Korean Tax Newsletter (November, 2015)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
Local Tax Law
On October 1, 2015, the Ministry of the Interior announced proposed revisions to the Local Tax Law, Local Tax Basic Law and Local Tax Incentive and Limitation Law and thereafter the proposed revisions to its Presidential Decree and Enforcement Regulation were announced, respectively on November 9 and 11. The proposed revisions would generally become effective from January 1, 2016 unless specified otherwise.
Change in de minimis threshold for resident tax on employee
Before the revision, if the number of employees does not exceed 50, a Korean business is not obliged to pay resident tax on employee, which is imposed at 0.5% of monthly employee payroll. According to the proposed revision, a basis of de minimis threshold is changed from the number of employees to monthly average payroll amount. Specifically, if the monthly average payroll amount of the recent one year of the Korean business does not exceed 50 times of KRW 2.7 million (i.e. KRW 135 million), the Korean business would be exempt from resident tax on employee.
Deemed acquisition tax for a majority shareholder
In case where a majority shareholder (who has acquired more than 50% of shares in a company) acquires additional shares, it is subject to a Deemed Acquisition Tax (“DAT”) at 2.2% (2% for vehicles) on the book value of the company’s certain taxable assets multiplied by the increased ownership ratio of the majority shareholder. However, if the ownership ratio after the additional share acquisition is not more than the maximum ownership ratio within immediately preceding 5 years, it would not be subject to a DAT. Under the proposed revision, the limit on period is abolished and therefore, if the ownership ratio after the share acquisition is lower than the previous maximum ownership ratio, the additional acquisition of shares by a majority shareholder would not be subject to a DAT.
Statute of limitation of local tax
The statute of limitation period under the Local Tax Basic Law is extended from 5 or 7 years to 10 years in case where tax returns are not filed until the due date in the event of acquisition through a gift, or when an actual owner acquires real estate in substance under the nominal trust agreement in accordance with the ‘Law on the Registration of Real Estate under Actual Titleholder’s Name’. The proposed revisions will be effective from the day on which local tax can be levied after the enforcement date of the law.
Alleviation of penalty on failure of withholding tax obligation
In case where it fails to fulfill proper withholding obligation, a withholding agent would be subject to penalty which is the sum of 10.95% per annum of interest penalty and 3%(previously 5%) of un/underpaid withholding tax capped at 10%. The proposed revisions will be applicable to local tax which tax liability accrues after the enforcement date of the law.
Improvement of taxpayer’s rights
Before the proposed revision, even for a taxpayer who does not have any local tax payable, un/under reporting penalty is imposed if the taxpayer does not properly comply with the reporting obligation. However, un/under reporting penalty will be imposed based on actual tax payable amount under the proposed revisions. If there is no local tax payable, a taxpayer would not be subject to tax penalty from failure of the reporting obligation. Also, in case where a taxpayer does not pay additional taxes when filing amended tax returns or overdue tax returns, un/under reporting penalty would not be imposed. The proposed revisions will be applicable to the local tax which tax liability accrues after the enforcement date of the law.
Enhancement of convenience for taxpayer
Before the proposed revision, the local income surtax return should be filed with each district office to which each place of business belongs, together with other supporting documents (e.g., financial statements, allocationstatement of local income surtax, etc.). However, according to the proposed revision, a taxpayer can submit other supporting documents only to the relevant district office of the business headquarters’ location.
Foreign Investment Promotion Law
On October 16, the Ministry of Trade, Industry and Energy announced proposed revisions to the Presidential Decree of Foreign Investment Promotion Law.
Foreign investment amount
In order to qualify as a foreign investment under the Foreign Investment Promotion Law, the investment amount should be more than KRW 100 million. Under the proposed revision, even in case of capital redemption with no consideration, it becomes clear that the existing investment amount would remain unchanged.
The Korean National Assembly passed the revisions to the Commercial Code on November 12 which newly adopts various M&A measures to facilitate companies’ restructuring and investment through expanding M&A market and promoting economic growth. The major revisions are as below and, unless specified otherwise, the revisions become effective from 3 months after the law is promulgated.
Adoption of triangular share exchange, reverse triangular merger and triangular split-off merger
In order to meet economic demands for various M&A structures using a subsidiary, the rules for triangular share exchange, reverse triangular merger and triangular split-off merger are newly introduced in addition to the existing triangular merger.
(*) Definition of terms
- Triangular share exchange: In case of a share exchange transaction, the parent company’s shares are issued to shareholders of a target company and shares of a target company are issued to the subsidiary. In the end, the target company becomes a grandson company of the parent company.
- Triangular merger: In consideration for a merger, a subsidiary provides a parent company’s shares to shareholders of a target company and the target company is merged into the subsidiary.
- Reverse triangular merger: In consideration for a merger, a subsidiary provides a parent company’s shares to shareholders of a target company and the subsidiary is merged into the target company.
Opposing shareholders’ rights to request to the company for the purchase of shares
As it has not been clear on whether shareholders of non-voting shares can exercise rights to request to the company for the purchase of shares owned by the shareholders when they are opposed to a resolution of shareholder’s meeting, the revision makes it clear that the shareholders of non-voting shares can exercise such rights. The revision would apply from the case when the request to the company for the purchase of shares is on-going at the time of enforcement date of the revised Commercial Code.
Alleviation of conditions for small-scale share exchange
Like a small-scale merger, in case where the total number of shares newly issued for a share exchange does not exceed 10% (previously 5%) of outstanding shares of the company which becomes a wholly owning parent company after the share exchange, the approval can be made by a board of directors’ meeting instead of a general meeting of shareholders. Also, according to the revisions, in case where the total number of treasury shares transferred for a share exchange or merger does not exceed 10% of outstanding shares, it would also qualify as a small-scale share exchange or merger.
Adoption of a simplified transfer, takeover or lease of business
Like a simplified merger or share exchange, in case where all shareholders of a company which involve a transfer, takeover or lease of business give their consent or in case where more than 90% of outstanding shares of the company are owned by the transaction party, the approval of a general meeting of shareholders of the company may substitute for the approval of the board of directors.
Revisions to the laws
Action Plans to BEPS Project
As the BEPS (BEPS : Base Erosion and Profit Shifting) measures were agreed in the G20 Leaders’ Summit held on November 15 and 16, the Ministry of Strategy and Finance (“MOSF”) has announced its action plans to the BEPS Project in the below categories which aims to prevent tax evasion of Multinational Enterprises(MNEs).
BEPS Project(1): Minimum standards
BEPS Project (2): Ensuring coherence of corporate income taxation
BEPS Project (3): Preventing abuse of international standards
BEPS Project (4): Ensuring transparency
The main action plans for BEPS Project (1) and (2) are summarized as below and other action plans for BEPS Project (3) and (4) are targeted to be announced by early December.
|Project||Action||BEPS Issue||Action Plan of the MOSF|
|Prevent treaty abuse||Unjust benefit of non-taxation or reduced taxation through tax treaty abuse||
|Counter harmful tax practices||Base erosion and profit shifting to low tax rate countries which provides preferential tax regimes for income to shift easily (e.g. service or intellectual property)||
|Country-by-Country Report||Insufficient information for tax authority on MNEs' transfer pricing ("TP") report||
|Dispute resolution||Increase in uncertainty and disputes in the interpretation and application of numerous new tax treaties||
|Ensuring coherence of corporate income taxation||Hybrid mismatch arrangements||Double non-taxation by using differences in the tax treatment of an entity or instrument (e.g. convertible bond) under the laws of two or more tax jurisdictions||
|Strengthen CFC rules||Profit shifting and deferral of taxation on the income of a foreign subsidiary in CFC jurisdictions||
|Limitation of dductions for interest expenses||Base erosion through the use of interest expense from highly leveragedfinancing structure||
|OECD Recommendations||Domestic CFC rules|
|Scope of CFC (entity)||Corporation, Partnership, PE and etc.||Corporation|
Suggested alternatives (either full taxation or partial taxation can apply)
|Computation of Income||CFC losses should only be offset against profits of CFC||No rules for the limitation of offsetting losses|
(Note 2) If a domestic company borrows a loan from its Foreign Controlling Shareholder ("FCS") or a third party with a guarantee from the FCS, and such borrowing exceeds 200% (600% for financial company) of its equity (or contributed capital if greater than the equity) in the company, the interest expense on the borrowing exceeding the thin capitalization ratio of the FCS's equity in the company is not deductible.
News from tax authorities
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.