|Jay Shim||Steve H Oh|
Foreign investors should take note of the following provisions in particular:
Stricter thin capitalisation rules
Before the amendment, the rule generally applied where the debt-to-equity ratio of the payer exceeds three to one. The 2015 Amendment reduces the ratio to two-to-one (the six-to-one ratio applicable to the financial services industry remains unchanged) and is effective for taxable years beginning on or after January 1 2015.
It is noteworthy that there is no grandfathering provision with respect to the application of the new two to one ratio, and thus notwithstanding obligations arising from related party debt existed before the amendment; interest accrued and deducted as such from January 1 2015 will be subject to the new two-to-one ratio tax regime. Greater attention would be needed in the immediate future for taxpayers whose debt- to-equity ratios were set to be maximised maintaining the three-to-one ratio under the old rule.
New corporate accumulated earnings tax
This new tax is targeted at large corporations in Korea which have been criticised for hoarding cash rather than reinvesting the surplus cash in the economy. In essence, the new tax is designed to encourage large corporations to use their excessive accumulated earnings to reinvest in their business, to increase the salary and wages of their employees, or to distribute in the form of a dividend. If applicable, a 10% tax will be imposed on retained earnings after deducting investment spending or spending on wage increases and dividend payout.
Proper planning would be required for large foreign investment companies (with more than a KRW 50 billion capital including financial services companies), especially if their foreign investors aim to profit from capital gains through the disposition of their shares in the long run making less distributions over the years. Furthermore, it is notable that there is no special exemption available for the financial services industry where outbound distributions are generally limited by financial regulatory governance.
Stricter resident requirement
Before the amendment, a 'resident' was defined as (i) a person who has a permanent address in Korea, or (ii) a person who has stayed in Korea for one year or more. The 2015 Amendment reduces the test from one year to 183 days.
Once determined as a resident for Korean tax purposes, the resident's income sourced from both Korea and foreign jurisdictions is taxed in Korea. However, individuals who have a permanent address for five years or less during the last 10 year period are taxed on foreign source income only if such income is paid in or transferred to Korea.
Imposition of capital gains tax on income derived from derivatives
Capital gains tax will be imposed on income derived from derivative transactions made on or after January 1 2016 (the Korean government for the past few years attempted to impose a tax on derivatives in the form of a transaction tax instead of capital gains tax). Although a number of supplemental rules and regulations are to be further developed, it is still the case that gains derived from derivatives through a fund (that is, indirect investment) are not taxable under this provision.
New VAT on purchases of electronic services from foreign e-commerce sites
Before the amendment, services provided to domestic customers by domestic programme developers were subject to VAT whereas VAT doesn't apply to the supplies of applications or programmes provided by foreign programme developers. The 2015 Amendment requires foreign application programme developers or e-commerce open marketers (if sales made through open market) to register online for VAT purposes and file VAT returns through the website of the National Tax Service.
New VAT on non-essential financial services
The recent trend to scale back VAT exemptions allowed for the financial services industry appears to continue. The 2015 Amendment includes the providing of non-essential financial services to the scope of taxable supplies subject to VAT.
Extension of statutory deadline for reassessment request
It has long been discussed that a disparity exists between the statutory period in which a taxpayer files a reassessment request (three years from the filing due date of past tax returns) and the statute of limitations which generally allows for five years. The 2015 Amendment extends the filing period for a tax reassessment to five years, but only to the extent that the previous three year reassessment period has not expired (that is, the earliest tax year under which calendar-year based corperate income taxpayers could file a reassessment claim is 2011).
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