Korean Tax Law Changes in 2020

■ Korean Tax Law Changes in 2020

Proposed tax law changes announced by the Korean government in July 2019 were approved by the National Assembly in December 2019 with several amendments and additions. We summarized below some of the major tax law changes for 2020 to keep you updated. Most of the tax law changes we discussed below came into force from the fiscal year starting, or income earned, on or after January 1, 2020 unless indicated otherwise.

I. Corporate Income Tax Law (CITL)

l Taxation on royalties for patents registered outside of Korea

While income derived from patent use is generally treated as royalties, the term ‘use’ is not clearly defined under some of the tax treaties in effect. The tax law changes have stipulated that “consideration for the use of, or the right to use other like property or rights” in the article for royalties in the tax treaty includes any payments for manufacturing know-how, technologies, or information contained in patents which are registered outside of Korea that are used in manufacturing or production activities in Korea. The revised provision is applied to payments made on or after January 1, 2020.

And also, in order to tax on compensation to overseas patent holder for infringement of a patent registered outside of Korea, such compensation would be classified as ‘other income’ which shall be subject to 16.5% income tax withholding (including 10% surtax) at source of payment. The revised provision is applied to payments made on or after January 1, 2020.

However, as there are previous cases in which the Korean Supreme Court judged that payments made for the use of patents registered outside of Korea do not constitute Korean-source income under the Korea-US tax treaty, the concerned patent holders may want to wait and see next court cases.

l Increased tax limit of entertainment expenses

Where entertainment expenses exceed the tax limit which is calculated by the law, the entertainment expenses in excess of the tax limit shall not be allowed as deductible expense.

Under the tax law changes, the tax limit ((a) + (b)) of entertainment expenses has increased as given below. It is effective from the tax year beginning on or after January 1, 2020.

Tax limit amount: (a) + (b)	Criteria	Before amendment	After amendment
(a) Basic amount	SME*	KRW 12,000,000	KRW 12,000,000
	Non-SME	KRW 24,000,000	KRW 36,000,000
(b) Additional amount based on sales amount	Not more than KRW 10 billion	0.2%	0.3%
	KRW 10 - 50 billion	KRW 20,000,000 + 0.1% of sales in excess of KRW 10 billion	KRW 30,000,000 + 0.2% of sales in excess of KRW 10 billion
	Over KRW 50 billion won	KRW 60,000,000 + 0.03% of sales in excess of KRW 50 billion	KRW 110,000,000 + 0.03% of sales in excess of KRW 50 billion

*SME represents small and medium enterprises.

l Increased threshold for deductible business car expense without car mileage log

Previously, the entire amount of expenses incurred for the use of business cars were deductible unless they exceed the threshold of Won 10 million per annum where a mileage log of the business car is not prepared.

Under the tax law changes, the threshold for deductible business car expense without car mileage log has increased from Won 10 million to Won 15 million. The revised provision is effective from the tax year beginning on or after January 1, 2020.

II. Individual Income Tax Law (IITL)

l Totalization of ‘net capital gains’ from transfer of foreign (non-Korean) shares

Previously, capital gains and losses arising from transfer of taxable shares had been allowed to be offset dividing domestic shares and overseas shares. And the deduction for capital gains was Won 2.5 million per annum for each division.

Under the tax law changes, a taxpayer shall totalize the net capital gains from the transfer of domestic shares and overseas shares. In addition, the deduction of Won 2.5 million is applied to the totalized net capital gains. The revised provision is applied to the transfer made on or after January 1, 2020.

III. Others

l Strengthened taxpayer’s burden of proof regarding abusive transaction

Previously, burden of proof regarding abusive transaction was not specifically stated in the International Tax Coordination Law (ITCL) of Korea. Therefore, if the Korean tax authority applied the “substance over form” principle to the taxpayer who enjoyed tax treaty benefits unduly though a cross border transaction which was indirectly made via a third party or two or more transactions, the burden of proof regarding such abusive transaction was on the Korean tax authority who challenged the abusive transaction.

Under the tax law changes, when a transaction reduces the tax liability by an amount specified in the Presidential Decree of the ITCL (e.g., 50%), the burden of proof is placed on the taxpayer to prove that the transaction has a valid business purpose, without an intent of tax evasion. If the taxpayer fails to prove, the “substance over form” principle shall be applied to the transaction. This new rule is effective from the tax year beginning on or after January 1, 2020.

l Reduction of securities transaction tax rate

Under the tax law changes, the securities transaction tax rate will be decreased from 0.5% to 0.45% for over-the-counter transactions of listed and non-listed securities from April 1, 2020. The securities transaction tax rate on the listed securities traded in the designated stock exchange market has been lowered by 0.05% since June 3, 2019, current effective rate being 0.25% (including surtax) for the securities listed on KOSPI and KOSDAQ.