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Notable Proposed Tax Law Amendments of 2020

2020.09.28

On July 22, 2020, the Ministry of Economy and Finance (the “MOEF”) released its proposed tax law amendments of 2020 (the “Proposed Amendments”).  We have outlined some of the major amendments.

The Proposed Amendments were confirmed by the Cabinet Meeting on August 25 and were submitted to the National Assembly on August 28, 2020.  They are subject to changes during the review process.  Once finalized and passed by the legislature (usually taking place in December), most of the Proposed Amendments would be effective from January 1, 2021.  However, the amendments regarding financial investments are expected to be effective from January 1, 2023.

1.    Corporate Income Tax

  • Extension of carryforward period for tax credits under the Special Tax Treatment Control Law (Article 144 (1) of Special Tax Treatment Control Law): The Proposed Amendments extend the carryforward period for all tax credits prescribed under the Special Tax Treatment Control Law to ten years (the pre-amended periods were five to ten years).  The extension applies to tax credits for which the carryforward period has not lapsed at the time of filing of corporate income tax return on or after January 1, 2021.

  • Extension of carryforward period for net operating loss (“NOL”) (Article 13 and 76-13 of Corporate Income Tax Law): The Proposed Amendments extend the carryforward period for NOL from ten years to 15 years.  The extension applies to NOL being reported on or after January 1, 2021.

  • Imposition of penalty on overseas companies for failure to submit the “Statement of Payment” (Article 75-7 of Corporate Income Tax Law): In order to improve the Korean tax authorities’ ability to obtain taxpayers’ tax-related information, the Proposed Amendments impose penalty for failure to submit the “Statement of Payment” on overseas companies.  The penalty applies to failures to submit the “Statement of Payment” that occur on or after January 1, 2021.


2.   Value Added Tax

  • Clarification of the place of supply of “electronic services” (Article 20 of Value Added Tax Law): The Proposed Amendments provide that the place of supply of electronic services will be the service recipient’s location of business place, address or abode (effective for services received on or after January 1, 2021).


3.   International Tax

  • Expansion of the scope of “overseas specially related party” (Article 2 (1) 8 of International Tax Coordination Law): Two parties to a transaction where a third party owns directly or indirectly at least 50% of their respective voting stocks are “related parties.”  Under the Proposed Amendments, stocks directly or indirectly owned by a kin to the third party will be included in determining the stock ownership percentage of the third party (applicable to fiscal years commencing on or after January 1, 2021).

  • Streamlining of information submission obligations related to international transactions and extension of the filing deadline (Article 11 of International Tax Coordination Law): Under the Proposed Amendments, a company subject to the master file and local file submission requirements would be exempt from the requirements for submitting “schedules of international transactions,” etc.  The filing deadline for “schedule of international transactions,” “summarized profit and loss statement,” and “information on overseas real estate and overseas investment” will be extended from the filing due date of corporate income tax return to six months from the end of the relevant fiscal year.  The submission deadline for Advance Pricing Agreement (“APA”) annual report will be extended from six months from the filing due date for the corporate income tax return for the covered tax years to 12 months therefrom (applicable to submissions made on or after January 1, 2021).

  • Extension of carryforward period for foreign tax credit and deduction of unused credit (Article 57 of Corporate Income Tax Law and Article 57 of Individual Income Tax Law): The maximum carryforward period for foreign tax credit will be extended from five years to ten years, and any unused foreign tax credit will be deductible (applicable to carry-forwarded foreign tax credits with respect to which the current five year carryforward period has not been expired when the relevant corporate or personal income tax return is filed on or after January 1, 2021).

  • Extension of roll-back period for the APA (Article 6 (3) of International Tax Coordination Law): The maximum roll-back period will be extended from five years to seven years for a bilateral APA and from three years to five years for a unilateral APA (applicable to APA applications filed on or after January 1, 2021).


4.   Finance Tax

  • Introduction of “financial investment income” category (Article 4 of Individual Income Tax Law): All income or gains earned by a resident individual from financial investment products under the Financial Investment Services and Capital Markets Act (excluding interest and dividend) will be classified as “financial investment income” and be taxed separate from other categories of income.  Financial investment income will be offset against financial investment losses, and net losses may be carried forward (applicable to income arising on or after January 1, 2023).

  • Improve fund tax regime (Article 4 of Individual Income Tax Law, etc.): All income or gains earned by a resident individual from investment in funds will be subject to taxation as financial investment income.  Financial investment income and losses from different funds will be allowed to be aggregated to the extent of financial investment income (applicable to income arising on or after January 1, 2023).

  • Reduction of securities transaction tax rate (Article 8 of Securities Transaction Tax Law): The tax rate for disposals on or after January 1, 2021 to December 31, 2022 will be reduced by 0.02%, and the tax rate on disposals on or after January 1, 2023 will be additionally reduced by 0.08%.  There will be no change for disposals on KONEX, which is currently at 1%.


5.   Individual Income Tax

  • Addition of a new tax bracket with a 45% tax rate (Article 55 (1) of Individual Income Tax Law): The current top marginal income tax rate for individuals is 42% (46.2% including local income surtax) for taxable income over KRW 500 million.  The Proposed Amendments provide a new tax bracket of 45% (49.5% including local income surtax) with taxable income over KRW 1 billion (applicable to income arising on or after January 1, 2021).

  • Expansion of the scope of assets subject to the reporting of foreign financial accounts (Article 34 of International Tax Coordination Law): Under the Proposed Amendments, the reportable foreign financial accounts will include accounts holding crypto assets or other similar assets (applicable to reporting filed on or after October 1, 2021).


6.   National Tax Basic Law

  • Change of the “base date” from which interest on national tax refund resulting from a refund claim filed by taxpayer accrues (Article 43-3 (1) 5 of Enforcement Decree of National Tax Basic Law): The base date is changed from the filing date of a tax refund claim to the payment date of the tax refund, etc. (applicable to national taxes appropriated or refunded on or after the enforcement date of the Enforcement Decree).

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