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 (August, 2012)

Proposed Revisions to Tax Laws for 2012

On 8 August 2012, the Ministry of Strategy and Finance announced proposed revisions to the tax laws for 2012 that generally would become effective as from 2013 unless specified otherwise. Changes are proposed to the Corporate Income Tax Law (CITL), Individual Income Tax Law (IITL), Tax Incentive Limitation Law (TILL), Value Added Tax Law (VATL), International Tax Coordination Law (ITCL), etc. The major proposed revisions are summarized below. It should be noted that the proposals are not final and may be subject to change or be deleted during the legislative process.

Corporate Income Tax Law

Taxation of foreign partnerships

  • Classification of a foreign partnership as a corporation or an unincorporated association

    Korea-source income of a foreign partnership currently is subject to corporate income tax or individual income tax, depending on whether the foreign partnership is treated as a corporation or an unincorporated association. However, there is no clear rule to determine the classification of a foreign partnership under Korean tax law. Under the proposed revision to the CITL, a foreign partnership would be treated as a foreign corporation for Korean income tax purposes in the following cases:

    • The partnership has corporate personality;
    • The foreign partnership is comprised only of limited partners; or
    • Where the legal nature of the foreign partnership is the same as or similar to that of a domestic entity that is regarded as a corporation for Korean legal purposes.

    The National Tax Service (NTS) is expected to announce a detailed classification list for the major types of foreign partnerships based on the above criteria. It should be noted that the above classification rules equally apply to foreign hybrid entities.

  • Current taxation of a foreign partnership

    Under the current IITL, a foreign partnership that is not treated as a corporation for Korean tax purposes generally is subject to Korean income tax as follow:

    • If the foreign partnership does not distribute its profits: It is treated as a single nonresident liable to individual income tax on its domestic-source income under the IITL.

    • If the foreign partnership distributes its profits: It may be subject to joint business taxation under the IITL. However, as the IITL does not provide detailed rules on the application of the joint business taxation to a foreign partnership, the tax treatment has been determined based on private tax rulings. Under the rulings, the taxable income of the foreign partnership is first calculated by deeming the partnership to be a single nonresident. The income is then treated as distributed to each partner based on its relative ownership percentages or profit/loss distribution ratio. The (deemed) distributed taxable income is subject to corporate income tax or individual income tax at the level of each partner, depending on whether the partner is a corporation or an individual.

    The proposed revision would clarify the Korean tax treatment of a foreign partnership treated as an unincorporated association, as follows:

    • The foreign partnership would be taxable at the level of each partner if (i) the foreign partnership has a place of business in Korea that is registered with the Korean tax authorities and the partnership submits information on each partner and the profit/loss distribution ratio; or (ii) the foreign partnership does not have a place of business in Korea but submits the required information to the Korean tax authorities.

    • The foreign partnership would be taxable as if it were a single nonresident if (i) the foreign partnership has a place of business in Korea, but the place of business is not registered with the Korean tax authorities or it does not submit the required information; or (ii) the foreign partnership does not have a place of business and does not submit the information.
  • Expansion of Korean partnership taxation to a foreign partnership

    Under the proposals, a foreign partnership that meets the following criteria would be allowed to apply for partnership taxation in Korea with effect for fiscal years beginning on or after 1 January 2014:

    • The foreign partnership is similar to a domestic entity that qualifies for partnership taxation;
    • It operates through a place of business in Korea; and
    • It is subject to tax under a regime similar to the Korean partnership taxation regime in its country of residence.

Calculation of tax deduction limit on entertainment expenses

The tax deduction limit on entertainment expenses currently is calculated as the sum of a base amount of KRW 12 million (KRW 18 million for small and medium-sized enterprises (SMEs)) and an additional amount calculated by multiplying revenue by a certain specified ratio (ranging from 0.03% to 0.2%, depending on revenue volume). However, only 20% of revenue is allowed as a basis for the calculation of the tax deduction limit on entertainment expenses when the revenue is derived from related party transactions. In addition, financial institutions, including collective investment companies, state financial companies (e.g. Export-Import Bank of Korea, Korea Investment Corporation, Korea Asset Management Corporation, Korea Credit Guarantee Fund, etc.) are allowed to add six or nine times their management fees to the revenue amount used to calculate the deduction limit.

Under the proposed revision to the CITL, the percentage applied to revenue derived from related party transactions would decrease from 20% to 10% and the multiplier used to calculate the additional revenue amount for state financial institutions would be six in all cases.

Tax deduction limit on bad debt allowance for financial companies

A different percentage (2% of receivable balance) currently applies to financial institutions for purposes of calculating the tax deduction limit on the bad debt allowance than applies to companies generally (1% of receivable balance). It is proposed to reduce the percentage applicable to financial institutions to 1%, i.e. the same that applies to companies generally.

Submission of Payment Statement

Currently, any person that pays dividends or interest to a domestic company must submit a “Payment Statement” to the district tax office (interest paid to financial institutions is not subject to this requirement). Under the proposed revision, if dividends or interest are subject to withholding tax, the withholding agent (instead of the payer) would be required to submit the “Payment Statement” and deemed dividends would be exempt from this obligation.

Value Added Tax Law

Input VAT credit on inappropriately issued VAT invoice

Currently, if a VAT invoice contains any erroneous information with respect to supplier, purchaser, supply amount, VAT, transaction date, etc., the input VAT stated on the invoice cannot be claimed. It is proposed that, where the information relating to a supplier or a purchaser is erroneously stated as being another supplier or purchaser in the same business unit or under the same consolidated payment system and the supplier duly pays output VAT based on the invoice, input VAT would be able to be claimed, provided all other required information is properly stated on the invoice.

The current VATL does not allow a purchaser to claim input VAT on a VAT invoice issued for VAT-exempt transactions and thus, if inappropriately claimed, the purchaser has to file an amended VAT return based on an amended VAT invoice and must pay VAT penalties. Under the proposals, if the purchaser can demonstrate that the supplier pays output VAT, the purchaser would be allowed to claim the input VAT without additional filing procedure or having to pay a penalty.

Tax Incentive Limitation Law

Tax credit for employment creation investment

The employment creation investment tax credit (ECITC) currently consists of a base rate (which is not applicable when the number of employees in the current year is decreased from the previous year) and an additional rate (which is claimed in proportion to an increase in the number of employees). The total credit ranges from 5% to 7%, depending on the size and location of the company. Under the proposed revision to the TILL, the base rate would be decreased and the additional rate would be increased for a large company, as follows:

Description Large company SME
Within SMA Outside the SMA
Base rate 3% → 2% 4% → 3% 4%
Additional rate 2% → 3% 2% → 3% 3%
Total 5% 6% 7%
* SMA refers to the Seoul Metropolitan Area.

In addition, the proposed revision would allow a company whose number of employees has decreased from the previous year to claim the base ECITC credit amount, but the credit would be reduced by KRW 10 million multiplied by the decreased number of employees decreased from that of the previous year.

R&D tax credit

  • Change in calculation of R&D tax credit

    The R&D tax credit amount is calculated as the greater of i) 40% (50% for SMEs) of the current year R&D expenditure exceeding the average of R&D expenditure incurred in the previous four years (“incremental basis method”); or ii) a certain percentage (see below) of current year R&D expenditure (“current year spending basis method”).

    Under the proposed revision, the incremental R&D expenditure amount would be calculated as the current R&D expenditure exceeding the previous fiscal year’s R&D expenditure, rather than the average amount for the previous four years. However, where the prior fiscal year’s R&D expenditure is less than the average of R&D expenditure incurred during the previous four years, the incremental basis method would not be able to be applied.

  • Scope of R&D expenditure eligible for R&D tax credit

    R&D expenditure eligible for the R&D tax credit of a company includes expenditure incurred by the company as a result of consigning (or re-consigning) its R&D to an R&D center of another domestic or foreign company. To clarify the scope of qualified expenditure for these purposes, it is proposed to limit the expenditure related to consigned R&D to activities directly performed by the R&D center.

  • Favorable R&D tax credit rate for medium-sized company

    Under the proposals, a company that satisfies the following conditions would be classified as a medium-sized enterprise:

    • The company operates a business that is listed in the TILL as a qualified SME business;
    • The company does not belong to a conglomerate subject to the rule for restrictions on cross investment within a conglomerate group; and
    • The average sales revenue of previous three years does not exceed KRW 300 billion.

    Under the current year spending basis method, SMEs (including large companies within the four- year grace period) are eligible for an R&D tax credit rate of 25% and large companies are eligible for a 15% and 10% rate for three years after the grace period and the following two years, respectively. Since a medium-sized company is treated as a large company under current law, the R&D tax credit rate for a large company (i.e. 3% to 6%, depending on the R&D expenditure ratio to current year revenue) is applied to the medium-sized enterprise after five years following the four-year grace period. Under the proposal, a medium-sized company would be entitled to a favorable 8% R&D tax credit rate after five years following the four-year grace period.

Foreign investment tax exemption

  • Expansion of foreign investment tax exemption in Foreign Investment Zone

    A foreign-invested company that carries on a manufacturing business, travel business, logistics business, SOC (i.e., Social Overhead Capital) and R&D in a Foreign Investment Zone (FIZ) is eligible for the foreign investment tax exemption (i.e. 100% exemption for the first five years and a 50% exemption for the following two years) if foreign investment amount is at least USD 30 million.

    The TILL is proposed to be revised to include computer programming, system integration and management, data processing and hosting related services within the scope of qualified business eligible for the foreign investment tax exemption in a FIZ.

  • Exclusion of loan from foreign investment amount

    It is proposed that, where a foreign-invested company or resident shareholder grants a loan to a foreign investor before the approval for a tax exemption is granted, or where a foreign-invested company grants a loan to a foreign investor after the approval for the exemption is granted, the loan would be excluded from the foreign investment amount when applying for the foreign investment tax exemption.

Tax incentive for foreign employees

Under the current TILL, a foreign employee can apply for a flat tax rate of 15% (16.5%, including the local income surtax), but this incentive is only available until 31 December 2012. It is proposed to increase the rate of the flat tax to 17% (18.7%, including the local income surtax) and extend the sunset clause of the tax incentive for two years, i.e. to 31 December 2014.

Alternative minimum tax rate for large corporations

The proposals would increase the alternative minimum tax (AMT) rates for large companies as follows:

Tax base
Current Proposed revision
10 billion
or less
10 billion -
100 billion
100 billion
10 billion
or less
10 billion -
100 billion
100 billion
AMT rates 10% 11% 14% 10% 11% 15%

The AMT rates applicable to SMEs would remain unchanged (i.e. 7% for SMEs and large companies within the four-year grace period, and 8% and 9% for large companies within three years and the following two years after the grace period, respectively).

Extension of sunset clause

The proposed measures would extend the sunset clause of certain tax incentives to 31 December 2015:

  • Income deduction for job sharing company and its employees;
  • Tax credit for investment in R&D equipment;
  • Tax credit for investment in employee welfare enhancement facility;
  • Tax credit for investment in productivity equipment;
  • Tax credit for third party logistics expenses; and
  • Tax credit for investment in SMEs.

International Tax Coordination Law

Transfer pricing methodology for payment guarantee service

Currently, where a company provides or receives payment guarantee services to or from its foreign related parties, the arm’s length price of the payment guarantee fees needs to be determined based on the general transfer pricing methods prescribed in the ITCL (e.g. comparable uncontrolled price method, resale price method, cost plus method, profit split method, transactional net margin method, etc.).

It is proposed that the ITCL would provide a transfer pricing methodology specifically applicable to payment guarantee services, the details of which will be set out in a presidential decree.

Income classification on consideration for use of equipment

According to the current CITL or IITL, consideration for use of industrial, commercial or scientific equipment is classified as leasing income subject to withholding tax at a rate of 2% (2.2%, including the 10% local income surtax) in Korea. However, most Korean tax treaties classify such income as royalties subject to reduced withholding tax rates ranging from 0% to 15%, rather than the domestic withholding tax rate of 20% (22%, including the 10% local income surtax). Therefore, it is unclear as to whether Korean-source income for use of the equipment would be subject to the 2% rate or a reduced rate under an applicable tax treaty. The proposed revision would clarify that, where the income is classified as royalties under a treaty, the treaty rate, rather than the 2% rate, would apply.

Foreign Financial Account Reporting System

Korean resident individuals and domestic companies are required to report foreign financial account information to the relevant district tax office in June of the following calendar year, if the aggregate account balance of all foreign financial accounts exceeds KRW 1 billion at any time during the calendar year.

Currently, foreign financial accounts include banking business related accounts and security transactions related accounts. The proposals would add accounts relating to bonds, derivatives and collective investment securities as accounts falling within the scope of the reporting requirement. This revision would be effective for the foreign financial accounts held as from 2013.

Additionally, the calculation basis of the aggregate account balance is proposed to be changed from the aggregate balance of any day by account to the aggregate balance of the end of each quarter by account, which would be effective for foreign financial accounts held as from 2012.

If you have any questions concerning the items in this newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals.


Seung Chan Park
Deloitte Anjin LLC
Job Title:
Tax, Partner
+82 2 6676 2422
Seong Ran Hong
Deloitte Anjin LLC
Job Title:
Tax, Senior Manager
+82 2 6099 4327
Young Kyung Koh
Deloitte Anjin LLC
Job Title:
Tax, Senior Manager
+82 2 6676 2346


Get connected
Share your comments


More on Deloitte
Learn about our site


Stay connected
  • Facebook RSS