Korean Tax Newsletter (January, 2014)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
Announcement of new measures to revitalize foreign investment in Korea
On January 1, 2014, the Ministry of Trade, Industry and Energy announced plans to revitalize foreign investment in Korea in order to introduce new foreign investment which may potentially lead to growth and job creation in Korea. The following outlines the main plan to promote foreign investment from a Korean tax perspective;
- Attraction of global companies to relocate their headquarters to Korea
- Apply a flat tax rate for foreign workers of Korean headquartered companies without a sun-set clause
- Introduce a new Advance Pricing Agreement ("APA") system for determining the appropriate price range for international transactions from both a national tax and customs duties perspective
- Clarify the valuation method for intangible assets and expedite the process for an APA
- Simplify the information submission obligations for transactions between Korean headquarters and overseas subsidiaries
- Customized support for foreign invested R&D centers
- Extension of tax exemption period for foreign engineers working for foreign invested R&D centers until FY2018
- Revision of incentive system to enhance job creation resulting from foreign investment
- Increase exemption limit for numbers of job creation
The above plan requires the revision of current tax laws. The relevant government authorities are planning to complete the tax law revisions and improvement of related systems by the end of 2014 or 2015.
News from Korean Government for Foreign Investment Promotion
On December 31, 2013, the National Assembly approved, with some revisions, the tax reform proposals for 2014 submitted by the MOSF. Below is a summary of selected changes to the Korean tax laws. Unless otherwise noted, all changes are effective for tax year beginning on or after January 1, 2014.
Corporate Income Tax Law
Decrease in capital gains tax rate for land/building in addition to Corporate Income Tax (“CIT”)
In the case where a domestic company transfers non-business purpose land or building prescribed by the presidential decree of the CIT law (“CITL”), the company should file and pay taxes on capital gains in addition to the CIT to the tax office. The tax rate on capital gains used to be 30%, however, it is decreased to 10%.
Extension of carryover period for statutory donations
Statutory donation expenses exceeding the statutory limit for deduction used to be carried forward for three years, however, under the revised CITL the carryover period will be extended to five years. It is the same carryover period as that of designated donation expenses exceeding the statutory limit for deduction.
Reinforcement of condition for qualified vertical spinoff
In the case where a company sets up a new company through a qualified vertical spinoff, the spinning-off company can defer capital gains from the spinoff transaction (i.e., FMV of new shares minus book value of contributed assets). One of the post spin-off conditions to be met for the deferral of capital gains tax was that the spinning-off company should not dispose 50% or more of the new company’s shares. However, under the revised CITL, the revised condition requires the spinning-off company to maintain 50% or more of the shares in the new company. It was revised to prevent the possibilities of tax avoidance by using indirect method of share transfer.
In the case that the spinning-off company fails to meet the post spin-off condition, the entire deferred capital gains will be recaptured as taxable income.
Penalties for failure of submitting information on Controlled Foreign Company ("CFC")
Under the revised CITL, if a domestic company who is subject to CFC rules fails to submit relevant information to the tax office, the company will be imposed of penalties (5/1000 of reserved income).
Tax Incentive Limitation Law
Changes in investment tax credit rate
Under the revised Tax Incentive Limitation Law (“TILL”), investment tax credit rate will be changed as follows:
|Type of investment
|FY 2013||FY 2014 ~ FY 2016|
|Large company||SMC(*)||Large company||Middle company||SMC|
|Environment preservation facilities||10%||10%||3%||5%||10%|
* SMC: Small and Medium-sized Company
** Under the revised TILL, the investment tax credit for R&D facilities can be claimed for the investment made until December 31, 2015.
Increase of alternative minimum tax rate for non-SMC
Under the revised TILL, alternative minimum tax rate for non-SMC will be changed as follows;
|Tax Base (KRW)||FY 2013||FY 2014 onwards|
|Up to 10 billion||10%||10%|
|10 billion ~ 100 billion||12%||12%|
|Over 100 billion||16%||17%|
Modification in tax exemption for foreign investment
In the case where a foreign investor obtains the approval for tax exemption from MOSF, one of the foreign investment tax incentives was the withholding tax exemption on the dividend received from the foreign invested company. However, under the revised TILL, tax exemption on the dividend income is no longer applicable. The revision would apply to foreign investment with a tax exemption approval obtained from MOSF after January 1, 2014.
In addition, the foreign investment tax incentives are not granted to a foreign investor who is a resident of a country where neither a tax treaty nor investment promotion and protection agreement is made with Korea. The revision would apply to foreign investment with a tax exemption approval obtained from MOSF after January 1, 2015.
Limitation of IIT incentive for foreign workers
Foreign workers working in Korea used to be eligible to apply a 18.7% flat tax rate on their salary income that would be received until December 31, 2014. However, a foreign worker who is a related party to the company (e.g. relationship via management control) will not be eligible to apply this incentive and the period of incentive application will be limited to 5 years starting from the date when the worker first began working in Korea.
Individual Income Tax Law
Adjustment of top Individual Income Tax (“IIT”) bracket
In order to reinforce taxation on high income earners, the lower limit of the top IIT bracket was adjusted from KRW 300 million to KRW 150 million. The applicable tax brackets for the individual income tax are as follows;
|Tax base (KRW)||Tax rates|
|FY 2013||FY 2014 onwards|
|Up to 12 million||6% (6.6%)||6% (6.6%)|
|12 million - 46 million||15% (16.5%)||15% (16.5%)|
|46 million - 88 million||24% (26.4%)||24% (26.4%)|
|88 million - 150 million||35% (38.5%)||35% (38.5%)|
|150 million - 300 million||35% (38.5%)||38% (41.8%)|
|Over 300 million||38% (41.8%)||38% (41.8%)|
* the individual income tax rates in parentheses include the 10% local income surtax.
International Tax Coordination Law
Reinforcement of taxation on CFC income
In order to strengthen the taxation on reserved income of a CFC, income derived from holding shares/bonds and transfer of an intellectual property which can meet certain conditions is regarded as distributable dividend income subject to the CFC rule. The detailed conditions to be stated in Presidential Decree have not been released yet.
Failure of compliance obligations for offshore bank account
According to the revised International Tax Coordination Law, a resident who has not complied with information submission obligations for offshore bank account information is required to explain the source of account balance within 90 days upon the tax authorities' notification. If it fails to explain or explains falsely, penalty as much as 10% of the underreported account balance would be imposed.
Local tax Law
Revision of local income surtax for CIT
Local income surtax for CIT was imposed at 10% of the CIT amount. According to the revised local tax law, however, it was revised that it is imposed based on the tax base amount rather than CIT amount as below.
|Tax base (KRW)||Standard tax rate (FY 2014 onwards)|
|Up to 200 million||1%|
|200 million - 20 billion||2%|
|Over 20 billion||2.2%|
With regard to the tax rate, it can be adjusted within the range of 50% of the standard tax rate by the local ordinance regulated by the local government.