Korean Tax Newsletter (January, 2008)
Revisions to Tax Laws
The revised tax laws for 2008 were passed by the National Assembly on December 27, 2007. In this newsletter, we will introduce the revised tax laws that were not covered previously. The revised tax laws went into effect beginning January 1, 2008.
Corporate Income Tax Law ("CITL")
- Tax filing for capital gains tax on transfer of shares between foreign companies
Under the previous law, in case where a foreign company ("AA") without a permanent establishment ("PE") in Korea transferred shares of a Korean company to another foreign company ("BB") without a PE in Korea, BB who pays the income had to withhold tax from AA on capital gains. With the revision, however, AA who earns Korea source capital gains can voluntarily file and pay the capital gains tax on the transfer of shares on its own in the cases prescribed by the PD of the CITL. However, if BB withholds tax from AA, AA will not be required voluntarily to file and pay the capital gains tax.
- Due date of Corporate Income Tax ("CIT") filing and payment
Under the previous law, a domestic corporate taxpayer had to file and pay annual CIT within three months after the fiscal year end. With the revision, however, the taxpayer can file and pay the CIT within three months from the last day of the month in which the fiscal year end date falls.
Individual Income Tax Law ("IITL")
- Deemed dividend from the conversion of entity form
The revised law stipulates that, in case where a Chusik Hoesa (a joint stock company) converts to a Yuhan Hoesa (a limited liability company) or vice versa according to the Korean Commercial Code, deemed dividend income to the shareholders shall not arise. This revised provision reflects previous rulings issued by the tax authorities in the same context.
Tax Incentive Limitation Law ("TILL")
- Indirect Foreign Tax Credit ("IFTC")
A company can claim the IFTC on underlying taxes of a qualified foreign subsidiary according to the TILL, if there is no provision for the IFTC in the tax treaty or there is no existing tax treaty between Korea and the resident country of the foreign subsidiary. Under the previous law, the conditions for a qualified foreign subsidiary are, among others, that a Korean parent company directly holds shares of at least 25%. With the revision, however, a qualified subsidiary will be the foreign company in which the Korean parent company directly holds shares with 20% or more of voting rights.
Proposed Revisions to the Presidential Decree of Tax Laws
On January 16, 2008, the Ministry of Finance and Economy ("MOFE") announced a proposal for revisions to the Presidential Decree of tax laws. We will introduce the proposed revisions which were not covered in the previous newsletters.
(Note) The proposed revisions are not final and therefore, subject to change in contents.
Presidential Decree ("PD") of the CITL
- Withholding tax on interest received by financial service companies
Under the current law, interest received by financial service companies is exempt from withholding tax, except for interest on bonds. Under the proposed revision, however, interest income which financial service companies earn from bonds would also be exempt from the withholding tax.
This proposed revision will be enforced for interest received or bonds sold on or after June 1, 2008.
- Impairment loss on shares in unlisted companies
Under the current tax law, impairment loss from shares recognized for accounting purposes is deductible for tax purposes only if a company which issued the shares meets certain conditions under the PD of the CITL (e.g. bankruptcy, etc. of a listed company). Under the proposed revision, however, if an unlisted company which is not a related party can meet the conditions (e.g. bankruptcy, etc.), impairment loss on shares in the unlisted company would be also tax deductible.
This proposed revision will be enforced for the impairment loss from the fiscal year which commences on or after January 1, 2008.
- Dividend Received Deduction ("DRD") for qualified holding companies
The qualified holding company under the Monopoly Regulation and Fair Trade Act ("MRFTA") can claim a DRD for dividends received from its subsidiary according to its shareholding ratio. The shareholding ratio will be reduced in the proposed revision as follows:
|shareholding ratio||deduction ratio|
|Above 80% (40% for a listed company)||90%|
|Above 50% (30% for a listed company)||70%|
|50% (30% for a listed company) or below||30%|
|shareholding ratio||deduction ratio|
|Above 40% (20% for a listed company)||80%|
|40% (20% for a listed company) or below||30%|
This proposed revision will be enforced for dividends received from the fiscal year which commences on or after January 1, 2008.
- Foreign currency translation gains and losses
Under the current law, a company should recognize foreign currency translation gains/losses (i.e. unrealized F/X gains/losses) on monetary assets and liabilities denominated in foreign currency using the basic exchange rate as of the fiscal year-end prescribed by tax law.
With the revision, however, in case of banking business companies, foreign currency translation gains/losses on all assets and liabilities including non-monetary assets and liabilities will be recognized for tax purposes. In contrast, non-banking business companies will not be allowed to recognize any foreign currency translation gains/losses for tax purposes.
Details of tax treatments for foreign currency translation gains/losses have yet to be announced.
This proposed revision will be enforced from the fiscal year which commences on or after Jan. 1, 2008.
- Foreign currency related derivatives
Under the current law, for financial service companies, valuation gains/losses from currency related derivatives can be recognized for tax purposes. For other companies, valuation gains/losses from currency related derivatives, the purpose of which is to hedge foreign exchange risks in association with foreign currency denominated assets and liabilities according to the Korean GAAP, can be recognized for tax purposes.
With the revision, however, valuation gains/losses from currency related derivatives shall not be recognized for tax purposes for all companies except for banking business companies on currency forward and currency swap. Details of tax treatments for foreign currency related derivatives have yet to be announced.
- IFTC for second- tier subsidiary
Under the current law, a Korean parent company can claim the IFTC only on dividend income earned by its first-tier foreign subsidiary. Under the proposed revision, however, the Korean parent will also be entitled to claim the IFTC for dividend income received from its second-tier subsidiary.
The same provision will be provided in the presidential decree of TILL.
Presidential Decree of TILL
- Ownership and management Independence test for SMCs
Under the current law, in case where a company ("AA") with KRW 500 billion of total assets directly owns 30% or more of interests in another company ("BB"), BB is not viewed as SMC because it fails to meet the requirements of the independence test. With the proposed revision, however, BB also will not satisfy the requirements for the independent test to be regarded as SMC, if 30% or more of its shares are indirectly owned by AA.
This proposed revision will be enforced from the fiscal year which ends on or after January 1, 2009.