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Major Amendments in Tax Code in 2018

31 Jan 2018

Overview

On December 19, 2017, the first amended tax law of the new government was promulgated. In the following, we will take a look at the amended tax laws, the major amendments to the Corporate Tax Law, Income Tax Law and Law for Coordination of International Tax Affairs.

 

Main Contents

Establishment of the new tax bracket applicable to the highest level of tax base (Article 55 (1) of the Corporate Tax Law of Korea (the “CTLK”))

The CTLK amended on December 19, 2017 (the "Amended CTLK"), has raised the highest tax rate applicable to the tax base higher than KRW 300 billion from 22% to 25% to levy more taxes on conglomerates. These amendments will be effective for the fiscal year beginning on or after January 1, 2018.

Current

Amended

- Corporate Tax Rate

Tax Base (in KRW)

Tax Rate (*)

200 million or less

10%

200 million~20 billion

20%

More than 20 billion

22%

- Newly Established tax bracket (25%)

Tax Base (in KRW)

Tax Rate (*)

200 million or less

10%

200 million~20 billion

20%

20 billion~300 billion

22%

More than 300 billion

25%

(*) 10% of corporate tax shall be additionally levied as local income tax

 

Decrease the limit of loss carryforward (Article 13 of the CTLK)

The domestic corporation, excluding SMEs or the corporations that are implementing the reorganization plan, can deduct the loss carryforward with the applicable limit calculated by multiplying the tax profit by a fixed rate determined by law. Under the Amended CTLK, the deductible limit has been reduced from the previous limit of 80% to 70% in the fiscal year beginning on or after January 1, 2018 and to 60% in the following years.

 

Adjustment of deductible limit of corporate vehicle-related expenses (Article 27-2 of CTLK)

Under the CTLK, the deduction limit for depreciation on corporate vehicle is KRW 8 million per year. However, the amended CTLK requires that the above amount be pro-rated on a monthly basis according to the retention period (the number of months), taking into account the equity between the vehicle that has been kept throughout the year and the vehicle that has been held for a certain period of time during the year (For example, the deductible depreciation limit for a vehicle that has been held only for 6 months shall be KRW 4 million). These amendments will be effective for the tax returns to be filed on or after January 1, 2018.

 

Addition of employment succession clause to the requirements for the qualified merger and division transactions (Article 44 (2) and Article 46 (2) of the CTLK)

In order to defer taxation on corporate capital gains arising from the merger and division of corporations, it is necessary to satisfy the following conditions: (1) business operation period requirements, (2) permanent equity requirements, and (3) business continuity requirements. The amended CTLK adds the succession of employment condition to the foregoing requirements. That is, a merger corporation should take over more than 80% of its employees as of one month prior to the date of merger and division registration and maintain this number till the end of the fiscal year. In addition, the above employment succession requirements are included in the follow-up (post-merger) management regulations. The amendment will be effective for merger or division transactions taking place from January 1, 2018 onwards.

 

Adjustment of the highest marginal tax rate for Individual income tax (Article 55 (1) of Individual Income Tax of Korea (the “IITK”))

The IITK amended by Law No. 15225 dated December 19, 2017 (the "Amended IITK") adjusted the income tax rate to improve taxation equality and income redistribution. The amendment will be applicable to incomes generated from 1 January 2018 onwards.

Current

Amended

Individual Income tax base and tax rate

Tax Base (in KRW)

Tax Rate(*)

12 million or less

6%

12 million~46 million

15%

46 million~88 million

24%

88 million~150 million

35%

150 million~500 million

38%

More than 500 million

40%

 

- Newly established tax bracket

Tax Base (in KRW)

Tax Rate(*)

12 million or less

same as left

12 million~46 million

46 million~88 million

88 million~150 million

150 million~300 million

300 million~500 million

40%

More than 500 million

42%

(*) 10% of individual income tax shall be additionally levied as local income tax

 

Strengthening taxation on capital gains incurred by major shareholders as a result of stock transfer (Article 104 (1) of the Income Tax Act)

Under the IITK, a capital gain tax of 20% (22% when including local income tax) is applied to capital gains derived from the transfer of shares held by major shareholders. However, in order to strengthen taxation on high-income or high-net-worth individuals, the Amended IITK newly introduces the capital gain tax base of more than KRW 300 million and this will entail the raise in the corresponding tax rate from 20% (22% when including local income tax) to 25% (27.5% when including local income tax). The amendment will be applicable to transfers taking place on and after January 1, 2018, but for the transfer of shares of SMEs, the amendment will be applied to all applicable transactions on and after January 1, 2019. For reference, shares other than those of SMEs owned by major shareholders for less than one year shall still be subject to a 30% tax rate (33% when including local income tax) under the Amended IITK.

 

Increase in withholding tax rate on income of dispatched workers belonging to a foreign corporation (Article 156-7 of the IITK)

Under the IITK, a domestic corporation that employs workers belonging to a corporation domiciled in foreign countries shall withhold 17% (18.7% when including local income tax) of the compensation being paid to the foreign corporation for the service of such employee. For reference, the withholding obligation only applies to domestic corporations which satisfy the requirements such as the total amount of salaries paid to foreign corporations, the level of sales, the level of total assets, and required industry stipulated in the Enforcement Decree of the IITK. The Amended IITK raised the withholding tax rate on dispatched workers from 17% (18.7% when including local income tax) to 19% (20.9% when including local income tax).The amendment will be applicable to service transactions taking place on and after July 1st 2018.

 

Adoption of BEPS Action 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments into Korea tax law (Article 15-2 and Article 16 of Law for Coordination of International Tax Affairs (the “LCITA”))

The Amended LCITA, which was amended by Law No. 15221 dated December 19, 2017, stipulates that if the net interest expense for the amount borrowed by a domestic corporation from its foreign affiliates exceeds 30% of the adjusted income amount (the amount of income before subtracting the depreciation cost and the net interest expense), the excess amount is not deductible for the Korean tax purpose so as to prevent multinational corporations from avoiding tax by excessively deducting interest costs, which is exactly what Action 4 of OECD BEPS states. The amendment will be effective for the fiscal year beginning on or after January 1, 2019.

For reference, the interest expense on borrowed money from foreign affiliates is also subject to the thin capitalization pursuant to Article 14 of the LCITA (see our newsletter in July 2017). If both thin cap and the foregoing deduction limit are applicable, whichever produces larger amount of non-deductible amount shall apply.


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