That staple of the securities lending industry – the manufactured dividend -is to get a new tax treatment in Korea. In essence, foreign lenders will no longer need to pay withholding tax on manufactured dividend paid to them by foreign borrowers.
Concern had been expressed by local agent lenders and clearing agents about the double taxation of manufactured dividends: foreign lenders were required to pay withholding tax on manufactured dividends when shareholders were already paying withholding tax on the actual dividend payment.
The Ministry of Finance and Economy (MOFE) in Seoul has now revised the withholding tax treatment of manufactured dividends paid by foreign borrowers to foreign lenders. Foreign lenders are no longer required to pay any tax on manufactured dividends, regardless of whether the final shareholder is a foreign investor or whether the foreign borrower has sold the shares.
A Citigroup spokesman in Seoul explains how the new regime will work. “If foreign borrower A (who does not have an establishment in Korea) lent securities to foreign investor B (who also does not have an establishment in Korea), and foreign borrower B sold the borrowed securities to a third-party foreign investor C, the issuer will pay dividend to investor C, and borrower B will pay manufactured dividend to lender A,” he says. “The manufactured dividend paid by borrower B to lender A will not be subject to withholding tax in Korea under the Corporate Tax Act (Article 93).”
The new ruling is also applicable only to securities lending transactions between a foreign lender and a foreign borrower: it is not applicable if the borrower is a resident in Korea. In addition, foreign borrowers are required to pay withholding tax on dividends, if the foreign borrower is considered as a shareholder at the Record Date.
The MOFE has not confirmed whether the new ruling can be implemented retroactively, but Citigroup says it can be expected to boost securities lending activity by foreign investors.