Korean Tax Newsletter (January, 2013)
Revisions to Korean Tax Laws for 2013
On December 28, 2012, the National Assembly approved, with some revisions, the tax reform proposals for 2013 submitted by the Ministry of Strategy and Finance. Provided below is a summary of select changes to the Korean tax laws. Unless otherwise noted, all changes are effective for tax years beginning on or after January 1, 2013.
Corporate Income Tax Law
Change in Non-deductible Entertainment Expenses Charged Between Related Parties
Considering the relatively low level of need to incur entertainment expenses among related parties, the amount of deductible entertainment expenses is lowered from the previous 20% of total entertainment expense to 10% of the total entertainment expense.
Clarity in Identifying Withholding Tax Obligations in Connection With Income from Bonds/Securities Issued by a Foreign Company
Where a foreign company pays to a domestic company income derived from bonds or securities issued by the foreign company, the party making the payment in Korea as a proxy, through power of attorney, or who is given express authority to make such payment, is obligated to withhold tax.
Tax Incentives Limitation Law
Extended Tax Support for Small and Medium Size Start-up Companies
Tax exemption period is extended from four years to five years for small and medium size start-up companies until December 31, 2015.
Revision of Tax Credit Related to Research and Development Expenses
|Before Amendment||After Amendment|
|Incremental tax credit of R&D expenses
* However, when R&D expenses of the current year are less than the average R&D expenses for the previous four years, the amount of credit would be (the amount of R&D expense x credit rate).
Extension of Special Tax Treatment Period and Tax Rate Adjustment of Foreign Employees
In order to attract and stabilize a strong workforce from foreign countries and to spur foreign investment, the flat tax rate regime applicable to foreign workers has been extended two years to December 31, 2014. However, to reduce the gap in the tax burden between domestic and foreign employees, the flat tax rate has been increased from 15% to 17% effective for income earned on or after January 1, 2013.
Non-taxation of Regular Foreign Currency Deposit Accounts of Non-residents
To increase the influx of foreign currency and reduce fund-raising expense by inducing long-term foreign currency deposits, interest income earned by non-residents from long-term foreign currency accounts (for those with a maturity of one year or longer) is exempt from corporate income tax or personal income tax, whichever is applicable.
Reform in Creation of Employment Investment Tax Credit
For companies which invest outside metropolitan areas, job creation tax credit is lowered to 3% (down from the previous 4%) while the job increase tax credit is increased from 2% to 3%. For small and medium sized companies whose employment headcount decreases, the tax credit amount is to be reduced by KRW 10 million per decline in one headcount.
Expansion of Special Tax Treatment on Dividend Income from Collective Investment Securities such as Real Estate Collective Investment Funds, etc.
To revitalize the rental housing market, the threshold amount of dividend income ㅡ derived from real estate investment trusts/funds subject to the 5% tax rate under separate taxation ㅡ is increased from KRW 100 million to KRW 300 million.
Expanded Special Treatment on Partnership Taxation
Foreign organizations which are similar to domestic entities eligible to elect partnership taxation and which also meet the requirements to be set out by the Enforcement Decree may now elect for partnership taxation regime. This change is being made to create parity between domestic and foreign businesses and attract various forms of foreign investment. This change is effective from the tax year (including a grace period of 1 year) beginning on or after January 1, 2013.
Taxation of Passive Foreign Partners by Income Sources
Previously, all allocated income attributable to a passive foreign partner investing in domestic private equity funds (PEF) were classified as dividends. Now, if passive foreign partners to domestic PEFs are qualified pensions, national funds companies incorporated in the country that has a tax treaty with Korea and exempt from taxation there, allocated income from PEFs can be classified as interest, dividends, or capital gains based on the character of the underlying income recognized by the PEFs.
Tax Incentives for Korean Companies Returning to Korea From Overseas
Tax incentives given to overseas Korean companies returning to Korea, which revitalize domestic job growth and investment opportunities, are extended for three more years until December 31, 2015. Overseas companies that close down and return to Korea to do business as small and medium size companies may qualify for a 100% tariff reduction. Even if the overseas businesses are not closed down, income tax including corporate income tax, is fully exempted for three years and by 50% for two years thereafter and is inclusive of the 50% reduced tariff effective through December 31, 2015, on the condition that overseas small and medium size companies which do not have a production facility in Korea, open up such a facility in Korea.
Law for Coordination of International Tax Affairs
Disclosure of Financial Information Based on Principles of Reciprocity Agreement
Prior to the Enforcement Decree, when the Korean government received a request for disclosure of financial information from a treaty partner based on provisions of the tax treaty, the Korean government had the authority to request financial information from specific branches of financial institutions. Under the amended regulations, the Korean government now has the authority to request financial information on non-residents and foreign companies from the headquarters of financial institutions, if necessary to facilitate an automatic and regular exchange of information with treaty partners.
Changes in Calculation for Determining Highest Balance of Foreign Financial Accounts
Domestic taxpayers who had foreign financial accounts with an aggregate value exceeding KRW 1 billion on any given day during the tax year were required to file a report on foreign financial accounts with the appropriate tax office by June 30 of the following year. Due to the inconvenience and cumbersome task of monitoring daily balances, effective January 1, 2013, the balances as of the end of each month are to be used as the basis to compute the threshold reporting figure.
Increased Reporting Requirements for Foreign Financial Accounts
The former law mandated that overseas financial accounts such as cash and securities were subject to reporting requirements. Regulations now require that derivatives, etc., opened at financial institutions overseas, also be subject to the reporting requirements.
Inheritance Tax and Gift Tax Act.
Non-resident Gift Tax Implications
Under the former gift tax rules, where the recipient of a gift was a non-resident, only domestic assets gifted to the non-resident were subject to gift tax. And to avoid the gift tax, resident taxpayers transferred domestic assets overseas before making gifts to non-residents. The law is revised so that foreign assets (foreign financial accounts) received by non-residents are now also subject to gift tax.
Framework Act on National Taxes
Penalty for Unlawful Claim of Tax Exemption/Deduction
An unlawful claim of tax exemption or deduction is now subject to a penalty in the amount of 40% of such benefits received. This is effective for unlawful claims of tax exemption/deduction applications submitted on or after January 1, 2013.
Disclosure of Taxpayer Identity Who Fails to File Report of Overseas Financial Accounts
Taxpayers who failed to file foreign bank account reports (“FBAR”), or if the amount that has been reported is understated by more than KRW 5 billion, such taxpayers are to be placed on the public violation list.
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.