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Newsletter | April 2015, Issue 1
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TAX
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Changes to the Presidential Decrees of Tax Laws for 2015
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The Government amended the Presidential Decrees of various tax laws on February 3, 2015. Included below are some highlights:
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1.
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New Excess Retained Earnings Tax (Article 93 of the Presidential Decree of the Corporate Income Tax Law)
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The new excess retained earnings tax applies to both domestic corporations and Korean subsidiaries of foreign corporations with shareholders’ equity exceeding KRW 50 billion (excluding small and medium-sized enterprises) for the fiscal year starting on or after January 1, 2015. Shareholders’ equity is calculated as total assets less total liabilities exclusive of unpaid corporate income tax. Corporations subject to the excess retained earnings tax can select one of the following two methods (1) and (2) and, once a method has been selected, it must be applied for 3 consecutive years.
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(1)
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[Current year income x 80% - (investment amount + wage increase + dividend payout, etc.)] x 11% (including local income tax)
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(2)
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[Current year income x 30% - (wage increase + dividend payout, etc.)] x 11% (including local income tax)
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Investment amount refers to the acquisition costs of tangible and intangible assets such as machinery & equipment, vehicles, tools, instruments and patents, as well as construction costs for new or existing buildings including land. Wage increase refers to the increase in the total amount of wages for employees (excluding executives, certain highly paid employees receiving annual salaries in excess of KRW 120 million, and other non-qualified employees), compared with the immediately preceding fiscal year. Dividend payout means cash dividend including any interim cash dividend made during the subject year.
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Where there is under-used income (corporations unable to meet the threshold investment amount) in the fiscal year 2015 (the first year of the new tax law), corporations are not required to pay the tax immediately but can rollover such under-used income to the following fiscal year 2016 and offset against any over-used income of the fiscal year 2016 to determine whether there is any tax liability. If there is under-used income of 2015 remaining after the offset, excess retained earnings tax will be imposed for fiscal year 2016. Similarly, any over-used income can be rolled over to the next fiscal year to offset against under-used income. This new tax law applies through the fiscal year including December 31, 2017.
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2.
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Reduction of Indirect Foreign Tax Credit (Article 94 of the Presidential Decree of the Corporate Income Tax Law)
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Previously, where a domestic corporation receives dividend from a foreign subsidiary (“the first-tier subsidiary”) for which its shareholding ratio is 10% or more, the domestic corporation could claim the corporate income tax paid by the first-tier subsidiary as indirect foreign tax credit. Moreover, in case where dividend was paid by a subsidiary of the first-tier subsidiary (“the second-tier subsidiary”) and the payment forms part of the source of the dividend paid by the first-tier subsidiary, the domestic corporation was allowed to claim a credit of the corporate income tax paid by the second-tier subsidiary up to a statutory amount as indirect foreign tax credit. However, under the amended Presidential Decree, the threshold of the first-tier subsidiary’s shareholding ratio for indirect foreign tax credit increased from 10% to 25% while corporate income tax paid by the second-tier subsidiary is no longer eligible for indirect foreign tax credit.
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3.
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Change to the Requirements of a Small and Medium-sized Enterprise (Article 2 of the Presidential Decree of the Special Tax Treatment Control Law)
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The requirements to qualify as a Small and Medium-sized Enterprise (“SME”) have been simplified. Under the amended Presidential Decree, to qualify as an SME, a company must satisfy certain sales criteria determined for each industry classification as stipulated by the Small and Medium-sized Enterprise Basic Law and have total assets not exceeding KRW 500 billion. All other requirements have been abolished.
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4.
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Strengthening of criteria for Determining Resident Status (Article 4 of the Presidential Decree of the Personal Income Tax Law)
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The length of stay for determining the resident status was changed from one year to 183 days under the amended Article 1-2 of the Personal Income Tax Law. In line with this change, the residency period under the Presidential Decree of the Personal Income Tax Law was also revised from “cumulatively for one year or more” during two consecutive years in Korea, to “cumulatively 183 days or more” during the consecutive two year period.
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5.
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Establishment of Capital Gains Tax on Transfer of Derivatives (Article 159-2 of the Presidential Decree of the Personal Income Tax Law)
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Transfer of KOSPI 200 futures and KOSPI 200 options, etc. is now subject to capital gains tax at the rate of 11%, effective from 2016.
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Back to Main Page
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