Korean Tax Newsletter (February, 2009)
Revisions to the Tax Laws
The revised tax laws and Presidential Decree of tax laws which are generally effective in 2009 were promulgated on December 26, 2008 and February 4, 2009, respectively. Most of the significant revisions were covered in our previous newsletters. We will introduce the revisions to the Corporate Income Tax Law (“CITL”) and Individual Income Tax Law (“IITL”), which were not covered previously, in this newsletter.
Corporate Income Tax Law
Receipt and maintenance of statutory documentary evidence
Before the revision, a company was required to receive and maintain documentary evidence such as credit card bills or VAT invoices for five years for transactions amounting over 10,000 won. Otherwise, a company may be subject to a penalty tax at the rate of 2% of the transaction amount. According to the revised law, the threshold amount will increase to 30,000 won from 2009 from the previous 10,000 won.
Individual Income Tax Law
Personal deduction amount
According to the revision, the personal deduction (i.e., the basic deduction and dependant deduction) amount per person will increase to 1.5 million won from 1 million won.
Qualification of dependent deduction
With the revision, the qualification for income deduction for female dependents will be adjusted to 60 years old or older from the previous 55 years old or older, while that of male dependent will remain the same as 60 years old or older.
In addition, the additional deduction of 1 million won for senior citizens who are 65 years old or older (but less than 70 years old) will no longer be available. Further, the additional deduction of 1.5 million won for senior citizens who are at least 70 years old will decrease to 1 million won.
Deduction cap on education expense deduction and medical expense deduction
The income deduction cap amount for education expense and medical expense will increase as follows:
|education||Pre-school, elementary, middle
school and high school
|2 million won/person||3 million won/person|
|University or college||7 million won/person||9 million won/person|
|Medical expense||5 million won||7 million won|
Earned income deduction
Under the revision, the earned income deduction rate for annual salary income up to 5 million won will decrease to 80% from 100%. Earned income deduction rates for annual salary income over 5 million won remain unchanged (i.e., 5~50%).
On the other hand, the deduction for a daily worker will increase to KRW 100 thousand won per day from 80 thousand won per day.
Capital gains from sale of paintings and antiques
Before the revision, capital gains derived from sale of paintings and antiques were not considered as taxable income to individuals. With the revision, capital gains from sale of paintings and antiques, of which sales proceeds are 60 million won or more (with some exceptions such as antiques less than 100 years from its production, a work by existing artists in Korea, etc.) will be included in “other income” subject to separate final taxation at 22% withholding tax (including 10% resident surtax). Deemed expense of 80% (90% for paintings and antiques owned for at least 10 years) will be allowed when calculating the capital gains. This revision will be enforced after January 1, 2011.
Proposed Revisions to the Tax Laws
On February 10, 2009, the Ministry of Strategy and Finance (“MOSF”) announced an advance notice for proposed revisions to the Ministerial Decree of tax laws, including the CITL and Tax Incentive Limitation Law (“TILL”), which will generally be effective beginning FY 2009. In addition, the MOSF announced a proposal to revise the tax laws on February 12, 2009. The major features of the proposed revisions (not all-inclusive) are as follows:
(Note) The proposed revisions are not final and therefore subject to change.
Corporate Income Tax Law
Charge-back of stock option cost
Under the proposed revision, to be qualified for a deductible charge-back cost of stock options granted by a listed foreign parent company which we introduced in our January tax newsletter, the following requirements should be additionally satisfied:
- The foreign parent company which is listed on the Korean or foreign stock exchange market i) holds 50% or more of shares issued by an unlisted Korean subsidiary; or ii) holds 30% or more of shares issued by an unlisted foreign company, which in turn owns 50% or more of the unlisted Korean subsidiary, as the largest shareholder;
- The stock options conforming to those prescribed in the Korean Commercial Code are granted within 10% of the total shares issued by the foreign parent company; and
- Written agreement on the charge-back of the stock option cost is made between the foreign parent company and the Korean subsidiary in advance.
Imputed interest rate for loans to related parties
Under the current law, a company may select either the statutory interest rate announced by the tax authority or the weighted-average interest rate of borrowings from third parties when calculating deemed interest income on loans to domestic related parties. According to the proposed revision, the interest rate announced by the tax authority will decrease to 8.5% from the current 9%. In addition, the lender’s weighted-average interest rate of borrowings from third parties can be applied only when such weighted-average interest rate is the same as or lower than that of the related party debtor.
Tax Incentive Limitation Law
Scope of temporary investment tax credit
With the proposed revision, investments in heavy-duty vehicles (e.g., a module trailer or a transporter) and equipments purchased for 200 thousand won or more held in large quantity on account of the nature of business and directly related to generation of revenue (e.g., beds and kitchen facilities of hotel business, etc.) will be eligible for the 10% temporary investment tax credit.
Tax deduction for job-sharing companies
According to the proposed revision, if a Small and Medium sized Company (“SMC”) having difficulties in its business (i.e. 10% or more decrease in annual sales/production or 50% or more increase in inventory) maintains a certain proportion of employees compared to the previous year and has reduced salary expense paid to its employees, 50% of the decreased salary amount will be deductible from the taxable income of the SMC.
Tax credit for retirement income
Under the proposed revision, retirement income of employees (except for directors) will be eligible for a tax credit at 30% of the calculated tax amount (which is capped at the amount of service years multiplied by 240 thousand won).
Developments at Tax Authorities
Postponement of tax audit
On February 10, 2009, the National Tax Service (“NTS”) announced that they will postpone tax audits on jobcreating companies (irrespective of business size) and job-sharing SMCs. In addition, the NTS plans to support companies suffering financial difficulties with an extension of the due date for tax payment, postponement of tax collection, early tax refund, etc.
Recent Tax Rulings and Cases
Classification of foreign worker (Josim 2008seo3462, 2009.1.16)
According to the existing NTS rulings (Seomyun2team-65, 2008.1.10. etc.), a Korean citizen who is a permanent resident of a foreign country can be included in the scope of a “foreign worker” for tax purposes and therefore entitled to preferential tax treatment on their earned income (i.e., flat rate of 16.5% including resident surtax on total salary income or progressive rate after 30% income dedcution for overseas assignment allowance) in accordance with the Article 18-2 of TILL.
However, according to the Korean Tax Tribunal’s case, an individual who is a permanent resident of a foreign country but holds Korean citizenship cannot be qulaified as a “foreign worker” for tax purposes, and thus earned income of the individual would be taxed without such preferential tax treatment.
Qualification for zero rated VAT (Booga-200, 2009.1.14)
Under the Korean Value Added Tax Law, certain goods or services rendered in Korea to a foreign company without a permenant establishment in Korea in return for payments in Korean won received through a foreign exchange bank qualify for zero rated VAT.
Where a company provides services which qualify for zero rated VAT to a foreign company and deposits the service fee received from the foreign company in its foreign currency bank account to pay salaries to its employees in foreign currency, such services would also qualify for zero rated VAT as long as receipt of foreign currency is proved with a certificate for foreign currency receipt issued by the foreign exchange bank.
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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