Korean Tax Newsletter (March, 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
On 23 March 2020, Korea’s National Assembly approved and enacted the Special Tax Treatment & Control Law, which includes various tax reform measures in response to the impact of COVID-19. The major changes that affect corporations and individuals are discussed below.
1. Reduction of income taxes for small and medium-sized enterprises (SMEs) within qualified disaster areas (Article 99-11)
- For qualifying enterprises, the amount of corporate and individual income taxes arising in the tax year that includes 30 June 2020 is reduced by 60% for small-sized enterprises and 30% for mid-sized enterprises.
- Qualifying enterprises include SMEs located in qualified disaster areas as designated under the Basic Law for Disasters and Safety Management, but do not include real estate leasing and supply businesses, professional services businesses, or financial and insurance businesses, among others.
- The tax reduction is limited to KRW 200 million.
- Enterprises claiming the tax reduction will not be subject to a minimum tax and may not claim any other tax incentives (except for job creation tax incentives).
2. Temporary uplift of limitation for deductions of corporate entertainment expenses (Article 136④·⑤)
The limits on deductions of entertainment expenses of corporations, which are based on the amount of the company’s revenue, are increased for 2020 only. The new deduction limits are as follows:
Increased deduction limit
10 billion or less
0.35% of revenue
Over 10 billion but no more than 50 billion
KRW 35 million plus (0.25% of revenues over KRW 10 billion)
Over 50 billion
KRW 135 million plus (0.06% of revenues over KRW 50 billion)
3. Expanded tax incentives for domestic companies relocating overseas facilities to Korea (Article 104-24)
- The existing tax incentives for companies that relocate back to Korea are expanded to apply to cases where an overseas facility is closed, or the facility’s production rate decreases by 50% or more, and existing domestic facilities are expanded.
- Where existing domestic facilities are expanded, the income subject to the tax incentives is limited based on the overseas facility’s level of shrinkage.
- Recapture applies only upon the closure of the newly expanded facilities.
4. Tax credits for real estate leasing business owners offering rental fee discount (Article 96-3)
- A real estate leasing business owner (lessor) that has registered its business with the district tax office and reduces the rent it charges during the first half of 2020 will receive an individual or corporate income tax credit for 50% of the rent reduction.
- The credit applies to reductions of rent charged to a small business owner under Article 2 of the Law on the Protection and Support of Small Business Owners (LPSSBO) for the lease of a commercial building under Article 2 of the LPSSBO that has been continuously used by the tenant for business purposes.
- The tax credit may not be claimed if certain conditions (such as an increase in rental fees or deposits) are met.
- The tax credit is claimed by the lessor when filing the individual or corporate income tax return.
- The lessor will not subject to a minimum tax and may carry forward any excess credit for five years.
▲ News from tax authorities
[Early refunds of year-end tax settlements for 2019 salaries ]
- On 10 March 2020, Korea’s National Tax Service (NTS) announced that it will expedite the tax refunds relating to year-end tax settlements for 2019 payroll taxes that were granted to support taxpayers in response to COVID-19 (limited to companies that apply for early refunds when filing their payroll withholding tax returns).
- Group refunds have been moved to 20 March from 31 March.
- Individual refunds have been moved to 31 March from 10 April.
- Where the year-end tax settlement cannot be completed due to the closure or bankruptcy of a company, affected employees can individually apply for the tax refunds.
- Employees may apply either online via the Home Tax System (the NTS’ e-filing system) or in writing by visiting the tax office.
- The refund application must be made by 20 March 2020.
[Every tax office installs nonhuman kiosk for tax payment]
- As from 1 January 2020, a nonhuman payment kiosk for the convenient payment of national taxes has been installed in every tax office.
- Various types of national tax can be paid via the kiosk, including the year-end tax settlement.
- However, taxpayers will not be able to initiate wire transfers of tax refund receivables at the kiosks.
[Temporary suspension of on-site tax investigations]
- In response to social distancing measures preventing the transmission of COVID-19, the NTS has temporarily suspended on-site tax investigations until 5 May 2020.
- A company for which the statute of limitations for investigation expires soon or that is suspected of hoarding hand sanitizer, masks, etc. may be subject to remote audits (i.e., audits conducted through phone calls, documents, etc. without visiting a taxpayer’s office).
- Remote audits also will be conducted for companies not agreeing to the suspension.
▲ Recent tax rulings and cases
1. Ministry of Economy and Finance, International Tax Department-79, 2020.02.05
In a ruling dated 5 February 2020, the Ministry of Economy and Finance determined that capital gains on subsidiary stock sales should be treated as income from owning shares when determining whether a company is subject to the controlled foreign company rules for Korean tax purposes.
2. Josim2019Seo0753, 2020.02.13o cost incurred in producing entertainment shows, etc.
[Facts of case]
- The taxpayer, a Korean company, entered into a patent licensing agreement with an Irish subsidiary of a US company, to which it paid royalties for business years 2015 through 2017. The taxpayer did not withhold Korean income tax from the royalty payments under Art. 12(1) of the Ireland-Korea tax treaty, according to which the royalties should not have been subject to Korean tax if beneficially owned by the Irish company.
- The NTS, however, assessed withholding tax at 15% under Art. 14(1) of the Korea-US tax treaty, based on its position that the Irish company was a mere pass-through entity and, therefore, the beneficial owner of the royalty income was the US company.
- The taxpayer appealed the assessment to the Tax Tribunal.
- The issue before the tribunal was whether the beneficial owner of the royalty income was the Irish company (and, therefore, the Korean tax authorities did not have taxing rights under the Ireland-Korea tax treaty) or the US company (meaning the Korean tax authorities could tax the royalties at 15% under the Korea-US tax treaty).
[Summary of decision]
- The Tax Tribunal held that the US company was the beneficial owner of the royalty income based on the following:
- Based on price negotiations dating from 2013, the taxpayer and the Irish company entered into the patent licensing agreement in January 2015; however, the US company also participated as a party to the agreement.
- The operating margin of the US company ranged from 16% to 34% for 2015 to 2017. However, the Irish company had accumulated operating losses for those years as well as a capital deficit due to the transfer of most of its revenue to the US company as R&D payments.
- The taxpayer claimed the Irish company had a separate corporate personality because it prepared financial statements and maintained a board of directors. However, the Tax Tribunal found that these activities were not sufficient to prove that the Irish company was the beneficial owner of the royalty income from the licensing agreement.
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