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South Korea

Jong-yul Lee and Danielle Suh
Kim & Chang
South Korea

The need to maintain Korea's competitiveness has prompted latest round in tax changes, which have covered withholding tax refunds, use of net operating losses and and cuts in corporate income tax rates, point-out Jong-yul Lee and Danielle Suh of Kim & Chang

The Korean government's biggest challenge is to maintain Korea as one of the most competitive and attractive countries for multinational corporations to invest in. To achieve this goal, Korea's tax laws continue to be amended and updated each year. The amendments are enacted and promulgated towards the end of each year and generally become effective as of January 1 of the following year.

In 2009 after 2008 was the year of change in political parties in Korea, the government continues to concentrate on economic growth and a reduction in the unemployment rate by creating new jobs. In doing so, the changes proposed and that came into effect for the 2009 tax year can be regarded as an important tool and playing its significant role towards the aim of making Korea more foreign investor-friendly and thus, creating more jobs.

National tax basic law

Request for refund of withholding tax (article 45-2(4) of the National Tax Basic Law (NTBL)): Before the amendment, foreign recipients of interest, dividends and other income could not make a direct request to the government for a withholding tax refund with respect to this income, while a direct refund request has been allowed with respect to rental income for ships, aircraft or facilities, business income, personal service income, wage and salary income, severance payment income, royalties and capital gains from the alienation of stocks starting with taxable year that includes January 1 2007.

From January 1 2009, however, foreign individuals and foreign corporations can make a request directly to the government (without going through the withholding agent) for a withholding tax refund for Korean sourced interest, dividends and other income as well, if certain conditions are met.

Reduction of penalties (article 48 of the NTBL): In the past, if a taxpayer filed an amended tax return voluntarily within six months from the original due date, the penalty for underreporting of tax base was reduced by 50%.

However, with this amendment, in addition to the 50% reduction, for amended tax returns filed on or after January 1 2009, the reduction in penalty is granted for voluntarily amended tax returns filed within one year (20% reduction) and within two years (10% reduction) from the original due date.

Corporation tax law and the presidential decree of the CTL

Change in corporate income tax rates (article 55 of the Corporation Tax Law (CTL)): The first taxable income bracket increases from W100 million ($80,300) to W200 million ($160,600), with effect from fiscal years which include December 26 2008. In addition, the corporate income tax rate (including resident surtax) reduction takes place as follows on table 1.

Reduction of withholding tax rate (article 98 of the CTL): The withholding tax rate on, for example, interest and dividends, paid to a foreign corporation, which are not effectively connected to a permanent establishment (PE) in Korea (including income paid to a foreign corporation with no PE in Korea), has been reduced from 27.5% to 22% (inclusive of 10% resident surtax). This revision applies to, for example, interest and dividends, paid on or after January 1 2009.

Introduction of consolidated tax return (articles 76-8 through 76-22 of the CTL): A consolidated tax return regime has been introduced and will take effect for fiscal years beginning on or after January 1 2010. A domestic corporation which has a 'fully controlled subsidiary' (defined in article 76-8 of the CTL) is allowed to apply the consolidated tax return with the approval of the commissioner of the National Tax Service. A domestic corporation that elects the consolidated tax return regime is not allowed to abandon the election for five years.

Carry-forward of net operating losses (NOL) (article 13 of the CTL): Under the revision, NOL can be carried forward for 10 years (before the revision, it was five years). In a case when the NOL carried forward is offset against future taxable income after the expiry of the previous statute of limitations (five years or seven years) but within 10 years, the statute of limitations is also extended until the end of the one-year period after the due date for filing of the corporate income tax return for the fiscal year in which the NOL was offset against income. Also, the obligation to maintain accounting books is extended. This revision applies to NOL arising from fiscal year beginning on or after January 1 2009.

Use of NOL of surviving company (article 45 of the CTL): Before the revision, an existing NOL of the surviving company can be offset against future taxable income after a merger, whether the income is generated from the surviving company's business or the disappearing company's business, subject to certain exceptions. However, with mergers taking place on or after January 1 2009, NOL of the surviving company cannot be offset against future taxable income arising from the business of the disappearing company.

Dividend paid deduction (DPD) for indirect investment vehicles (article 51-2 of the CTL): Before the revision, a DPD was allowed for private equity funds and a private equity fund's special purpose company for example, in accordance with the Indirect Investment Asset Management Business Act. With the revision, since February 4 2009, a DPD is also allowed for corporate-type indirect investment vehicles (such as Investment Yuhan-Hoesa and Investment Hapja-Hoesa) in accordance with the Financial Services & Capital Market Act.

However, private equity funds registered with the Financial Services Commission on or after January 1 2009 do not qualify for the DPD (such funds may elect the partnership taxation).

Interest rate applied to related-party transactions (article 89 of the CTL-PD): Before the revision, in case of money-lending transactions between related parties, the arm's-length interest rate is the weighted average interest rate, in principle. If the weighted average interest rate is not applicable, the arm's-length interest rate is the interest rate determined and announced by the commissioner of the National Tax Service (before the revision, 9% per annum). Under the revised CTL-PD, a corporate taxpayer is allowed to choose (i) the weighted average interest rate or (ii) the interest rate provided for in the ministrial decree (at present, 8.5% per annum). This revision applies to fiscal years for which tax return has been filed on or after February 4 2009.

Deductibility of stock option chargeback (article 19 of the CTL-PD): Previously, in the case where a parent company grants stock options for officers and/or employees of its subsidiary and related expenses were charged to the subsidiary, the charge-back of such expenses for stock option was not deductible. Under the CTL-PD, if either of the following conditions is satisfied, the charge-back is allowed for deduction: (i) stock options are granted to officers and/or employees of affiliates in accordance with the Securities Exchange Law or (ii) stock options are granted by a foreign listed parent company for officers and/or employees of domestic unlisted subsidiary. This revision applies to stock options exercised after the promulgation date of the CTL-PD.

Calculating taxable income for foreigners on short-term stay (article 3 of the PITL): Before the revision, resident individuals (that is, those who had an address or place of abode in Korea for one year or more) are taxed in Korea on their worldwide income, that is, both Korean source and non-Korean source income. Under the revision, foreign resident individuals who have resided in Korea for five years or less in a 10 year period are taxed on all Korean source income plus only such non-Korean source income that is being paid in Korea or being remitted to Korea. This revision became effective for income earned on or after January 1 2009.

Taxation of investors with income from indirect investment vehicles (article 17 of the PITL): Before the revision, income distributed to investors by indirect investment vehicles such as investment trusts, investment corporations and private equity funds were taxed as dividends. Under the revision, income distributed to investors by indirect investment vehicles (such as Investment Yuhan-Hoesa, Investment Hapja-Hoesa, Investment Chohap and Investment IK-Myung Chohap) newly added in accordance with the Financial Services & Capital Market Act is also being taxed as dividends. This revision applies to income earned on or after February 4 2009. In addition, private equity funds qualify now for the partnership taxation regime starting with income earned since January 1 2009.

Special tax treatment control law

Reserves for technology and human resources development (Article 9 of the Special Tax Treatment Control Law (STTCL)): The reserve for technology and human resources development expired due to a sunset clause as of December 31 2006. The government decided again to allow taxpayers to deduct amounts reserved for technology and human resources development within the limit of 3% of revenue. This incentive takes effect for the taxable year which begins on or after January 1 2009 and is due to expire on December 31 2013.

Reduction of preferential flat rate on personal income tax applied to foreign workers (article 18-2 of the STTCL): Effective for income earned on or after January 1 2009, the flat rate on personal income tax preferentially applied to foreign individuals working in Korea has been reduced from 18.7% to 16.5% (inclusive of the 10% resident surtax).

Value-added tax law

The following two amendments for the Value-Added Tax Law shall be effective on or after January 1 2010, not January 1 2009.

Expansion of the application of VAT taxation on taxpayer basis (articles 4 and 5 of the VATL): Under the system of VAT Taxation on Taxpayer Basis which took effect from January 1 2008, a taxpayer is permitted to register only one place of business where all VAT obligations for the taxpayer may be carried out on the condition that the taxpayer is required, among others, to implement an enterprise resource planning (ERP) system that integrates all of the data and processes of the organisation under a unified system. The government, by abolishing the ERP, will expand the application of the VAT taxation on taxpayer basis. A taxpayer who wants to apply the system from the tax period in which January 1 2010 falls should register with their district tax office by December 11 2009.

Mandatory issuance of electronic VAT invoices (article 16 of the VATL): Under the revision, a corporate taxpayer is required to issue VAT invoices electronically when it supplies goods or services from January 1 2010.

Education tax law

Education tax (article 3 of the Education Tax Law (ETL)): Before the revision, education tax is levied at 0.5% of the gross receipts (adjusted for certain items as detailed in the ETL) of banks and insurance companies, for example, except for certain financial institutions. With the revision since July 1 2009, financial investment companies (including securities companies) in dealing and brokerage businesses under the Financial Services & Capital Market Act, specialised credit financial business companies (cards and leasing, for example) and Export-Import Bank of Korea also became subject to education tax.

JY Lee (jylee@kimchang.com) and Danielle Suh (dsuh@kimchang.com), Kim & Chang