This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.

Bookmark Email Print page

Korean Tax Newsletter (February, 2007)


Revisions to Tax Laws

Revision to Tax Incentive Limitation Law

The Tax Incentive Limitation Law ("TILL") revised as of December 30, 2006 introduced the Earned Income Tax Credit ("EITC") to provide tax benefits to workers who have dependents with low income. The purpose of the EITC is to encourage low income earning workers for more working and to supplement their earned income, which will be effective from January 1, 2008. More details for the newly introduced EITC will be provided by Presidential Decree of the TILL.

Proposed Revision to Presidential Decree of Corporate Income Tax Law

  • In accordance with the current Corporate Income Tax Law ("CITL"), capital lease assets leased from a leasing company under the Credit Finance Law ("CFL") or the Law for Promotion of Small-medium Sized Companies & Purchase of Goods ("LPSCPG"), are regarded as assets of the lessee for which the lessee could recognize depreciation expenses, while all other types leased assets are recorded on the lessor's books. Under the proposed law, if the capital lease can meet conditions under the CITL, it can be regarded as a capital lease even if an asset is not leased from the leasing company under the CFL and the LPSCPG. More details for the capital lease under the CITL will be provided by Ministerial Decree of the CITL.
  • Under the current law, a financial company may apply the greater of: i) 2% of its loan receivables; or, ii) the amount of loans multiplied by the actual ration of bad debts order to compute the tax-deductible limit of the allowance for bad debt and alternatively, the financial company can also select to apply iii) the standard limit guidance of the Financial Supervisory Service or the Ministry of Finance and Economy. The proposed law, however, stipulates that the tax deductible limit of the allowance for bad debt that the finance company should apply is the greatest of: i), ii) or iii) without any selection.
  • As a type of transaction subject to anti-avoidance rules, the proposed law newly includes derivative transactions between related parties where benefits are transferred to a counterpart related party through not exercising the right in the derivative or by adjusting the exercise period.
  • Under the CITL as currently in force, if a company makes a loan to related parties, the interest rate should be determined based on an imputed interest rate announced by the tax authority (currently, 9%). Under the proposed law, the weighted-average borrowing interest rate of the company should be regarded as an imputed interest rate. However, if it is not available, the interest rate (currently, 9%) announced by the tax authority should be used as the imputed interest rate. More details for the weighted-average borrowing interest rate will be provided by Ministerial Decree of the CITL.
  • Certain paper companies listed under the CITL (e.g., SPCs), may be entitled to claim deductions for dividends when they distribute 90% or more of their distributable income. However, there have been no specific restrictions on the actual dividend payments to the shareholders. According to a new provision introduced under the proposed law, if paper companies do not pay dividends to their foreign shareholders within 3 months from the date of resolution of dividend declaration, the dividend will be deemed to have been paid to their foreign shareholders on the last day of the 3rd month from the resolution date, at which time the Korean withholding tax will be applied for the dividend income.

Developments at Tax Authorities

Agreement between Korea and Qatar for a new tax treaty

On January 30, 2007, MOFE announced that Korea and Qatar had agreed on a new tax treaty between Korea and Qatar at a working-level conference. During the conference, the two countries agree to adopt 'Tax Sparing Credits' as a tax incentive for foreign direct investments, which, along with low tax rates under the treaty, is expected to lighten the burden of investors' tax liabilities. Furthermore, the two countries agreed that any business income generated from an off-shore construction place should be considered as non-taxable and such agreement is included in the Protocol.

In this regard, this agreement has formed a foundation for business entrance, mutual investment and economic cooperation between the two countries. The agreed tax treaty will be in force after being signed and completing the ratification procedures of National Assembly.

Repeal of taxpayers' obligation to submit documents on production rate of yield

NTS has been receiving documents annually on the production rate of yield from certain manufacturing companies; however, it repealed such taxpayers' obligation as of January 24, 2007. The production rate of yield refers to a ratio between input of raw materials and production of products. NTS has used the documents submitted by taxpayers for examination of the appropriateness of filed tax returns and assessment of tax computed based on purchase information in cases where books or supporting documents are unavailable to be provided to NTS.

Recent Rulings and Cases

Value-added tax exemption on re-imported goods (Seomyun3Team-93, 2007. 01. 10)

With respect to the application of VAT exemption, in case where a company with more than two places of business, (e.g. headquarters and a branch), exports goods through its headquarters, and the branch subsequently imports the same goods (or vice versa), it is deemed that importer and exporter for those goods are the same. If customs duties are exempt in such transactions, then VAT shall be exempted under Article 44 of Presidential Decree of the Value Added Tax Law.

Debt forgiveness income of foreign invested company operating a tax exempted business (Seomyun2Team-91, 2007. 01. 21)

In case where a foreign-invested company, which is operating a tax-exempt business only, has debt forgiveness income and such income was directly related to the tax-exempt business, then the debt forgiveness income shall be included in its tax exempt income.


Get connected
Share your comments


More on Deloitte
Learn about our site


Stay connected
  • Facebook RSS