Korean Tax Newsletter (July 2023)

▲ Revisions to tax laws

The major revisions introduced by the Ministry of Economy and Finance on June 30th (Wed) are as follows:

[Individual Excise Tax Law] (Presidential Decree No. 33607, 2023.6.30)

A. Termination of Reduction in Individual Excise Tax for Automobiles

• (Revised content) The system of flexible tax rates for individual excise tax on automobiles (basic rate of 5% → flexible rate of 3.5%, with a threshold limit of 1 million won) that has been extended five times since July 2020 and which was in effect until June 30, 2023, will be terminated as of June 30.
• (Purpose) Considering that 1) the "reduction in individual excise tax standard for domestic cars" will be newly implemented in the second half of the year, resulting in an 18% reduction in the tax standard for domestic cars and 2) a 100% exemption from individual excise tax for environmentally friendly cars, as well as 3) the continuation of special provisions such as tax reductions for multi-child families purchasing passenger cars, it is expected that consumer burden will not increase significantly even with the termination of the current flexible tax rate.
• (Effective date) Scheduled to be terminated as of June 30, 2023.

[Local Tax Law] (Presidential Decree No. 33609, 2023.6.30, Partial Revision)

B. Decrease in Fair Market Value Ratio for Property Tax on Housing in 2023 (Local Ordinance Article 109, Paragraph 1, Clause 2)

• (Revised content) the fair market value ratio for property tax on housing in 2023 will be reduced.
• (Before revision) 60% of the assessed value. However, for houses recognized as the one house per household for the calculation of the taxable base for property tax in 2022, the tax was based on 45% of the assessed value.
• (After revision) 60% of the assessed value. However, for houses for which the taxable base for property tax, established in 2023, is calculated and recognized as the one house per household, the following applies:

1) Houses with an assessed value of 300 million won or less: 43% of the assessed value.

2) Houses with an assessed value exceeding 300 million won but not exceeding 600 million won: 44% of the assessed value.

3) Houses with an assessed value exceeding 600 million won: 45% of the assessed value.

• (Effective date) To be implemented from June 30, 2023.

▲ Tax Authorities News

Financial Supervisory Service notice in relation to Trade of Overseas (HQ) Listed Stock Acquired through a Stock Compensation System

On the 19th of June, the Financial Supervisory Service issued a precautionary notice for domestic employees of global companies when trading overseas listed stock received through the employer stock compensation system.

This notice was issued considering the expansion of the stock compensation systems (performance-based incentives) for beneficiaries and the increased trading of overseas listed stocks (overseas HQ) by domestic employees.

「Foreign Exchange Transactions Act」 and 「Capital Market Act」 stipulate that when trading overseas listed stocks, it should be done through domestic investment intermediaries (domestic securities companies). If domestic employees trade the overseas listed stocks (overseas HQ) received, or deposit the funds in overseas financial institutions through overseas investment intermediaries (overseas securities firms), they may be subject to sanctions for violating the 「Foreign Exchange Transactions Act」 and other regulations. Furthermore, if the trading funds are deposited in overseas financial institutions (overseas banks, etc.), it is stipulated that advance reporting of overseas deposits to the foreign exchange bank (domestic bank) is required.

In the event of violation of this reporting obligation (penalty amount for violation when trading through overseas securities firms: USD 10,000, penalty amount for violation when depositing trading proceeds in overseas financial institutions: USD 20,000), a penalty equivalent to 2% of the violation amount will be imposed. However, if voluntary reporting of the violation obligation is made, a 50% reduction may be applied.

In other words, to avoid such violations and potential penalties, it is necessary to deposit the overseas listed stocks (overseas HQ) with domestic investment intermediaries (domestic securities companies) and then trade them. Especially, when domestic employees of global companies receive overseas listed stocks as part of the stock compensation system and trade them through overseas investment intermediaries, the likelihood of violation is high, so companies and employees are advised to be cautious when dealing with stock received through overseas employer stock compensation plans.

▲ Tax rulings and cases 

A. According to the tax ruling (Joteuk, Semeon-2022-Byeopgyugukjo-2297, 2023.06.13,), a foreign-invested company that has established a factory within an economic free zone for the purpose of engaging in elevator manufacturing is eligible for tax exemption. However, the elevator maintenance and repair service operated by the same foreign-invested company does not fall within the scope of the designated tax exemption business.

▣ Inquiry

The scope of the tax exemption applies to a foreign-invested company that has received a tax exemption decision from the Minister of Strategy and Finance for investment in elevator manufacturing factory facilities and is engaged in elevator manufacturing and installation, maintenance, and repair services. 

▣ Response

According to Article 121-2, paragraph 1, clause 2-2 of the 「Tax Incentive and Limitation Law」, when applying tax exemptions for foreign investment, the scope of the tax exemption is determined by taking into account the designated scope of exemption decided by the Minister of Strategy and Finance under the same Article, paragraph 8. Therefore, in the case of a foreign-invested company that has received a tax exemption decision from the Minister of Strategy and Finance for establishing factory facilities within an economic free zone for the purpose of engaging in elevator manufacturing, the elevator maintenance and repair service operated by that company does not fall within the designated scope of tax exemption.

B. According to the ruling (Joteuk, Semeon-2023-Byeopin-1004, 2023.06.14), personnel expenses of an assistant who works in a dedicated department for creative work without performing other tasks and supports the execution of creative development are considered eligible costs for research and human resources development tax deductions.

▣ Inquiry

Whether the personnel expenses of an assistant working in a dedicated department for creative work within a company qualify as eligible costs for research and human resources development tax deductions under Article 10 of the 「Tax Incentive and Limitation Law」.

▣ Response

The personnel expenses of an assistant who works in a dedicated department for creative work within a company, exclusively performing creative development tasks without engaging in other duties, are considered eligible costs for research and human resources development tax deductions under Article 10 of the 「Tax Incentive and Limitation Law」. (However, individuals who qualify as shareholder executives under Article 7, paragraph 3, clause 1, 2, or 3 of the 「Enforcement Decree of the Tax Incentive and Limitation Law」 are excluded.)

C. Regarding the question of whether an overseas financial account qualifies as a joint account and whether it falls under the category of the actual owner who is responsible for reporting the overseas financial account under Article 53 of the 「Adjustment of International Taxes Act」, it is a matter to be determined based on various factors and overall circumstances (Gihwekjaejeongboo Gookjejosejedogwa-282, 2023.06.02).
▣ Inquiry

When a domestic corporation forms a joint venture, such as a joint venture of A, B, and C, to carry out a jointly awarded construction project overseas and operates a business financial account under the names of "JV of A, B, C," whether the joint venture member who participated in the joint venture (e.g., domestic corporation C) needs to report the financial account as a joint account holder or the actual owner.

▣ Response

According to Article 53, paragraph 2, clause 2 of the 「Adjustment of International Taxes Act」, a joint account refers to an account held by two or more individuals under a joint account opening procedure at a financial institution of the concerned country, where two or more individuals are listed as depositors by mutual agreement. Therefore, the determination of whether it is a joint account depends on factors such as the account opening agreement and the joint account opening procedure. In this case, it is determined that it does not qualify as a joint account.

The determination of the actual owner is based on the laws and agreements of the relevant jurisdiction, in accordance with Article 94 of the 「Enforcement Decree of the Adjustment of International Taxes Act」. It considers factors such as whether the individual bears the economic risk in transactions related to the specific overseas financial account, receives income such as interest or dividends, or has the authority to dispose of the account. In this case, it is determined that the individual does not qualify as the actual owner.

D. Due to the exclusion of Die & Mould from the scope of immediately depreciable tools through legal amendments, even in cases where the standard useful life of a Die & Mould has changed, if the depreciation has been reported and applied based on the initially declared useful life before the enforcement date of the amended Corporate Tax Enforcement Decree, the initially declared useful life should be applied (Gihwekjaejeongboo Beobinsejegwa-352, 2023.06.22).

▣ Inquiry

Method for applying the useful life for depreciation of a Die & Mould (Special Tooling) acquired before January 1, 2020.

▣ Response

Even though the Enforcement Decree of the Corporate Tax Act was amended (2020.2.11. Presidential Decree No. 30396), to exclude Die & Mould from the category of immediately depreciable tools and change the standard useful life for Die & Mould, if the useful life of the Die & Mould was declared and applied before the enforcement date of the amended Enforcement Decree of the Corporate Tax Act, the initially declared useful life (by asset) should still be used, as specified in Article 28, paragraph 4 of the Enforcement Decree of the Corporate Tax Act.

Contacts

If you have any questions regarding the above information, please contact the provided contact information below, and we will be happy to assist you with a response.

Inbound Tax Leader, Scott Oleson | scoleson@deloitte.com
Tax Partner , Young Pil Kim | youngpkim@deloitte.com