Tax incentives for foreign-invested companies in Korea
30 Jun 2018
Targeted to promote foreign investments in Korea, a variety of tax incentives are being granted to foreign-invested companies operating in Korea. Nevertheless, recent trend indicates that such benefits granted to the foreign-invested companies are gradually on the decline. In this month’s newsletter, we are going to discuss the major tax incentives available to the foreign-invested companies in Korea and then introduce the outlook on how the current tax regime for foreign-invested companies would be reconstructed in the upcoming years.
2. Main contents
(1) Eligible foreign-invested companies
The Korean tax law grants tax incentives to foreign-invested companies engaged in the New Growth Driver Industry, and to certain foreign-invested companies established in designated special economic zones, such as the Foreign Investment Zone, Free Economic Zone, Free Trade Zone, etc.
(2) Major tax incentives
(i) Corporate income tax exemption/reduction for foreign-invested companies
The tax exemption/reduction amount varies between different types of businesses carried out, but the amount for exemption/reduction is generally calculated as follows:
- Until the tax year in which 3 or 5 years have passed since the beginning of the tax year in which income was first generated: Corporate income tax * foreign investment ratio * 100%
- Until the tax year in which 2 years have passed since the period specified above: Corporate income tax * foreign investment ratio * 50%
Threshold for the tax exemption/reduction also varies between different types of businesses carried out, but it is generally calculated by the addition of the following: 1) cumulative foreign investment amount multiplied by a prescribed ratio (e.g. 50%) and 2) eligible employment costs, which take account of the number of full-time employees, etc.
Furthermore, if the foreign investor fails to satisfy the conditions for tax exemption/reduction or sells its shares to a domestic company during the exemption period, etc., the exempted/reduced tax amount for the past 5 years from the date at which the conditions for exemption/reduction are no longer satisfied and thereafter shall be recaptured. Further, a penalty interest at a daily rate of 0.03% applied to the exempted/reduced tax amount shall be imposed and payable by the foreign investor.
(ii) Other tax incentives for foreign investments
In addition to the corporate income tax exemption/reduction discussed above, foreign-invested companies are also eligible for local tax (e.g. acquisition tax and/or property tax) exemption, customs duty exemption, etc. Brief description of these benefits are discussed below:
- The acquisition tax and property tax assessed on the assets that a foreign-invested company acquires and holds for purposes of carrying out its business in Korea shall be 100% exempted until the tax year in which 3 or 5 years have passed since the date of business commencement. For the following 2 years, 50% of the assessed tax shall be exempted.
- In case of imports for capital goods directly related to the business subject to the tax reduction or exemption, customs duties, special consumption tax and value added tax shall be exempted if certain requirements are met.
Similar to the corporate income tax exemption/reduction, the tax incentives discussed above are also subject to recapture and penalty interests if the foreign-invested company fails to satisfy the conditions for exemption/reduction, etc.
3. Concluding Remarks
As seen above, Korean tax law grants a number of tax incentives to foreign-invested companies in Korea. However, conditions to satisfy for the tax incentives are quite demanding and the exemption or reduction may later be clawed back or recaptured if the foreign-invested company fails to satisfy the requirements for exemption/reduction. Accordingly, it is advisable to seek a tax expert’s professional advice if a foreign investor intends to make investments in Korea.
Furthermore, the National Tax Services has publicly announced that it will abolish corporate income tax and individual income tax exemption granted in relation to foreign investments. The European Commission has designated Korea as one of the “non-cooperative jurisdictions for tax purposes” in December 2017, and the Korean government has agreed to take action and make amendments to the current regime. Accordingly, Korea has decided to abolish corporate income tax and individual income tax exemption for foreign investments while customs duty and local tax exemption, which comply with international standards and norms, still remains. The overhaul of the existing law concerning the foreign investment will be in effect from January 1st, 2019 and thereafter. Given the circumstances, potential foreign investors need to consider this outlook on the regime change as well before they decide to make investments into Korea.