Korean Tax Newsletter (January, 2020)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
▲ Revisions of Tax Laws
In December 2019, Korea’s National Assembly approved the tax reform proposals for 2020. The tax reform makes changes to 15 laws, including the Corporate Income Tax, Individual Income Tax, and amends other tax incentives.
The major changes that affect corporations and individuals are discussed below.
[Framework on National Taxes]
1. Reduction of penalty taxes
If an amended tax return is submitted within one month after the original due date, 90% of underreporting penalty taxes would be waived.
2. Introduction of penalty tax on delayed payment of Special Agriculture and Fishery taxes based on Local Income Tax would be postponed.
- 1 January, 2020 → 3 February, 2022.
3. Non-residents income receipt’s rights to claim for the tax refund for with withholding tax liabilities. If the party responsible to file for withholding tax is unable to assist in claiming for the withholding tax refund due to bankruptcy, discontinuance of business, etc. the right to claim for the withholding tax refund extends to non-residents.
[Corporate Income Tax Law]
1. Small and medium-sized enterprises (SMEs) would be allowed to deduct entertainment expenses up to KRW 36 million.
- Maximum deduction of entertainment expenses for SMEs increased from KRW 24 million to KRW 36 million
- Deduction rates in respect to gross income :
- Under KRW 10 billion: 0.2% → 0.3%
- KRW 10 billion~50 billion: 0.1% → 0.2%
(Over KRW 50 billion, the rate remains to be 0.03%)
2. Criteria to determine the dividend received deduction (“DRD”) rate of holding company would be modified.
The “Greater than” would be replaced with “equal or greater than” and “equal or less than” would be replaced to “less than”.
[Individual Income Tax Law]
1. Calculation formula to determine the limitation of retirement income of directors will be changed.
The formula before the tax revision was Annual Average Amount of the gross income earned during the previous three years prior to the date of retirement x 1/10 x The period of employment after January 1, 2012/12 x multiplier of 3. The multiplier will be changed to 2.
- the tax revision will be effective on contributions to pension made on or after Jan 1, 2020.
- The multiplier of 3 will be applied to contributions to pension made during Jan 1. 2012 to Dec 31. 2019
[Tax Incentive Limitation Law]
1. Revisions have been made for tax incentives on acquisition of foreign corporations in materials, parts, and equipment production business.
- Financial investment businesses (i.e. finance and insurance business) would no longer be eligible.
- Acquisition method: Stock purchase + Asset/business transfer
- When acquiring with co-investors, at least 50% of total investment shall be from domestic corporations in order to be eligible (or at least 30% with the control of the acquired corporation).
2. Tax credit rates will be temporarily increased for investment in facilities to improve productivity for medium-sized leading enterprises (MSLEs) and SMEs.
The tax credit rate will be increased to 5% and 10% for MSLEs and SMEs, respectively. The investment made from 2021 3% and 7% of tax credit rates will be applied.
3. Tax credits are extended for two years until Dec 31, 2021 for the investment in pharmaceutical quality management facilities.
4. Tax credit for video production cost is applicable to cost incurred in producing entertainment shows, etc.
5. When two or more heirs succeed to a family business together, gift tax incentives for family business succession will be available.
6. When a taxpayer leases at least two housing units, individual income tax and corporate income tax deduction rate for small-housing rental business is reduced to 30% and 75% when leasing at least 4 years and 8 years, respectively, for the first housing unit leased and 20% and 50%, for the second housing unit leased and beyond.
7. Tax incentives for certified enterprises for their quality in international logistics agency business are introduced.
- In case the freight expense incurred to outbound freight forwarders is more than 40% of total maritime transport cost (expenditure rate should be higher than the previous tax year)
- 1% of the total shipping cost could be claimed as tax credit (the increased amount from previous year could be eligible for 3% of additional tax credit)
- Tax credit limit is up to 10% individual or corporate income tax.
8. Corporations that are tenants in National Food Cluster Center are eligible to receive 100% deduction of individual and corporate income taxes for 3 years and 50% deduction for another 2 years.
9. New legislation on cases subject to preliminary feasibility assessment of tax incentives and exemption requirements.
- Additional requirements for deliberation by the Cabinet meeting for economic and social response
- Matters pertaining to promote relations between South and North Korea or matters pursuant to agreements and treaties between countries
- Urgent matters to discuss due to international conventions or national events.
- When seeking improvements for existing tax incentives by reflecting in-depth evaluation results
Amendments of the 20 enforcement decrees have been approved at the Cabinet meeting and they will be promulgated and go into effect in February. The major changes that affect corporations and individuals are discussed below.
[Enforcement decree of Corporate Income Tax Law]
1. A corporation in the course of performing a restructuring plan is allowed to utilize carry forward losses to deduct up to 100% of taxable income. The cap on deductions of carry forward losses increased from 60% to 100% of taxable income.
2. Personnel expense of expatriates assigned to overseas branches which were 100% invested by the taxpayer (SMEs or MSLEs) are deductible for tax purpose under the condition that less than 50% of total annual salary and expense of the expatriates’ are paid by the taxpayer.
3. Accounts receivables from 3rd parties that have not been collected for two years after the payment due date are qualified as deductible bad debt expenses.
4. A small amount of account receivables, the value of which does not exceed KRW 300,000 (increased from KRW 200,000) which at least six months have passed since the collection date are qualified as deductible bad debt expense.
5. Instant depreciation is allowed for repair cost in case the repair cost for each item of asset is less than KRW 6 million which increased from KRW 3 million.
6. Metal molds are no longer a qualified type of asset eligible for instant depreciation.
7. Revisions on deductions of corporate passenger vehicles expense.
- The deductible business-purpose passenger vehicle expense without the operation records is increased from KRW 10 million to KRW 15 million per vehicle
- In case of loss on disposal of passenger vehicles or car lease termination, it is allowed to deduct the related cost up to depreciation expense (cannot exceed KRW 8 million per year) even after the 10th year since the disposal or termination of lease. Before the revision, it used to have no limitation on deductible expense after the 10th year.
[Enforcement decrees of Individual Income Tax Law]
1. Gains from disposal of construction machines which were acquired after Jan 1, 2018 are subject to individual income tax.
2. Donations carry forwards are deducted against gross income before the donation expenses incurred in current year.
In case an individual makes an in-kind donation, he/she could choose between the market price and the book value, whichever is bigger, as the value of donation.
3. Reduced scope of collateral land eligible for 1 house per 1 household transfer tax exemption.
Multi-purpose house of which real transaction price is over KRW 900 million will be eligible for 1 house per 1 household transfer tax exemption and 80% of long-term holding deduction only on the residential-purpose portion.
4. Rationalization of the calculation method of the number of jointly owned houses for the housing rental income tax purpose.
Before the revision, in case houses are jointly owned, only the number of houses owned by the largest stakeholder was added. The revision makes the minority stakeholders who make more than KRW 6 million as annual housing rental income or own more than 30% of houses of which value exceeds KRW 900 million to be deemed to own the jointly owned housing for the tax purpose.
5. Before the revision, when a taxpayer registers one house per one household as a private apartment for rental in districts subject to adjustment, he/she was eligible for transfer tax exemption regardless of the length of residence. As a result of the tax reform, two-year minimum length of resident is required in order to receive one house per one household tax exemption.
6. Before the revision, home owners who temporarily owned two houses in districts subject to adjustment could enjoy transfer tax exemption when selling the first house within two years after the acquisition of the second house. As a result of the tax reform, the transfer tax exemption is allowed when the taxpayer moves into the second house and sells the old house within one year after the acquisition of second house.
7. In case taxpayers who own multiple houses in districts subject to adjustment transfer houses they owned more than 10 years, they will not be subject to special heavy transfer tax temporarily for transfers made during the period of Dec 17, 2019 to June 30, 2020.
[Enforcement decree of Tax Incentive Limitation Law]
1. The scope of beneficiaries of the tax incentives for venture business has been expanded to include the Fintech companies as defined in the Electronic Financial Transactions Act, Financial Investment Services and Capital Markets Act, and Foreign Exchange Transactions Act.
2. Detail of the tax incentives available for the acquisition of foreign corporations that produce material, equipment, and parts, has been established.
- The target company of the acquisition must be a foreign corporation which (i) produces material, equipment, and parts, and (ii) the sales of the aforementioned items exceed 50% of the total sales of the corporation.
- The above condition should be met until the end of the fourth fiscal year from the beginning of the next year in which the acquisition occurred.
3. Detail of the tax incentives available for the joint contribution by the corporations with demands for material, equipment, and parts.
- The target company of the joint contribution must be (i) a small and medium-sized; and (ii) a leading enterprise that specializes in the production of material, equipment, and parts.
- The Memorandum of Understanding (“MOU”) should be signed between the investor and investee companies, and each investor company should contribute more than 25% of the total paid-in capital of the investee company.
- Investee company, within 3 years of the investment, shall utilize more than 80% of the contributed capital to i) R&D; ii) Research test facility and/or vocational training facility; iii) Productivity improvement facility; or iv) New growth technology commercialization facility.
4. The scope of beneficiaries, such as advanced technology-based small and medium-sized entities, of the tax incentives for investments has been defined as below:
- The target company must be i) certified excellent technology company; ii) certified excellent R&D company; and iii) certified excellent technical grade company
- The invested stocks must be held for more than 3 years and incentives should not be available to the related parties.
5. The scope of deductible expenses under 5G Network Investment Tax Incentives has been expanded to include the incidental costs such as construction costs, etc.
6. The scope of beneficiaries for tax incentives available for investments in safety facilities has been expanded to include the oil/heat pipelines, LPG storage facilities, etc.
7. The scope of tax incentives for investments in productivity improvement facility has been expanded to include the smart factory that utilizes the data to actively manage the factory production.
8. The scope of the assets subject to accelerated depreciation has been expanded as below:
- The previous application period of 7/3/2019~12/31/2019 has been extended to 2020/6/30.
- The life of the depreciable business assets, that include R&D facility, new commercialization facility, process improvement facility, and energy saving facility, is reduced by 75% for SMEs, 50% for large companies.
9. Detail of the tax incentives available for the corporations hiring female discontinued-career employees has been established.
- The definition of “discontinued-career” has been expanded to include the following:
- If the employee got married within a year of unemployment;
- If the employee has a child attending pre-college schools;
- The definition of “peer industry” has been expanded to the same kind of business.
10. The conditions of tax incentives available for gift tax on the succession of family business have been relaxed, such as changing the industry of the business.
11. R&D tax incentives available for HR development costs such as college customized education expenses, etc.
12. The definition of new growth and original technology has been expanded to include advanced material, equipment, parts, system semiconductor design and manufacturing technologies.
[Enforcement decree of Inheritance and Gift Tax Law]
1. The conditions of tax incentives available for gift tax on the succession of family business have been relaxed.(* table 1)
2. The related subcontractor transaction now excludes the transaction with the entity which more than 50% of capital is contributed by the public trusts and funds.
3. Valuation method for Inheritance and Gift Tax has been revised as below:
- Acquisition price by the related parties shall not be recognized as a fair market value.
- Fair market value of the buildings and business industry change of the family business succession are now evaluated by the KNTS valuation committee.
4. The conditions for the payment due extension tax incentive available for the succession of family business have been relaxed.(**table 2)
[Enforcement decree of Value Added Tax Law]
1. VAT is now exempt on the imported airplane parts
2. The conditions for Import VAT payment extension available for SME are relaxed. The payment extension is available if the payment is made within 15 days from the payment due date. The due date of the application is also extended from CIT filing date to three months after the filing date.
[Enforcement decree of Adjustment of International Taxes Act]
1. Burden of proof for routing of transactions is levied when the domestic tax burden has decreased by more than 50%.
2. Late filing penalty for tax compliance of foreign financial accounts has been reduced from 10~70% to 30~90% to incentivize self-reporting.
▲ News from tax authority
Introduction of 「Advance Examination Procedures for R&D Tax Credit」
The advance examination procedures to the Commissioner of the NTS can be requested to assess whether certain R&D expenditures are eligible for R&D tax credit.
- Applicants: domestic companies and Korean residents (excluding foreign invested companies and non-residents) who wish to claim R&D tax credit
- Effects of examination: ① if the applicant claimed R&D tax credit in accordance with results of the advance examination, penalty for under-reporting will not be imposed; ② Contents completed advance examination will be excluded from a pool subject to tax returns validation and post-verification of tax incentives.
Initiation of Appraisal Service to Enhance Tax Equality under Inheritance and Gift Tax Law
If the value of the inherited or gifted property appraised and reported under supplementary valuation method is significantly different from the fair market value, the Commissioner of the NTS may appraise respective property and impose taxes assuming such appraised amount is the fair market value.
The recently amended the Presidential Decree of the Inheritance and Gift Tax Law (IGTL) provides a legal basis for appraisal services by approving above appraised value as the fair market value although it is determined after the filing due but before the due date for the tax authority’s determining the inheritance/gift tax base and tax payable.
Appraisal services cover non-residential real estate (excluding officetels and commercial buildings notified by the NTS) and land without buildings.
Applicable to inheritances and gifts occurred on or after February 12, 2019.
Initial Year Imposing Tax Filing Obligations on Every Home Rental Income
An owner of home rental business earning less than KRW 20 million (based on earnings in 2019) is also required to file tax returns. In case where the owner of home rental business does not register its business within 20 days after the start date of home rental, the penalty equal to 0.2% of rental income is imposed.
* If home rental is started prior to December 31, 2019 and respective business registration is completed until January 21, 2020, no penalty will be imposed.
The owner of home rental business should report the status of business place including rental income, etc. by February 10 to the tax office having jurisdiction over its business place. The owner is also required to report global income (i.e. all income including rental income) during the period from May 1 to June 1 to the head of tax office having jurisdiction over the area of his/her residence.
▲ Recent tax ruling case
Seoul Administrative court 2019Guhap60240, 2019.11.22.
Insurance sales commissions received by a financial investment institution which also runs the business of insurance franchise are not includible in computing its tax base of the education tax.
(Issue): Whether insurance sales commissions paid by an insurance company and received by a financial investment institution which also runs the insurance franchise are includible in computing the tax base of the education tax given such commissions are income of financial/insurance company.
(Summary of judgement): A taxpayer’s obligation of the education tax payment should be determined based on the nature of work performed and the source of income instead of based on the nominal legal status.
Insurance sales commissions are received by the taxpayer since it acted as an insurance franchise rather than it undertook tasks of financial investments and related activities as a financial investment institution.
Accordingly, such commissions are not subject to the education tax.
Officetels constructed by the taxpayer were subject to VAT because they fall out of the scope of VAT exempted housing (i.e. national housing) under the Special Tax Treatment & Control Law (‘STTCL’). However, the National Tax Tribunal (‘NTT’) concluded the taxpayer’s reliance on NTT’s previous decision constructed a reasonable cause for tax abatement, therefore, the imposition of penalty taxes for under-reporting VAT and for incomplete VAT invoice was invalid.
(Issue): Whether officetels constructed by the taxpayer with usable square feet of 85㎡ or smaller can be considered as VAT exempted national housing under the STTCL. Whether penalties for failure to file VAT returns and pay VAT should be assessed in case where non-filing of VAT returns was due to reliance of a taxpayer on NTT’s interpretation that such officetels were not subject to VAT prior to revision at a later time by the Joint Meetings of Tax Judges (2017Seo991, 2017.12.20).
(Summary of decision):
The STTCL provides VAT exemption when national housing defined under the Housing Law (‘HL’) and related construction services are supplied. However, the Housing Law defines officetels as ‘quasi-housing’ rather than ‘housing’, a prior condition for ‘national housing’. Accordingly, the Tax Tribunal concluded officetels constructed by the taxpayer were not qualified for national housing and is not eligible for VAT exemption. The NTT ruled the taxpayer was not responsible for paying penalty taxes for under-reporting of VAT, for incomplete VAT invoice, and for non-filing of preliminary return on capital gains based on the supply of taxpayer’s officetels was made prior to revising NTT’s view by the Joint Meetings of Tax Judges and the taxpayer did not file VAT returns relying on NTT’s previous interpretation. However, the NTT ruled penalty tax for non-payment should be borne by the taxpayer considering equality in tax.
The taxpayer anticipated its acquisition of apartment complex would qualify for the acquisition tax exemption provision and commenced causative action for acquisition on July 2, 2014 before the repeal of provision on December 31, 2014. Although apartment construction was completed on July 23, 2016 after the end date of sunset provision, its causative action had initiated prior to the repeal. Therefore, it is reasonable to view taxpayer’s apartment was subject to the provision repealed and should be exempt from acquisition tax.
(Issue) Article 33(1) of the Local Special Tax Treatment & Control Law (‘LTTCL’) provided acquisition tax exemption in case of certain apartment complex (i.e. more than 5 units but smaller than 60㎡) built by December 31, 2014. Whether a taxpayer is eligible for acquisition tax exemption, in case a taxpayer had started apartment construction from July 2, 2014 and completed on August 23, 2016 in the belief such apartment would be exempted from acquisition tax, although the provision repealed before the completion date.
(Summary of decision) The taxpayer commenced construction on July 2, 2014 which was before the end date of sunset provision, therefore, it is reasonable to apply the repealed provision and exempt from acquisition tax for taxpayer’s apartment complex.
Seomyon 2018 Beopin 3678, 2019.12.27
For purposes of computing tax credits, the number of employees should be counted excluding employees turning to age 30 in the relevant taxable year although these employees were counted in the immediately preceding taxable year.
(Summary of ruling request)
Tax incentive for individual or corporate income tax purposes is given where the headcount of regular youth employees between age 15 and 29 in the relevant taxable year exceeds the headcount of such employees in the preceding taxable year (Article 29-5(1) of the STTCL and Article 26-5(3) of the Presidential Decree of the STTCL). Nonetheless, tax credit is subject to recapture if the headcount of regular youth employees is decreased. In order to compute recapture amount, employees at age 29 or under on the last date of the taxable year counted for tax credit computation should be deemed to be under 29 even after subsequent tax years (Article 29-5(2) of the STTCL and Articles 26-5(6) and 26-5(7) of the Presidential Decree of the STTCL).
Whether an employee turned to age 30 in the relevant tax year can be deemed to be under 29 referencing Article 26-5(7) for purposes of computing tax credits for increasing jobs for youth.
In case where an employee qualifying for regular youth employee in the preceding tax year turned to 30 in the relevant tax year, Article 26-5(7) of the Presidential Decree of the STTCL is not applicable when computing the headcount under Article 29-5(1) of the STTCL.
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