On January 8, 2018, the Korean government announced a draft bill to amend the presidential decrees of tax laws in 2018. Included in the draft bill was a proposal, announced on August 2, 2017, to reduce the scope of domestic tax exemption on capital gains from sale of shares of listed Korean companies by non-residents of Korea through the Korea Exchange.

Details:

Currently, a non-resident and a foreign company is not subject to Korean income tax on capital gains realized on the sale of shares in a listed Korean company through the Korea Exchange, if the non-resident: (i) has not owned (together with any shares owned by any person with a certain special relationship with such non-resident) 25% or more of the total issued and outstanding shares of such company at any time during the calendar year in which the sale occurs, and during the preceding five calendar years; and (ii) has no permanent establishment in Korea.

The draft bill proposed that the ownership threshold for the tax exemption be reduced from the current less than 25% threshold to less than 5% (inclusive of any position(s) held by a non-resident (or a foreign company)’s specially related parties). If the domestic tax exemption is not available, a tax exemption may be available under a treaty. Otherwise, any capital gains by a non-resident will be subject to Korean tax at either 11% of the sale proceeds or 22% of the capital gain, whichever is less.

Implication / Significance:

Based on the draft bill, the proposed amendment would have applied to a sale of shares beginning July 1, 2018 without any transitional period upon promulgation of the draft bill, expected to occur in early February 2018.

Previously, the proposed amendment was designed to apply to sale of shares beginning January 1, 2018. However, as a transitional measure, the Korean government announced that shares acquired on or before the enactment of the proposed amendment will be subject to the current threshold of 25% for a sale of shares on or before December 31, 2018.

However, taxpayers continued to voice their strong opinion to the Ministry of Strategy and Finance that the expansion of the scope of taxation was excessive. Accordingly, the proposed amendment was deleted on February 1, 2018 at the Cabinet meeting.