Korean Tax Newsletter (August, 2015)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
On August 6, 2015, the Ministry of Strategy and Finance announced proposed revisions to the tax laws that would generally become effective from January 1, 2016 unless specified otherwise. Changes are proposed to the Corporate Income Tax Law (“CITL”), Personal Income Tax Law (“PITL”), Tax Incentive Limitation Law (“TILL”), International Tax Coordination Law (“ITCL”), Value Added Tax Law (“VATL”), Inheritance and Gift Tax Law (“IGTL”), National Tax Basic Law (“NTBL”), etc. and major proposed revisions are summarized as below. It should be noted that the proposals are not final and may be subject to change or be deleted during the legislative process.
Corporate Income Tax Law
Payroll increase of young regular workers for Earnings Accumulation Tax (“EAT”) purposes
In 2014, the Korean government has introduced EAT regime to impose additional 10% corporate income tax to a company within a group restricted from cross-shareholdings or with net equity over KRW 50 billion which does not use its earnings for investment, payroll increase and dividends. According to the proposed revisions, weighted ratio of 150% will be applied to the payroll increase of young regular workers (aged between 15 and 29), which is deducted from accumulated earnings subject to the EAT, if the number of young regular workers increases.
This proposed revision will be effective from a fiscal year for which corporate income tax return is filed after the effective date of the concerned presidential decree of the CITL, in which case the proposed revision would be expected to apply from the fiscal year ending December 31, 2015.
Limitation on deductible company vehicle-related expenses
Under the current CITL, expenses incurred in relation to vehicles used for business purposes of a company (including depreciation, rental fee, fuel expense, insurance, maintenance expense, car tax, toll fee, etc.) are allowed to be fully deducted for the Corporate Income Tax (“CIT”) purposes, while concerned input VAT incurred cannot be claimed as a credit on its VAT returns under the VATL. With the proposed revision, however, the below additional requirements should be satisfied for the company vehicle-related expenses to be treated as tax deductible expenses:
- i) If certain conditions (e.g., subscription of insurance policy for business purposes which allows only directors/employees of the company to drive the vehicles, reporting of the company vehicles used for business purposes to the district tax office, etc.) are met,
- a certain ratio (e.g., 50%) of the expenses are allowed to be tax deductible, but if an actual usage ratio of the vehicles for business purposes are proved through a daily driving log, etc., the actual usage ratio will be applicable; or
- when the company’s logo is attached to the vehicles (other than that in a detachable form), 100% of the expenses are allowed to be tax deductible.
- ii) If the conditions mentioned in i) above are not met, the entire company vehicle-related expenses would be denied for tax deduction.
When the company vehicle-related expenses are denied for tax deduction, it will trigger a deemed personal income to relevant persons in the company.
Scope of real estate shares
Under the current CITL, if a foreign company transfers shares issued by a Korean company of which 50% or more of total assets is comprised of real estate (“real estate shares”), it is treated as a transfer of the real estate rather than the shares. With the proposed revision, to be consistent with the Presidential Decree of PITL revised in 2015, when the Korean company owns real estate shares of another company, a real estate ratio shall be calculated as below:
[Real estate asset amount of the Korean company + (Real estate shares amount issued by another company and owned by the Korean company x Real estate asset amount of another company / Total assets amount of another company)] / Total assets amount of the Korean company
Annual deduction limit of tax loss carry forward
Under the current CITL, tax loss can be carried forward for 10 years and is allowed to be fully deducted from taxable income. However, under the proposed revision, a company which is not classified as a Small and Medium sized Enterprise (“SME”) will be able to utilize its tax loss carry forward only within a certain limit. A deduction limit of the tax loss carry forward, which will be newly introduced, is 80% of the taxable income of the fiscal year for non-SME (exclusive of non-SME under a business rationalization plan, workout plan, etc.).
Application for extension of filing due date for CIT return
Currently, a company subject to a statutory external audit is entitled to apply for an extension of filing due date for the CIT return until 2 weeks prior to the original fling due date for the CIT return, if an external audit is not completed. Under the proposed revision, the application for the extension can be made until 3 days prior to the original filing due date for the CIT return.
Key for allocation of joint expenses
Under the current CITL, key for allocation of joint expenses can be summarized as follows:
- Between joint business operators with capital investment relationship: capital investment ratio
- Between joint business operators without capital investment relationship:
- If they are related parties for tax purposes, sales ratio either for the current year or for the prior year (when elected, it is required to be applied for at least 5 years. In case of no election, sales ratio for the prior year is applied as a default method)
- If they are unrelated parties for tax purposes, an agreed ratio between joint business operators
According to the proposed revision, a total asset amount ratio can additionally be elected as an allocation key between related party joint business operators without capital investment relationship.
Additional conditions for tax-free in-kind contribution
Under the current CITL, conditions for qualified tax-free in-kind contribution are as follows:
- A company which contributes assets (the “contributing company”) has been operating its business for at least 5 years as of the in-kind contribution date;
- A contributed company continues to operate the business transferred through the in-kind contribution until the end of the fiscal year to which the in-kind contribution date belongs;
- In case of joint contribution with local resident or foreigner, they are not related parties to the contributing company; and
- 80% or more of the stocks of the contributed company are possessed by the contributing company right after the in-kind contribution until the end of the fiscal year to which the in–kind capital contribution date belongs.
With the proposed revision, in addition to the above conditions, the transferred business should be a separable and independent business unit (excluding real estate rental business, etc.) from the contributing company, which is a condition required for a qualified tax-free spin-off under the current CITL, in order to be qualified as a tax-free in-kind contribution.
Changes in consolidated CIT return filing system
Under the proposed revision, consolidated CIT return filing system will be revised as below:
- Cancellation of approval for consolidated CIT return filing system
The Korean tax authority can currently cancel an approval for consolidated CIT return filing: i) when a fiscal year of a member of the consolidated tax group is inconsistent with the consolidated fiscal year; ii) when the consolidated CIT return filing system is applied to a company which is not wholly owned by the parent company in the consolidated tax group (the “consolidated parent company”); iii) when the consolidated CIT return filing system is not applied to a company which is wholly owned by the consolidated parent company; or etc.
The proposed revision to the CITL adds that, if the consolidated parent company becomes wholly owned by another domestic company (except for non-profit domestic company), the approval for the consolidated CIT return filing system will also be cancelled.
- Claw-back provisions for cancellation of approval for consolidated CIT return filing system
If the approval for consolidated CIT return filing system is cancelled within 5 years from the approval date (i.e., mandatory period for application), tax loss carry forward which was already utilized in the previous consolidated CIT returns will be included in taxable income of a company, which deducted the tax loss carry forward, and be included in deductible expenses of a company, which incurred the tax loss carry forward, for a fiscal year in which the cancellation is made.
- Limitation on deduction of built-in loss
The current CITL provides that, if the consolidated parent company merges with another domestic company through a qualified tax-free merger, loss from disposition of assets transferred from a merged company incurred for fiscal years which end within 5 years from the merger registration date can be deducted only from taxable income derived from a business transferred from the merged company.
Under the proposed revision, loss from disposition of assets owned by the consolidated group before the merger should also be deductible only from taxable income of business operated by the consolidated parent company before the merger and taxable income of subsidiaries in the consolidated tax group.
- Alternative Minimum Tax (“AMT”) for consolidated tax return filing system
With the proposed revision, calculation method for the AMT for consolidated tax group will be changed to be on the consolidated tax group basis from on the current stand-alone basis, while tax exemptions or credits for consolidated tax group will continue to be computed on a stand-alone basis.
Personal Income Tax Law
Expansion of scpoe of major shareholders
With the proposed revision, a scope of major shareholders subject to capital gains tax on transfer of listed shares will be expanded as below:
i) ownership ratio of 2% or more; or
ii) total share value of KRW 5 billion or more
i) ownership ratio of 1% or more; or
ii) total share value of KRW 2.5 billion or more
i) ownership ratio of 4% or more; or
ii) total share value of KRW 4 billion or more
i) ownership ratio of 2% or more; or
ii) total share value of KRW 2 billion or more
i) ownership ratio of 4% or more; or
ii) total share value of KRW 1 billion or more
This proposed revision will be applied to a transfer of shares made on or after April 1, 2016.
Capital gains tax on transfer of SME shares by major shareholders
Capital gains tax on transfer of SME shares is currently imposed at 10%, irrespective of shareholding ratio. Under the proposed revision to the PITL, capital gains tax rate on the transfer of SME shares owned by major shareholders will increase from 10% to 20%.
Withholding tax obligation on salary income to dispatched employees with high salary
Under the current PITL, employees dispatched in Korea and paid from a foreign company should voluntarily join the qualified Class B Income Taxpayers Association and pay their Korean income taxes on a monthly basis, or file the annual individual income tax return on an annual basis.
According to the proposed revision, domestic companies which receive services from the foreign company through the dispatched employees with high salary would be required to withhold personal income taxes at 17% of service fees (or salary amount if it is substantiated). The foreign company can apply for a refund of the withholding tax to the district tax office when a payroll tax settlement is conducted by the foreign company.
Tax Incentive Limitations Law
Tax credit for increase of employment of young regular workers
A company hiring young regular workers will be eligible for tax credit for increase of employment of young regular workers, which is computed by multiplying KRW 5 million (KRW 2.5 million for large companies) by increased number of young regular workers (capped at increased number of total regular workers) compared to the prior fiscal year.
The proposed revision will be effective for three years from a fiscal year to which December 31, 2015 belongs to a fiscal year to which December 31, 2017 belongs.
Changes in tax exemption for foreign invested companies
The revision to the TILL was proposed to change a tax exemption limit for foreign invested companies, to encourage creation of employment by the foreign invested companies, as follows:
70% of foreign investment amount
50% of foreign investment amount
50% of foreign investment amount
40% of foreign investment amount
Employment basis amount (*)
(capped at 20% of foreign investment amount)
Employment basis amount (*)
(capped at 40% of foreign investment amount)
Employment basis amount (*)
(capped at 30% of foreign investment amount)
(*) Sum of KRW 20 million per new employee of graduate from meister high school, etc., KRW 15 million per new employee of young worker, etc., and KRW 10 million per new employee of other worker.
Prevention of delay in foreign investments
Under the current TILL, an approval of tax exemption for foreign invested companies will be revoked if an initial investment (including capital increase) is not made within 3 years after a notice day of the tax exemption. In order to strengthen a rule to prevent delay in foreign investment, the proposed revision further prescribes that, if a foreign invested company does not commence its business within 5 years from a notice day of the tax exemption, the foreign invested company will be deemed to commence its business on the date after 5 years from the notice day.
Prevention of indirect investment by domestic investors to foreign invested companies
Under the current TILL, if domestic investors directly or indirectly own 10% or more of a foreign company shares, the tax exemption for foreign invested companies is not applicable to investment amounts from the foreign company corresponding to the shareholding ratio of the domestic investors in the foreign company. Also, investment amounts equivalent to loans, extended by the foreign invested companies and the domestic investors owning 10% or more of interest in the foreign invested companies, to foreign investors, are not eligible for the tax exemption for foreign invested companies.
With the proposed revision, the ownership ratio of domestic investors will be lowered from 10% to 5% and the above provision for exclusion of the tax exemption will also be applied to the case when the domestic investors exercise substantial influence on the foreign company or the foreign invested companies.
Extension of sunset clause and change in tax credit rates
The proposed measures would extend the sunset clause of the following tax incentives to December 31, 2018 and revise certain tax credit rates as below:
|R&D tax credit for new growth engine or source technology||20% (30% for SME) x R&D expense||Same|
|Investment tax credit for SME||3% x investment||Same|
|Tax credit on employment welfare facility||7% (10% for certain houses, dormitory, etc.) x investment||Same|
|Logistics tax credit||3% (5% for medium-sized company and 10% for SME)||Same|
|Tax credit on R&D facility and energy saving facility||3% (5% for medium-sized company and 10% for SME)||1% (3% for medium-sized company and 6% for SME)|
|Tax credit on productivity improving facility||3% (5% for medium-sized company and 7% for SME)||1% (3% for medium-sized company and 6% for SME)|
Tax incentives for preemptive business restructuring
The proposed revision newly introduces tax incentives for preemptive business restructuring plan under the Special Law for Enterprise Vitality Enhancement and major features of the tax incentives can be summarized as below:
- Taxation of capital gains taxes on exchange of shares for the preemptive business restructuring will be deferred until shares acquired from the exchange are disposed, and the security transaction tax on the exchange of shares will be exempt.
- Capital gains from disposition of duplicate assets after a merger (in all types of industries) for the preemptive business restructuring will be included in taxable income over 3 years after a 3-year grace period.
- Assumption and payment amount of financial debt of subsidiaries by a parent company for restructuring would be treated as deductible expenses of the parent company for tax purposes. The subsidiaries can include the gain on debt forgiveness in taxable income over 3 years after 4-year grace period.
- Capital gains from disposition of assets made for redemption of financial debts and gain from donation of assets from shareholders for the purpose of improvement of financial soundness would be included in taxable income over 3 years after a 4-year grace period.
- Gain on debt forgiveness from financial institutions in the course of business restructuring would be included in taxable income over 3 years after a 4-year grace period. Bad debt expenses incurred by the financial institutions will be allowed as deductible expenses for tax purposes.
International Tax Coordination Law
Requirements for submission of Transfer Pricing (“TP”) documentation
In order to comply with recommendations of OECD/G20 BEPS (Base Erosion and Profit Shifting) Project, the proposed revision to the ITCL requires a Multinational Enterprise (“MNE”) with a certain size of transactions and assets (to be regulated in the Presidential Decree of ITCL) to submit additional TP documentation (i.e., a comprehensive report on cross-border transaction information) which would address management information and current status of cross-border transactions of the MNE. To be specific, the following information should be included in the comprehensive report on cross-border transaction information:
|Report I (Master file)||
|Report II (Local file)||
Failure to submit the comprehensive report on cross-border transaction information by the due date (i.e., CIT return filing due date), penalty up to KRW 10 million will be imposed.
Value Added Tax Law
Deferment of import VAT payment for export SME
Under the current VATL, a taxpayer is required to pay import VAT to the customs office upon declaration for import of goods. Under the proposed revision, export SME satisfying certain conditions (to be regulated in the Presidential Decree of VATL) will be entitled to the deferment of the import VAT payment upon the import declaration and can settle the payment by offsetting import VAT against input VAT credit when filing the VAT returns.
This proposed revision will be applied to goods imported on or after July 1, 2016.
Zero-rate VAT on supply of goods or service for earning of foreign currency
Under the current VATL, a taxpayer can apply zero-rate VAT on supply of certain goods or services to a non-resident or foreign company for earning of foreign currency. With the proposed revision, zero rate VAT on professional services (e.g., legal, accounting and tax services, advertising, market research, management consulting services, etc.) or business supporting services (e.g., employment agency, administrative support services, etc.) provided to the non-resident or foreign company, which may be viewed to be used/consumed in Korea, will be applicable only if similar favorable tax treatments are granted to domestic residents in the country of the non-resident or foreign company, based on the reciprocity principle.
This proposed amendment will be applied to transactions made on or after July 1, 2016.
Due date for receipt of VAT invoice for claim of input VAT credit
Under the current VATL, a statutory VAT invoice, based on which associated input VAT can be claimed as a credit on quarterly VAT returns, should be issued at the time when goods or services are provided. However, input VAT can also be recoverable if the relevant VAT invoice is received within taxation period in which concerned goods or services are supplied, while a penalty for failure to timely receive VAT invoice is imposed. According to the proposed revision, due date for receipt of VAT invoice for the purpose to claim input VAT credit will be extended to the final VAT filing due date for each taxation period (i.e., July 25 for the first half year and January 25 for the second half year).
VAT on supply of cross-border electronic services
From July 1, 2015, supply of electronic services (such as games, audio or video files, electronic documents, software, etc. activated through mobile communication devices or computers) in Korea by foreign suppliers, overseas open market operators, etc. (the “foreign digital suppliers”) using information communication network would be subject to 10% VAT in Korea. In this regards, the current VATL does not specify that the above provision is not applicable to B to B transactions; thereby domestic business operators receiving electronic services, subject to Korean VAT under the current VATL, from the foreign digital suppliers cannot claim input VAT credit on the electronic services, since the foreign digital suppliers are not required to issue VAT invoices.
Hence, the proposed revision to the VATL clearly states that supply of electronic services by the foreign digital suppliers will not be subject to VAT in Korea if the services are provided in relation to a business of the domestic business operators. The proposed revision will be applied from a taxation period to which the promulgation date of VATL belongs.
Inheritance and Gift Tax Law
Gift tax on income from business opportunities offered by related parties
Income derived by a major shareholder (directly or indirectly owning 50% or more of shares together with relatives) of a company (the “beneficiary company”), which gets benefits from business opportunities offered by another company (which is a related party for tax purposes), would be subject to gift tax. According to the proposed revision, the deemed donation income of the major shareholder will be calculated based on operating profits of the beneficiary company for 1 year multiplied by its shareholding ratio and 3 years of business opportunities offering period. Estimated CIT amount of the beneficiary company on the deemed donation income will be deducted from the deemed donation income and the gift tax amount will be recomputed after 3 years by applying actual operating profits of the beneficiary company for 3 years.
National Tax Basic Law
Causes for expansion of scope of tax audit
Under the current NTBL, the tax authority can expand a scope of tax audit to other taxation periods or another type of taxes if: i) there are specific suspicions of tax evasion; ii) clear suspicions of certain tax evasion is related to another taxation period; or etc. Revision to the NTBL was proposed to clarify the causes for expansion of the scope of tax audit by requiring: i) to identify specific evidence of tax evasion; or ii) to reasonably suspect that certain items exist in another taxation period in which there are suspicions of similar tax evasion to that of the taxation period subject to initially covered tax audit.
National Tax / Local Tax Coordination Law
Unification of tax audit for determination of income tax base for national and local tax purposes
Under the current tax laws, both the National Tax Service (the “NTS”) and the local tax authority have a right to conduct tax audit to determine income tax base for national and local income tax purposes, respectively. According to the proposed revision, only the NTS has the right to conduct tax audit in relation to calculation of income tax base and the local tax authority will decide local income tax base in accordance with the corporate/individual income tax base determined by the NTS.
Proposed Revisions to Korean Tax Law for 2016
If you have any questions concerning the items in this month’s newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals.