Below are some of the notable changes in the Korean tax law that may be relevant to foreign companies doing business in Korea and foreign-owned Korean companies. Not surprisingly and to the disappointment of foreign investors, the recent trend to scale back the various tax benefits and incentives created during the Korean IMF crisis to encourage foreign investments appears to continue.
- Limiting a tax auditor's right to exercise discretion to extend the period of tax audit on the basis that scope of tax audit should be expanded. In addition, a new provision has been enacted to encourage the tax auditor to complete an ongoing audit earlier than scheduled if the circumstances are clear that there is no need for further audit.
- Expansion of the eligibility for claim for reassessment and adjustment of customs value to harmonise with transfer pricing rules under the tax law. The new law provides protection for the taxpayer where the determination of the transfer price agreed with the tax authority under an advance pricing agreement (APA) deviates from the customs value determined with the customs authority.
- Restriction of tax incentive for qualifying foreign investment to corporate level taxes only. Tax exemption (full and partial) for dividends paid to foreign investors of qualifying foreign-invested Korean companies has been abolished for qualifying foreign investment approved on or after January 1 2014. However, foreign investors will continue to enjoy the additional tax benefits on dividends from qualifying foreign-invested companies that were approved prior to January 1 2014.
- Special 18.7% flat-tax regime available for foreign employees is set to expire at the end of 2014 unless extended. In addition, the regime has been amended so that it is no longer available to foreign employees who are considered related to the employer.
- The 50% safe harbour for determining whether passive income earned by a controlled foreign company (CFC) should be taxed to applicable Korean shareholders is no longer applicable. The new law provides that even if interest, dividends and royalty (passive income) comprise less than 50% of CFC's gross income, if the percentage exceeds a certain threshold amount prescribed by the Presidential Decree (to be promulgated), such income may be subject to current taxation as deemed dividends to the shareholder. Further, in case where a taxpayer fails to submit relevant documentation of a CFC, a penalty may be imposed in the amount of 0.5% of the total retained earnings of a CFC up to KRW100 million ($94,000).
- To prevent offshore tax evasion and to promote intergovernmental exchange of information relating to tax, a law has been enacted to allow periodic exchange of information between governments for both individual residents and domestic corporations. Also, financial institutions that do not comply with the requests for information will be imposed a fine in the amount not more than KRW30 million. This provision is designed to enforce the inter-governmental agreement (IGA) between the US and Korea that is expected to be signed during the first half of 2014.
- Tax incentives that were available to foreign investments from countries without a tax treaty with Korea (including agreement to exchange information or bilateral investment treaty) have been eliminated for new requests submitted on or after January 1 2015 (except for some countries in which the Enforcement Decree will specify). Also, the amended law seeks to prevent the abuse of tax incentives by requiring a list of the substantive shareholders of the foreign entity as part of the documents required for submission.
- New provision heightening the reporting requirements for Korean companies or individuals with 10% or more ownership in foreign companies has been enacted with the result that KRW10 million in fine may result if the company or individual fails to file all of the necessary documents stipulated by the law.
- Reporting rules have been strengthened with stiffer sanctions for violating the foreign financial account reporting obligation. A Korean resident who has a reporting obligation of its foreign financial accounts will be subject to a fine in the amount equal to 10% of unreported amount.
- Procedures for foreign corporations requesting exemption or non-withholding under a tax treaty has been modified so that the withholding agent is required to withhold tax where there is a justifiable cause stipulated by the Presidential Decree (to be promulgated), including the situation where the withholding agent fails to receive the application for non-taxation / tax exemption status or the declaration of foreign investment vehicle or where the withholding agent is unable to determine the substantive owner of income based its review of documents received. Only after the relevant taxes are withheld in those cases can the substantive owner or the recipient of income file for a tax refund to the competent tax authorities within three years from the last day of the month in which the respective taxes were withheld.