features matter more than the rate.
| Feature | Effect |
|---|---|
| Large-city surcharge | The charge is tripled for companies established in designated large-city areas — and this applies not only on incorporation but on a capital increase made within five years of establishing there |
| Follow-up rule | The heavier charge can be brought into play after the event where the company subsequently comes within scope |
| Area boundaries are not intuitive | The designated areas are defined by statute and carve out specific districts — including, for example, free economic zones and certain national industrial complexes. Two addresses a few kilometres apart can fall on opposite sides |
Your registered address is therefore a tax decision, not only a property decision. It should be settled before incorporation, because the five-year rule means an early capital increase inherits whatever you chose at the start. Certain business types are also excluded from the surcharge by statute — worth checking against your actual business purpose before assuming the worst.
Neither, stated in the abstract — and that is the honest answer.
| Debt | Equity | |
|---|---|---|
| Attraction | Interest deductible; repayment is not a distribution | No thin capitalisation exposure; no interest to defend |
| Cost | Deduction removed above the ratio, including on guaranteed bank debt; disallowed interest recharacterised | Registration licence tax, tripled in designated areas; harder to withdraw later |
| Decided by | Whether the terms can be shown to be arm's length, and whether a guarantee is unavoidable | Where you are registered, and how soon after incorporation the increase happens |
The sequence matters more than the choice. Settle the registered address first, then the shareholding, then the debt-to-equity ratio and the loan terms. Each constrains the next, and the cheapest moment to change any of them is before the first payment.
Before the money moves: confirm the registered address against the designated-area boundaries and the excluded business types; fix the shareholding, because it determines who is a foreign controlling shareholder for the ratio; then model the funding mix against the ratio, including any bank debt that will carry a parent guarantee; and document the loan terms so the safe harbour is available rather than theoretical.
We do this work for foreign-invested companies in English end to end. If a funding round is being planned, the useful first exchange is a short written one about the intended address, the shareholding and whether any lender will require parent support.
Basis. This note reflects the Act on International Tax Adjustment provisions on the disallowance of interest on borrowings exceeding the prescribed multiple of a foreign controlling shareholder's contribution — including the aggregation of amounts borrowed from the shareholder, from its related parties and from third parties under the shareholder's guarantee or security; the disposition of disallowed interest and its interaction with withholding; the ordering rule applying disallowance to higher-rate interest first; and the exception where arm's length amount and terms are demonstrated — together with the Local Tax Act provisions on registration licence tax for a capital increase, the large-city surcharge and its five-year and follow-up rules, and the statutory definition of the designated areas and their carve-outs. It is general information as at September 2026, not advice on a specific situation. Please take advice before acting.
Very often yes, and this is the single most misunderstood point. The rule catches three things: amounts borrowed from the foreign controlling shareholder, amounts borrowed from that shareholder's related parties, and — decisively — amounts borrowed from a third party under a guarantee given by the foreign controlling shareholder, including the provision of security or anything that substantively guarantees payment. A Korean project loan supported by a parent guarantee is therefore inside the rule even though not a won came from the parent. In property and project structures, where parent guarantees are standard practice, this is the normal case rather than the exception.
Two things, and the second is the one people miss. The interest above the threshold is not deductible for the Korean company. Separately, that same amount is treated as having been disposed of as a dividend or other outflow to the shareholder — which brings withholding tax with it. Where withholding was already applied to the interest, the two are set off against each other in the calculation. And where different interest rates apply across the borrowings, the disallowance starts with the highest-rate interest first, which makes the cost worse than an average-rate assumption would suggest.
Yes, and it has to be built before the money moves. The rule does not apply where the company demonstrates that the amount borrowed and the terms of the borrowing are the same as, or similar to, what would apply between unrelated parties. That is a real safe harbour, but it is an evidential one: proving it after the fact from a loan that was never designed for it is difficult and expensive. Designing the terms before drawdown is straightforward. This is the clearest example we see of a problem that costs almost nothing to prevent and a great deal to fix.
Registration licence tax is charged on the amount paid in on a capital increase. The headline rate is modest, but it is tripled in designated large-city areas — and the tripling applies not only on incorporation but on a capital increase made within five years of establishing the company there. There is also a follow-up rule that can bring the heavier charge into play after the event if the company later moves into scope. Whether your address is inside or outside the designated area is therefore a tax question, not just a property question, and it should be settled before you register.
Neither, in the abstract. Debt is attractive because interest is deductible and repayment is not a distribution — but the deduction is exactly what thin capitalisation removes, and a parent guarantee is enough to trigger it. Equity avoids that but carries the registration charge, is harder to take back out, and locks in a shareholding that may be awkward later. In practice the sequence matters more than the choice: settle the registered address, then the shareholding, then the debt-to-equity ratio and the loan terms — because each constrains the next, and the cheapest moment to change any of them is before the first payment.
Tell us the intended registered address, the shareholding, and whether any lender will require parent support. Those three settle most of the analysis — and all three are cheapest to change now.