Korean Tax Newsletter (July, 2021)

▲ Tax law amendments

The Korean State Council has promulgated, after deliberation, various tax law amendments to the Restriction of Special Taxation Act. In addition, the National Tax Service has made announcements with respect to value-added tax (VAT) and national tax adjudication matters.

The major regulatory changes are discussed below.

Enforcement Decree of the Restriction of Special Taxation Act

• 1. Special tax treatment for capital gains on substitute land compensation (Enforcement Decree §73)
  
  • A new provision expands the capital gains tax exemption for in-kind contributions to include substitute land contributions. When a taxpayer contributes substitute land (i.e., land transferred to a taxpayer by the government as compensation for the acquisition of the taxpayer’s land) to a real estate investment company, full capital gains tax will not be imposed, but, rather, capital gains tax will be imposed on the market value of the substitute land less the value of a three-year bond for the land.
  • This provision is effective as from 4 May 2021.
    
• 2. Tax credit for landlords that reduce commercial rent (Enforcement Decree §96-3)
  
  • Landlords that reduce the rent on their commercial units will be entitled to tax credit for the amount of such reduced rent.
  • This provision is effective as from 4 May 2021.
    
• 3. Capital gains tax reduction for taxpayers that transfer land for public rental housing construction (Enforcement Decree §97-9) 
  • If both land and buildings are transferred for purposes of public rental housing constructions, and the purchase price or the acquisition cost of each asset is not separately identified, the value between land and buildings must be calculated according to the allocation rule outlined in the Enforcement Decree §166(6) of the Individual Income Tax Act.
  • Required documentation that must be submitted to the local tax office includes proof that the acquirer of the land and buildings is the designated public rental housing constructor according to the Public Housing Special Act §2-1-3 and §4.
  • This provision is effective as from 4 May 2021.
    

VAT Regulations

• New VAT forms have been introduced following tax reform simplifying the VAT administrative process. The new taxation election form has been subdivided into four categories (Form 8(1)-(4)) and two new notice forms have been introduced (Forms 9(1) and 9(2)).
• The forms are effective as from 15 June 2021.
  

National Tax Adjudication Regulations

• 1. The tax judge pool has been expanded to include disposition tax officials in order to reduce the rate of adjudications (§2)
  • Disposition tax officials have been designated to act as tax judges for purposes of dispositions.
  • This provision is effective as from 1 July 2021.
• 2. The representative of the tax judge appointment procedure reformed (§29)
  • The representative of the tax judge will be directly appointed by the head of the National Tax Service.
  • This provision is effective as from 1 July 2021.
• 3. Representative cases with identical issue will be designated to the appropriate public affairs division of the district tax office, and a standard response will be prepared to be shared across all the district tax offices (§10-2) 

▲ News from the tax authorities 

Tax incentive would be expanded for companies that reshore manufacturing operations 

On 21 June 2021, Korea’s Ministry of Strategy and Finance announced tax proposals to incentivize domestic companies to return manufacturing operations from foreign countries to Korea (i.e., “reshoring”).  If a domestic company establishes or expands manufacturing operations in Korea within five years of transferring or closing their manufacturing operations in a foreign country, then the company  would receive a full corporate income tax exemption for the first five years of domestic operations and a 50% exemption for the following two years.  If manufacturing operations in a foreign country are simply reduced, the tax exemption still would be available in proportion to the amount of manufacturing operations reduced in the foreign country. In addition, certain requirements would be eliminated, such as the minimum reduction requirement for foreign manufacturing operations. 

Currently, domestic companies are entitled to apply for tax incentives and subsidies upon building or expanding manufacturing operations in Korea, but only if they have been operating in a foreign country for at least two years. Such tax incentives and subsidies initially were granted only to small and medium-sized enterprises, but this now has been extended to large enterprises. 

R&D tax credit for investments in semiconductor technologies

The K-Semiconductor Strategy announced by the government on 13 May 2021 is a comprehensive measure to enhance the competitiveness of the Korean semiconductor industry in an increasingly competitive global market. More than KRW 1 trillion has been allocated to a special fund to build the world’s largest semiconductor technology hub in Korea.

The government has proposed  to establish a new core strategic technology category for the research and development (R&D) tax credit under the Restriction of Special Taxation Act, in addition to the existing categories for general investment, new growth investment, and proprietary technology investment. Semiconductor-related technologies, such as extreme ultraviolet lithography, would be included in the new core strategic technology category.

The R&D tax credit for the core strategic technology would be 30-40% for large enterprises and 40-50% for small and medium-sized enterprises (SMEs), which is 10% higher than the new growth and proprietary technology investment categories.The capital investment credit for the core strategic technology would be 6% for large enterprises, 8% for medium-sized enterprises, and 16% for SMEs, which is 3-4% higher than the new growth and proprietary technology investment categories (and  3-4% higher than the previous year for capital investments). 

The government has indicated that this R&D credit would be available as from the second half of 2021 through 2024, with the possibility of extension. 

▲Recent tax rulings and cases

• If the foreign tax paid in excess of the deduction threshold in accordance with the Art. 57(1) of the Corporate Income Tax Law (CITL) is related to foreign-source deductible expenses, and if the domestic-source income is in a loss position, the loss carryforward provisions under Art. 57(2) of the CITL and Art. 94(15) of the Enforcement Decree are not applicable. (Seomyun-2020-Bupryunghaesukgookjo-5204, 20 May 2021)

• If a building is partially leased and subject to valuation in accordance with Art. 61 of the Inheritance and Gift Tax Law (IGTL), the leased part and the non-leased part must be valued separately. The leased part must be valued based on the greater of the rent capitalization value or the market value according to Art. 5 of the IGTL and Art. 7 of the Enforcement Decree. The non-leased part must be valued based on the market value according to Art. 61(1) of the IGTL and Art. 50(1) and (6) of the Enforcement Decree. (Sajeon-2020-Bupryunghaesukjaesan-1133, 4 June 2021)

• Property tax deductible from aggregate real property tax (ARPT) must be calculated as the (publicly declared value – tax base) x ARPT fair value ratio x the property tax fair value ratio x the property tax rate,  according to Articles 4-2 and 5-3 of the ARPT Enforcement Decree. (Josim-2021-Seo-2155, 15 June 2021)

• If a nonprofit corporation operating with permission from the competent government authority supplies services at cost for designated nonprofit business purposes, the value-added tax (VAT) is exempt, according to Art. 26(1)(18) of the VAT Law. (Seomyun-2020-Bupryunghaesukbuga-6351, 24 June 2021)

For additional tax news and information from over 90 countries, visit tax@hand or download the tax@hand mobile app today.

Contacts

For further questions or inquiries, please kindly contact representatives listed below.

Inbound Tax Leader, Scott Oleson, +82 (2) 6676-2012 / scoleson@deloitte.com
Indirect Tax Partner, Hong Seok Han : +82 (2) 6676-2585 / hseok@deloitte.com
M&A Tax Partner , Young Pil Kim : +82 (2) 6676-2432 / youngpkim@deloitte.com
BPS Tax Partner, Park Sung Han, +82 (2) 6676-2521 / sunghpark@deloitte.com
TP Partner, Lee Yong Chan, +82 (2) 6676-2828 / yongclee@deloitte.com
GES Partner, Seo Min Soo, +82 (2) 6676-2590 / mseo@deloitte.com