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Newsletter | December 2013
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TAX |
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Proposed Tax Law Changes for Year 2014 |
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On August 8, 2013, the Ministry of Strategy and Finance (“MOSF”) announced a list of proposed tax law amendments, most of which will take effect as of January 1, 2014 if enacted into law. The main currently proposed amendments are summarized below, but may be subject to change during the National Assembly’s legislative review later this year. |
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Elimination of Tax Exemption on Dividends from a Qualifying Foreign Invested Enterprise |
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Under the current tax law, dividends from a foreign invested enterprise that receive foreign investment tax exemption are not subject to domestic withholding tax. However, under the proposed tax law amendment, such withholding tax exemption will no longer be available to dividends paid out by foreign invested enterprise, even if the foreign invested enterprise received foreign investment tax exemption. |
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Elimination of Tax Exemption on Foreign Investment by Companies in Non-Tax Treaty Countries |
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Under the current tax law, the following entities do not receiving any tax exemption on foreign investment into Korea: (i) an overseas entity in which a Korean individual has a shareholding of 10% or more or (ii) an overseas entity that has borrowed 10% or more of its debt from a foreign invested enterprise in Korea or Korean individual or company. |
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In addition to the above, the proposed tax law eliminates tax exemption on any investment made by a foreign entity located in a jurisdiction that does not have a tax treaty (including Bilateral Investment Treaty and Agreement for Exchange of Tax Information) with Korea, effective for tax exemption application made on or after January 1, 2015. |
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VAT by Proxy on Comprehensive Business Transfer |
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Comprehensive business transfer, as defined under the tax law, is currently not subject to Value Added Tax (“VAT”). However, according to the proposed tax amendment, the purchaser of the assets in a comprehensive business transfer may elect to pay VAT by “proxy” (i.e., on behalf of the transferor) on the proceeds paid in the comprehensive business transfer and receive a corresponding VAT credit. |
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Expanded Reporting Requirements of Foreign Subsidiaries |
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Under the proposed amendments, foreign subsidiaries doing business outside Korea that are required to submit their financial information will be expanded from companies in which the parent company holds 50% or more equity interest to companies in which the Korean parent holds 10% or more equity interest. Currently, companies that fail to comply with this reporting obligation may be subject to an administrative fine of up to KRW 10 million. The proposed tax law amendment also seeks to further strengthen the rules by imposing administrative fine to taxpayers who do not submit information on their foreign subsidiaries when filing their corporate income tax returns. |
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Limitations to Applying the 18.7% Flat Tax Rate |
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Under the proposed amendments, the 18.7% flat income tax rate (including local income tax) on earned income of foreign workers will apply only during the first 5 years of their employment in Korea. In addition, certain foreign workers who exercise control (either directly or indirectly) over the management of the Korean employing entity, will be excluded from the application of the flat tax rate. |
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