On July 21, 2022, the Ministry of Economy and Finance released its “2022 proposed tax law amendments” (the “Proposed Amendments”), which will generally be effective from January 1, 2023 if finalized and ratified by the National Assembly.

The expected timeline for the Proposed Amendments is as follows:

• July 22 - August 8, 2022: Open to public comments 
• August 18, 2022: Vice-Ministerial meeting 
• August 23, 2022: Cabinet meeting
• Prior to September 2, 2022: Submission to the National Assembly 

The Proposed Amendments are subject to change during the review process.  Once finalized and ratified by the National Assembly, which is expected to take place in December, the Proposed Amendments will generally take effect from January 1, 2023.

Outlined below are some of the Proposed Amendments that may be relevant for overseas companies, overseas invested companies established in Korea, non-resident individuals, Korean companies, and/or resident individuals engaged in cross-border transactions.

1.   Finance Tax
 

• Two Year Deferral of Financial Investment Income Tax Regime (Articles 4 and 37 of the Personal Income Tax Law)
  
  The Proposed Amendments defer the commencement of the financial investment income tax regime (comprehensive taxation of income from financial investment products such as shares, bonds, funds, investment contract securities, derivative linked securities, derivatives, etc.) for two years from January 1, 2023 to January 1, 2025.
   

• Relaxation of Majority Shareholder Threshold for Domestically Listed Shares (Article 94 of the Personal Income Tax Law, etc.)
  
  In determining the “majority shareholder,” the Proposed Amendment removes the ownership percentage threshold (KOSPI 1%, KOSDAQ 2%, KONEX 4% or more) as a determinant and instead institutes the increased investment amount threshold (from KRW1 billion or more to KRW10 billion or more) as a determinant.  In addition, the “majority shareholder” status is to be determined by reference only to the investment held by an individual without considering any investment held by related parties.  The Proposed Amendment will be applicable to transfers on or after January 1, 2023.
   

• Reduction of Securities Transaction Tax (“STT”) rate for KOSPI and KOSDAQ (Article 5 of the Presidential Decree of the STT Law)

2.   Corporate Income Tax
 

• Reduction in Corporate Income Tax Rates
  
  Under the current Corporate Income Tax Law (the “CITL”) of Korea, the corporate income tax rates (including local income tax) range from 11% (for taxable incomes of KRW200 million or less) to 27.5% (for taxable incomes in excess of KRW 300 billion).  The Proposed Amendments reduce the corporate income tax rates, i.e., ranging from 22% (for taxable incomes of KRW 20 billion or less; however, a special rate of 11% will apply to taxable incomes of KRW 500 million or less for small-and-medium enterprises and middle market enterprises) to 24.2% (for taxable incomes in excess of KRW20 billion).  The Proposed Amendment will be applicable to fiscal years commencing on or after January 1, 2023.
   

• Reduction of Double Tax Burden on Dividends Received from Foreign Subsidiaries
  
  A foreign tax credit system has been used to reduce the double tax burden that would otherwise arise when dividends are distributed by foreign subsidiaries to the domestic parent companies.  The Proposed Amendments allow the domestic parent companies to deduct dividends received from their foreign subsidiaries from their taxable income if the dividends meet certain requirements.  The Proposed Amendments are applicable to dividends distributed on or after January 1, 2023; foreign tax credit is available for foreign taxes paid on dividends on or before December 31, 2022 (including unused foreign tax credits carried forward from prior years).
   

• Relaxation of Limit on Use of Net Operating Loss Carryforward
  
  Under the current CITL, the net operating loss carryforward that arose in previous fiscal year(s) may be utilized up to a limit of 60% of the taxable income of a given fiscal year.  The Proposed Amendments increase the limit on the utilization of net operating loss carryforward to 80% of the taxable income of a given fiscal year, applicable to fiscal years commencing on or after January 1, 2023.

3.   Personal Income Tax
 

• Abolition of Five-Year Limit on Flat Tax Rate Available for Foreign Workers 
  
  Currently, under the special tax regime for foreign nationals working in Korea, a foreign worker may choose to be taxed on his/her earned income under either the ordinary income tax rates or the flat tax rate of 20.9% (inclusive of local income tax) only for the first five years from the year in which the foreign worker starts working in Korea for the first time.  The five-year limit will be abolished as of January 1, 2023.  The abolition of the five-year limit will apply prospectively (i.e., to foreign workers who start working in Korea for the first time on or after January 1, 2023) and also to foreign workers who are currently, or have been in the past, taxed under the special tax regime.
   

• Adjustment to Individual Income Tax Brackets
  
  Individual income tax brackets are adjusted as follows:

• Tax Relief for Retirement Income 
  
  The amount of income tax deduction based on the number of years of employment with respect to retirement income will be increased to alleviate the income tax burden of retired individuals.

4.   Other Notable Proposed Amendments
 

• Introduction of New Global Minimum Tax System (Article 80 of the International Tax Coordination Law, etc.)
  
  If a multinational enterprise’s (“MNE”) effective tax rate in a particular jurisdiction is below a global minimum tax rate of 15%, earnings of the MNE may be subject to additional tax in other jurisdictions (“Pillar Two”).  The minimum tax rules are applicable to separate business units (each “constituent entity”) of MNEs with consolidated financial revenues of more than EUR750 million for at least two of the four fiscal years preceding the tested fiscal year.
  
  The Pillar Two system of the minimum tax rules includes the income inclusion rule (requiring the parent of an MNE to pay top-up tax on its proportionate share of the income of any low-taxed constituent entity in the jurisdiction of the parent company) and the undertaxed payments rule (requiring other constituent entities to pay top-up tax in their jurisdictions where the income inclusion rule is inapplicable), both of which will result in the payment of allocable share of the top-up tax as a corporate income tax.  Each step of the calculation of the top-up tax on income of a constituent entity is described below, applicable to fiscal years commencing on or after January 1, 2024.
   

• Addition to Procedural Requirements for Application of Tax Exemption (Article 156-2 of the Personal Income Tax Law, Article 98-4 of the Corporate Income Tax Law, etc.)
  
  A tax exemption application package should include “documents related to the establishment and business operations of a foreign corporation/non-resident and the domestic source of income of such foreign corporation/non-resident” as well as the Application for Tax Exemption/Non-taxation.  The head of the competent district tax office may (a) reject the application for tax exemption/non-taxation or ask the foreign corporation/non-resident to amend the application if certain requirements are not satisfied or any information shown on the application is inaccurate, and (b) request additional information if the information submitted is insufficient to review whether all tax exemption requirements are satisfied.  In addition, the Proposed Amendments allow the income payer to request information from the foreign/non-resident income recipient, applicable to the applications filed on or after January 1, 2023.