In December 2018, the Korean National Assembly passed the tax law amendments proposed by the Ministry of Economy and Finance (“MOEF”).  

As a follow-up measure, the amendments to the Presidential Decree of the relevant tax laws were promulgated on February 12, 2019.  Separately, in December 2018, the Korean National Assembly passed the amendments to the local tax laws proposed by the Ministry of the Interior and Safety, and the Ministry promulgated the amendments to the Presidential Decrees of the relevant local tax laws.

Summary of Key Amendments and the Presidential Decrees:

The amendments generally took effect as of January 1, 2019, although in some cases, different effective dates have been specified.

1. Corporate income tax  

Reduced scope of secondary tax liability of business transferee (Article 22 of the NTBL-PD)

In order to lessen the secondary tax liability burden of the business transferee, the scope of secondary tax liability has been limited to where the transferor and transferee are “related parties,” or the business transfer was part of a tax avoidance scheme.

The passed bill will apply to: (i) business transfers occurring on or after the effective date of the relevant provisions of the NTBL-PD; and (ii) business transfers, which occurred before the effective date of the relevant provisions of the NTBL-PD, where the party with secondary tax liability has not yet received the payment notice.

New accelerated depreciation incentive for investment in equipment (Article 28-3 of the STTCL, Article 25-3 of the STTCL-PD, newly enacted)

To encourage investment in new growth businesses or equipments, accelerated depreciation is allowed under which the reported useful life of an asset used to calculate the depreciation will be 50% of the standard useful life of the asset, thus doubling the depreciation.

• Small and medium size enterprise / middle level enterprise (larger than medium size enterprise but smaller than large enterprise): business assets
• Large enterprise: R&D facilities, facilities for new growth engine technology business, etc.

The passed bill will be applicable to assets acquired between July 1, 2018 and December 31, 2019.

Improved depreciation method for tax qualified vertical spin-off and in-kind contribution (Article 29-2(2) of the CITL-PD)

To prevent usage of a reorganization as a tax reduction method, depreciation based on “book value” of the transferred assets should be required, even in case of a tax qualified vertical spin-off or in-kind contribution.

The passed bill will be applicable to vertical spin-offs or in-kind contribution occurring on or after the effective date of the revised CITL-PD.

2. Value added tax

Expanded scope of VAT-able electronic services provided by foreign businesses (Article 53-2(1) of the VATL, Article 96-2 of the VATL-PD)

Originally, cloud computing service was subject to the VAT in Korea only when it was provided by a “domestic” supplier.  

To achieve tax equity between domestic and foreign businesses, the MOEF proposed to include cloud computing services provided by a foreign supplier to be within the scope of electronic services subject to VAT.  Further, when the final bill was passed by the National Assembly, it also included: (i) advertisement publication services; and (ii) brokerage services for goods or services as VAT-able electronic services provided by foreign businesses. 

Below is the scope of brokerage services for goods or services:

• Brokerage services to rent, use or consume goods or places in Korea; and
• Brokerage services to sell and purchase goods or places in Korea.

The passed bill will be applicable to services supplied on or after July 1, 2019.

3. Local tax

Reduction in penalty tax rates for under-payment and over-refund-claim (Article 34 of the LTBL-PD)

To alleviate taxpayer’s burden, the penalty tax rate has been reduced to 0.025% per day (9.125% per annum) on the non-payment amount.  This took into consideration the reduced market interest rate on overdue loan payments.
* 10% limit for withholding tax remains unchanged.

The passed bill will be applicable to local taxes reported and imposed on or after January 1, 2019.