In December 2019, the National Assembly passed the tax law amendments proposed by the Ministry of Economy and Finance (the “MOEF”), and the MOEF subsequently announced the relevant Presidential Decrees on February 11, 2020.  The National Assembly also passed the local tax law amendments proposed by the Ministry of the Interior and Safety in December 2019.  The tax law amendments and the related Presidential Decrees are currently in effect. 

We provide below a summary of the major tax law amendments.  Please note that most of the amendments below are effective as of January 1, 2020.

1.  International Tax
 

• Enhancement in methods to determine income attributable to a domestic place of business [Article 130 (2) and 132 (3) of the Presidential Decree of the Corporate Income Tax Law (the “CITL”)]

To incorporate international standards on determining income attributable to a domestic place of business for a non-resident/foreign corporation, expenses reasonably attributable to a domestic place of business in connection with the generation of domestic source income will be tax deductible (regardless of whether actually disbursed or not) to alleviate the requirements for tax deduction, and tax deduction for interest expenses in connection with internal treasury dealings to the extent that such deduction is entitled in a relevant tax treaty will be allowed to expand the scope of deductible interest expenses.

In order to rationalize the scope of domestic source income attributed to a domestic place of business of a non-resident/foreign corporation, the list of includable income items has been deleted, rendering any foreign-derived income that is attributed to domestic place of business as domestic source business income.

The amendment will be applicable to taxable years commencing on or after January 1, 2020.
 

• Allowance of filing refund claim by non-residents subject to withholding under the National Tax Base Law (the “NTBL”) [Article 25-3 of the Presidential Decree of the NTBL]

In order to preserve refund claim rights for non-resident individuals and foreign corporations, cases where non-resident individuals and foreign corporations subject to withholding under the NTBL may file refund claims are as follows:

• Withholding an agent’s bankruptcy or closure of business 
• Withholding an agent’s non-cooperation on a legitimate refund claim request by the non-resident or foreign corporation subject to withholding tax

For the refund claims above, the following documents are required:

• Evidence substantiating the fact that it falls under any one of the categories outlined above
• A certificate of tax residency proving that it is a substantive owner of the Korean source income

The amendment will be applicable to income paid on or after January 1, 2020.

2.  Corporate Income Tax and Value Added Tax
 

• Addition of investment advisory service within the scope of services qualifying for zero-rate VAT [Article 33 (2) of the Presidential Decree of the Value Added Tax Law]

In order to provide equitable treatment for similar services, the investment advisory service referred to in Article 6 (1) 4 of the Financial Investment Services and Capital Markets Act is added to qualifying for zero-rate VAT on a reciprocal. 

The amendment will be applicable to services provided from July 1, 2020.
 

• Exclusion of asset-backed securitization companies from the Special Tax Regime for Promotion of Investment & Mutual Cooperation [Article 100-32 (1) of the Special Tax Treatment Control Law]

In order to minimize unnecessary regulations for reasons including business-related considerations, companies eligible for deduction of declared dividend in accordance with Article 51-2 (1) of the CITL (such as asset-backed securitization companies established under the Asset-Backed Securitization Act) have been added to the list of companies that are excluded from the Special Tax Regime even if their net shareholders’ equity is in excess of KRW 50 billion. 

The amendment will be applicable to tax returns to be filed on or after January 1, 2020.
 

• Relaxation of requirement for maintenance of log book to substantiate deductible expenses of business-use automobile [Article 50-2 (7) of the Presidential Decree of the CITL, etc.]

In order to ease tax compliance burdens through rationalization of standards related to deductible expenses of business-use automobile, a deduction up to KRW 15 million per year of expenses for business-use automobile is allowed even if the log book is not maintained. 

The amendment will be applicable to taxable years commencing on or after January 1, 2020.

3.  Local Tax
 

• Rationalization of the scope of heavy acquisition tax imposed on trust property located within the Seoul Metropolitan Area (“SMA”) [Article 13 of the Local Tax Law (the “LTL”) and Article 27 of the Presidential Decree of the LTL]

In order to clarify the scope of heavy acquisition tax on trust property used as a head office or main office, and to improve taxation equity between a head office and branch and between company-owned property and trust property, where the trust property is used as a head office or main office, the heavy acquisition tax has been adjusted to apply only to those newly constructed or expanded for the purposes of being used as a head office or main office.

Regarding real property acquired in connection with (i) establishment of the head office; (ii) establishment of the branch; or (iii) transfer of head office or branch located outside of SMA to within SMA, those that are characterized as trust property, and being used by the “grantor” as its head office or branch, are subject to heavy acquisition tax.

The amendment will be applicable to tax liabilities arising on or after January 1, 2020.
 

• Implementation of interest-like penalties for local tax [Article 178 of the Local Tax Incentive Limitation Law (the “LTILL”) and Article 123 of the Presidential Decree of the LTILL]

In order to secure effectiveness of the tax reduction/exemption system, and to enhance fairness for taxpayers who pay the local tax upfront, the interest-like penalties rule for local tax has been implemented.  Where the acquisition tax reduction/exemption enjoyed by the taxpayer during the acquisition of real property is recaptured, interest-like penalties are to be imposed on the additionally assessed acquisition tax amount. 

Interest-like penalties are calculated as applying 0.025% per day on the additionally assessed acquisition tax amount, accruing from the date immediately following the acquisition tax due date until the date on which the reason for the recapture occurs.

The amendment will be applicable to real estate acquisition tax reductions enjoyed after January 15, 2020.