The Ministry of Economy and Finance and the Ministry of the Interior and Safety announced revised tax bills on July 30, 2018 and October 10, 2018, respectively. The proposed amendments are expected to change in the process of discussions that will be held during the regular session of the National Assembly, and are mostly proposed to be effective for tax years beginning on or after January 1, 2019, i.e., after the amendments are finalized through the resolution of the National Assembly plenary session in December 2018.

Key Amendments:

Some of the significant amendments that may affect your business or may be of interest to you are highlighted below.

1.   Corporate income tax

1) Income tax incentives for foreign direct investment abolished [Articles 121-2 and 121-5 of the Special Tax Treatment Control Law]

Tax exemption on corporate tax and income tax is abolished to reflect the OECD standards regarding international tax and to achieve equitable taxation between domestic and foreign investments. Customs duty, acquisition tax, and property tax exemption will continue to be available, while provisions relating to acquisition tax and property tax exemption will be transferred to the Local Tax Incentive Limitation Law.

The revised regulations will be applied to tax exemption applications made on or after January 1, 2019. Tax exemption applications made on or before December 31, 2018 will continue to be eligible for tax incentives under the current provisions.

2) Provision on priority of income classification under a tax treaty abolished [Article 28 of the International Tax Coordination Law]

The provision on priority of income classification under a tax treaty is abolished.

Under the current law, a tax treaty has priority over domestic tax law concerning classification of Korean source income of a non-resident individual or foreign corporation. In this regard, the Supreme Court has recently determined that if the withholding tax rate is applied to interest income under the tax treaty, but the taxation is considered as dividend income under the domestic tax laws, the interest exemption regulation under the domestic tax laws should not apply (Supreme Court Decision 2015Du2710, February 28, 2018). With the proposed change, classification of Korean source income under domestic tax law will be valid regardless of the tax treaty, and conversely, classification of income under a tax treaty will not necessarily determine its character under domestic tax law.

The purpose of the amendment is not only to resolve the limitation of taxation under the domestic tax laws based on the income classification in the tax treaty (as the decision of the Supreme Court indicates), but also to secure Korea’s broader taxation rights in case of conflict between the domestic tax laws and the tax treaty.

3) New Dividend Received Deduction (“DRD”) rate for a holding company [Article 18-2 of the Corporate Income Tax Law]

The purpose of this amendment is to encourage increased use of holding company structures, and as such, promote greater transparency and corporate governance. This will be applicable for dividends received on or after January 1, 2019.

2.   Value-added tax (“VAT”)

1) Expanded scope of deemed sale treatment for goods supplied for non-VAT-able business purposes [Article 10 (1) of the Value-Added Tax Law]

Exported goods acquired at zero-rate VAT is added to the list of goods subject to the deemed sale treatment when the goods are used for purposes other than the taxpayer’s VAT-able business. The purpose of this amendment is to prevent abuse of VAT exemption or credit. This amendment will be applicable to goods that are used or consumed on or after January 1, 2019.

2) Reduction of VAT penalties [Article 60 (2), (5) of the Value-Added Tax Law]

To streamline the VAT penalties system, the penalties for negligent transmission of electronic VAT invoice is reduced, and the final due date for delayed transmission is extended for goods or services supplied on or after January 1, 2019.

Please note the change in penalty for the non-submission of credit card sales slips: 1% → 0.5% of the supply value.

For negligent transmission of electronic VAT invoice, the penalties are:

• (Delayed transmission) 0.5% → 0.3% of the supply value:
  If the VAT invoice is transmitted no later than the final VAT return filing due date of the respective taxable period (the 25th day of the month following the taxable period in which the supply was made).
• (Non-transmission) 1% → 0.5% of the supply value:
  If the VAT invoice is not transmitted until after the final VAT return filing due date of the respective taxable period (the 25th day of the month following the taxable period in which the supply was made).

3) New criminal penalty provisions for non-compliant VAT-exempt invoices [Article 10 (1), (2) of the Tax Evaders Punishment Act]

To encourage transparency of VAT-exempt transactions, the taxpayer may be subject to imprisonment of no more than one year or a fine of no more than 20% of the supply value under the following circumstances:

• Non-issuance or false issuance of invoice;
• Non-receipt or false receipt of invoice; or
• False submission of aggregated invoice, etc.

3.   Local tax

1) Various exemptions on mergers, spin-offs, etc. revised [Article 57-2 of the Local Tax Incentive Limitation Law]

To continuously support corporate structural improvement (e.g., merger) and enhance effectiveness of exemptions, the following changes to the exemption rate, eligible transactions, and exemption period are anticipated:

• Exemption for qualified mergers: 50% of acquisition tax (limited to acquisition of business properties).
  *60% exemption on a merger between SMEs or a merger with a technological innovation business enterprise.
• Exemption for qualified spin-offs/in-kind contributions: 50% of acquisition tax.
• Sunset period: December 31, 2021.

Exemptions for qualified asset exchange and comprehensive transfer of assets will be ceased, and this proposed amendment is applicable to tax liabilities arising on or after January 1, 2019.

2)  Refund request procedure of withheld local income tax for income recipient and income payer (i.e., withholding agent) introduced [Article 50 of the Local Tax Basic Law]

Unlike the national tax laws, current local tax laws do not have provisions setting forth refund request procedures of the withheld local income tax for income recipient and income payer; they are left with litigation as the only option to appeal excessive collection of local income tax. This proposed amendment attempts to resolve the lack of relevant legislation and to reinforce taxpayer’s rights. If enacted, this amendment would be applicable to taxable years commencing on or after January 1, 2019.

Woo Hyun Baik | whbaik@kimchang.com

Christopher Sung | chrissung@kimchang.com     

Sung Sik Kim | sungsik.kim@kimchang.com