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South Korea: Proposed tax law amendments in 2015



Jinyoung Hwang

Jin Hoon Oh

On August 6 2015, the Ministry of Strategy and Finance (MOSF) announced the tax law amendments proposal for year 2015. The key features of the 2015 tax law amendments proposal which would impact multinational enterprises (MNEs) are as follows.

Tax reduction benefit to foreign invested companies with increased reflection of employment criteria

With the aim of encouraging job creation, employment criteria will be weighted more heavily when calculating a ceiling on tax reduction for a foreign invested company.

Under the current Special Tax Treatment Control Law (STTCL), a foreign invested company is able to claim a tax reduction within a certain limit, or ceiling, which is based on the aggregate of the criteria relating to the investment amount and criteria relating to employment. The amendment proposes that criteria relating to employment are afforded more consideration and criteria relating to investment amount are reflected less strongly in calculating a ceiling on tax reduction. This amendment will be applicable to the first investment made on or after January 1 2016.

Considering a small number of people employed at a foreign invested company in general, a foreign company, which has decided to, is thinking about, investing in Korea, should complete its investment before January 1 2016 to receive more tax reduction benefits under the current STTCL.

Adjusted criteria for determining real property holding company status for tax purposes

For the purpose of improving equitable treatment with Korean residents and preventing tax avoidance, the proposed amendment adjusts the criteria for determining real property holding company (RPHC) status with respect to non-resident and foreign entities.

Under existing laws, the transfer of shares of an RPHC by a non-resident or foreign entity is deemed to be the transfer of real property with applicable capital gains tax imposed, and a share of an RPHC is determined based on whether real property comprises more than 50% of the company's total assets.

The proposed amendment also takes into account the value of shares (equivalent to the amount of property holding ratio) of other RPHCs which are held by the given RPHC (this is already applicable to the resident when the Presidential Decree of the IITL was amended on February 2015) and this amendment will be applicable to share transfers made on or after January 1 2016.

Non-residents and foreign entities should check in advance whether their shares may be classified as shares of RPHC according to the amendment, since the transfer of those shares is subject to capital gains tax.

Tightened reporting requirement for overseas financial accounts

In line with the amendment made in February 2015, which imposed a stricter domestic residency period, the reporting requirement for foreign financial accounts of overseas Koreans is tightened under this amendment.

The existing law exempts the reporting obligation for the previous year for those overseas Koreans who resided in Korea for less than 365 days during the previous two years. The amendment shortens the domestic residency period from 365 days to 183 days and narrows the exempted scope. This amendment will be applicable to those who will maintain the overseas financial accounts in 2016 and report those accounts in 2017.

Additional documentation requirement relating to MNEs' international transactions

To prevent tax avoidance through the manipulation of transaction prices among affiliates of MNEs, the proposed amendment imposes an obligation on MNEs to submit additional information on their cross-border related party transactions.

The new obligation will apply to domestic companies that have cross-border related party transactions and assets exceeding specific thresholds to be prescribed under the Presidential Decree of the Law for Coordination of International Tax Affairs (LCITA). This would also apply to Korean permanent establishments (PEs) of foreign companies. The companies subject to the amendment should submit a comprehensive international transaction report containing management information and current transfer pricing related transactions by the corporate tax return filing due date, and the failure to comply with the reporting obligation will result in a non-compliance penalty not exceeding KRW 10 million ($8,400).

The amendment is in line with the revision to the Guidance on Transfer Pricing Documentation suggested by the OECD as part of the Base Erosion and Profit Shifting (BEPS) project.

The companies to which the amendment applies are advised to prepare in advance, because a comprehensive international transaction report with a substantial amount of information including management and international transactions information should be filed by the corporate tax return filing due date.

The amendment will be applicable from the taxable year commencing on or after January 1 2016.

Imposition of a withholding tax obligation on domestic companies for service fees paid to foreign companies on seconded foreign expatriates

The proposed amendment (article 156(7) of the Individual Income Tax Law (IITL)) added a new provision that imposes an obligation to withhold tax at a rate of 18.7% (including local surtax) of the service fee (the amount equivalent to salary paid by the foreign company to its foreign expatriates) paid by a Korean company to a foreign company for its use of the foreign company's 'high-income' foreign expatriates dispatched to the Korean company.

The foreign company that dispatches the high-income expatriates to the Korean company will make additional tax payments if the withholding is deficient, or may seek a refund if the withholding exceeds the expatriate's tax liability by filing a tax return with the relevant tax office. The details of the rules and procedures will be prescribed in the Presidential Decree of the IITL. The amendment will be applicable from the taxable year commencing on or after January 1 2016.

Authority granted to financial companies to identify and retain information for the periodic exchange of financial information

To enhance the effectiveness of periodic exchange of financial information, the authority to identify and retain information has been granted to financial companies. Under the proposed amendment, financial companies will be able to identify personal information of non-residents, if it is necessary to submit relevant financial information, and retain account information until the identified account is classified as an account subject to report to the National Tax Service (NTS). The amendment will be applicable to the identification of personal information of non-residents by financial companies on or after January 1 2016.

Limitation on use of net operating losses

Under the amendment to article 13 of the CITL net operating losses (NOLs), which can be carried forward to offset against taxable income, will be limited to 80% of taxable income in that year in order to prevent the use of net operating losses from being concentrated in a certain year. The limit on this utilisation is unlikely to increase the tax burden to the company permanently, given that any exceeding amount can be used during the rest of the deduction period. However, the exceptions to this amendment apply to small and medium-sized enterprises, companies in workout procedures by a court decision, and companies in workout procedures by implementation of plans for management normalisation. The amendment will be applicable from the taxable year commencing on or after January 1 2016.

Narrowed scope of the supply of electronic services by foreign companies subject to VAT

Under article 53(2) of VAT law, which was added on December 23 2014, if non-residents or foreign companies provide electronic services such as games, music, video files or software in Korea, they must pay VAT on the supply of electronic services (VoES).

The fact that non-residents or foreign companies supplying electronic services use a simplified online VAT registration has caused the relevant Korean companies to not benefit from any input tax deduction because the simplified online registration does not issue a tax invoice. Accordingly, the proposed amendment clarifies that if electronic services are supplied with respect to the Korean companies, they are not subject to VAT. Therefore, the amendment makes it clear that the taxable supply of electronic services will be limited to transactions with individual customers (B2C transactions), and not to business-to-business (B2B) transactions. The amendment will be effective from the taxation period that includes the publication date of the proposed 2015 Tax Amendment, which is July 1 2015.

Jinyoung Hwang ( and Jin Hoon Oh (, Seoul

Lee & Ko

Tel: +82 2 2191 3172 and +82 2 6386 6262


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