Korean Tax Newsletter (July, 2009)
Revisions to the Tax Laws
Proposed Revision to Ministerial Decree to Tax Incentive Limitation Law ("TILL")
R&D tax credit
Proposed revisions to the Ministerial Decree to the TILL would expand the categories of institutions that are eligible for the R&D tax credit. Under current law, institutions affiliated with companies and R&D departments of companies approved under the Technology Development Promotion Law are eligible for the credit in respect of R&D expenses such as salary paid to R&D researchers, expenses for samples/parts/raw materials, reagent expenses and rent for R&D facilities.
According to the proposed revisions, creative institutions affiliated with companies and specialized creative departments of companies designated by the Ministry of Strategy and Finance ("MOSF") upon the recommendation of the Minister of the Ministry of Culture, Sports and Tourism also would be eligible for the R&D tax credit.
Withholding Tax in India
Under India's 2009/2010 budget presented on 6 July 2009, any person earning income that is subject to withholding tax would be required to obtain a Permanent Account Number ("PAN"). Otherwise, tax would be withheld at the rates provided in the Indian Income Tax Act, the Finance Act, an applicable tax treaty or at a rate of 20%, whichever is highest. A PAN would be needed to claim a refund for tax withheld in excess of the rate specified in the Finance Act or the treaty.
The withholding tax rate on dividends, interest, and royalties and fees for technical services under the Korea-India tax treaty is 15%/20%, 10%/15% and 15%, respectively. The rate on royalties and technical services fees under the Indian Income Tax Act is 10.6%. Since the Indian domestic law rate is less than the treaty rate, the domestic law rate will apply, provided that a PAN has been obtained. If enacted, the proposal would be effective as from 1 April 2010.
Development at Tax Authorities
Plan to Further Enhance R&D Tax Credit to Highest Level among OECD Countries
On 2 July 2009, the MOSF held a conference with the CEOs of major companies and Small and Medium-Sized Companies ("SMCs") to discuss the "Plan to Promote Investment for Job Creation and Economic Recovery". During the conference, the MOSF announced a plan to increase the Korean R&D tax credit rate to the highest rate among the OECD countries. The proposed tax credit rate would be as follows:
|Non-SMCs||R&D expensesⅹ3~6%; or
Incremental R&D expense
|SMCs||R&D expensesⅹ25%; or
Incremental R&D expense
(*) R&D expenses for the current year exceeding the average R&D expenses for the prior four years.
Recent Tax Rulings and Cases
Alternative Minimum Tax with respect to R&D Tax Credit Carryover Amount (Jaejoteuk-665, 2009.07.09)
The R&D tax credit (except for a non-SMC R&D tax credit after deducting the amount equivalent to the salary expense incurred for employees with advanced degrees) is not subject to the alternative minimum tax ("AMT") limitation under revised Article 132 of the TILL effective from 1 January 2004.
The authorities have ruled that where a company has unutilized R&D tax credits due to the AMT, but carried over from prior years before the 2004 revision to the TILL, the carried over R&D tax credit is not subject to the AMT limitation under the current TILL.
Acquisition Costs of Shares of Demestic Company (Jaekukjo-334, 2009.07.21)
Where a foreign company without a permanent establishment in Korea becomes a majority shareholder by acquiring more than a 50% interest in an unlisted Korean company, the foreign company is required to pay a deemed acquisition tax ("DAT") equal to 2.2% of the book value of specified taxable assets of the company (such as real property, motor vehicles, certain memberships, etc.) multiplied by the ownership ratio of the foreign company. The DAT is included in the share acquisition cost basis of the foreign company for purposes of calculating Korean capital gains tax.
In addition, where the Korean company has redeemed its shares owned by the foreign company at an amount lower than the acquisition cost basis, the difference between the capital redemption price and the acquisition cost would increase the acquisition cost basis of the remaining shares.
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:
|Seung Chan Park
+82 (2) 6676-2422
|Young Pil Kim
+82 (2) 6676-2432
|Seong Ran Hong
+82 (2) 6676-2442
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