Proposed tax law changes announced by the government in August 2015 were approved by the National Assembly in December 2015 with several amendments and additions. We summarized below some of the major tax law changes for 2016 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, 2016, unless indicated otherwise.
1. Corporate Income Tax Law (CITL)
Under the previous corporate income tax law, tax loss was allowed to be carried forward for 10 years and fully deducted from taxable income. However, under the amended CITL, a company which is not classified as a Small and Medium sized Enterprise (“SME”) may utilize its tax loss carry-forward only within certain limit. A deduction limit of the tax loss carry-forward for non-SME (excluding non-SME under a business rationalization plan, workout plan, etc.) is 80% of the taxable income of the fiscal year.
The purpose of this amendment in CITL is to prevent taxpayers from using business purpose vehicles for personal use or abusing the tax deductions allowed for company vehicle with expensive vehicles.
For the company vehicle related expenses to be treated as tax deductible for corporate income tax purposes, the following conditions should be satisfied:
a. The company should purchase car insurance that allows only directors/employees of the company to drive the vehicles and be covered under the insurance. Without such insurance, any company vehicle related expenses will be disallowed deduction; and
b. The company should maintain a detailed driving log for the reporting to the National Tax Service (NTS).
This driving log requirement is waived if the company vehicle related expenses are KRW 10 million per car and per year or less for each company vehicle. However, if the company vehicle related expenses are over KRW 10 million per car and per year, the company must prove that the car has been used for business purposes by providing a detailed driving log (vehicle type, total annual mileage use by vehicle type, mileage use for business purpose, car related expenses including depreciation, lease, fuel, vehicle tax, car insurance, etc). Actual usage ratio of the expenses shall be allowed if such actual usage ratio for business purposes is proved through a daily driving log.
Under the amended CITL, annual depreciation and loss on disposal of assets incurred in relation to a vehicle will be allowed deduction for up to KRW 8 million per year. Also, the depreciation equivalent included in the lease or rental fee will be subject to this annual depreciation deduction limit of KRW 8 million per car. The amount in excess of the limit will have to be carried forward for deduction in the following years.
Under the current CITL, a company can choose the period of depreciation between 4-6 years. However, vehicles purchased in 2016 and after will be subject to the depreciation of five years.
VAT-exempted taxpayers have been allowed to issue either electronic tax invoices or paper tax invoices as issuing electronic tax invoice was not mandatory before the revision, which raised transparency concerns.
From July 1, 2015, VAT-exempted taxpayers shall be required to issue electronic tax invoices for all transactions and submit them to the National Tax Service the same as regular taxpayers. For non-compliance, additional penalty taxes will be imposed from January 1, 2016.
2. International Tax Coordination Law (ITCL)
In July 2013, the Organization for Economic Cooperation and Development (“OECD”) and G20 countries adopted the Base Erosion and Profit Shifting (“BEPS”) prevention project, which aims to provide governments with clearer international solutions to fight against corporate tax planning strategies of multinational companies that exploit gaps and loopholes of the current system to artificially shift profits to locations where they can be subject to more favorable tax treatment.
In line with the OECD’s BEPS prevention project and Guidance on Transfer Pricing Documentation, the tax law change imposes a new documentation requirement for certain multinational companies to submit information on international transactions.
In order to comply with the recommendations of OECD/G20 BEPS prevention project, the amended ITCL requires a Multinational Enterprise (“MNE”) with a certain size of transactions and assets (to be regulated in the Presidential Decree of ITCL) to submit additional transfer pricing (“TP”) documentation (i.e., a comprehensive report on cross-border transaction information) together with its annual corporate tax returns, which would address management information and current status of cross-border transactions of the MNE.
Report I (Master file)
●Comprehensive legal ownership structure and location of
subsidiaries or offices of the MNE
●Explanation on major business restructuring, share acquisition,
sale of business, etc.
●Detailed explanation on business and business strategies of
●Explanation on major related parties and circumstances leading
to related party transactions
●List of related parties involved and indication of relationship by
the type of related party transactions
Affected taxpayers are Korean multinational corporations and foreign corporations having a PE in Korea that meet all of the following conditions:
a. Annual gross sales of an individual entity exceed KRW100 billion; and
b. International related party transaction exceeds KRW 50 billion per year.
Failure to comply with the reporting requirement will result in a noncompliance penalty of KRW30 million.
3.Individual Income Tax Law (IITL)
Capital gains tax on transfer of SME shares was previously taxed at 10%, irrespective of shareholding ratio. Under the amended IITL, capital gains tax rate on transfer of SME shares owned by major shareholders (defined) increases from 10% to 20% the same as the non-SME shares.
A scope of major shareholders subject to capital gains tax on transfer of shares is expanded as follows:
KOSPI and unlisted companies
i) ownership ratio of 2% or more; or
ii) total share value of KRW 5 billion or more
i) ownership ratio of 1% or more; or
ii) total share value of KRW 2.5 billion or more
i) ownership ratio of 4% or more; or
ii) total share value of KRW 4 billion or more
ii) total share value of KRW 2 billion or more
The amended IITL will be applied to a transfer of shares made on or after April 1, 2016. However, the amended IITL for an unlisted company will be applied to a transfer of shares made on or after January 1, 2017.
The following table summarizes the new applicable capital gains tax rates by type of shareholders and corporations:
Shares issued by
Type of corporations
Type of shareholders
listed or unlisted transaction / Holding period
Effective date of the amended IITL
January 1, 2016
1 year or more
Less than 1 year
Currently, a foreign secondee working in Korea who receives earned income from a foreign corporation outside Korea is not subject to payroll withholding tax on such Korea sourced earned income, but can voluntarily join a taxpayers’ association to pay monthly payroll withholding tax to enjoy a 10% tax credit. The amended IITL requires a domestic company using foreign secondees to withhold payroll income tax at 17% when the domestic company pays service fees to the foreign corporation which dispatched the foreign secondees.
The domestic company having foreign secondees will be subject to the withholding obligation when making payments to the foreign corporation if all of the following conditions are met:
a. The total amount of the service fees paid to a foreign corporation (or multiple foreign corporation involved) in return for services by the foreign corporation via foreign secondees exceeds KRW 3 billion per year; and
b. The sales revenue of the domestic company making such service fee payment exceed KRW 150 billion or the total assets exceed KRW 500 billion during the preceding fiscal year; and
c. The domestic company engages in air transportation, construction business, or professional, scientific and technical service business
For the withholding tax withheld and paid by the domestic company, the foreign company dispatching foreign secondees will be allowed to claim a refund of any overpaid withholding tax via a year-end settlement. A copy of the contract executed between the domestic company and the foreign secondees and documents to support the wages and salaries paid by the foreign company to the secondees should be submitted. These year-end settlement and refund claim procedures may be undertaken by the domestic company on behalf of the foreign company
The amended IITL will apply to payment made to a foreign company from July 1, 2016.
Before the tax law revision, retirement income deduction was made on the fixed percentage basis where we can deduct 40% of retirement income uniformly when calculating retirement income tax base. Under the revised IITL, to reduce tax burden of low income workers and increase tax burden of high income workers, the retirement income deduction was changed to the progressive percentage basis with the rates ranging from 35% to 100% of the original income deduction.
This amended IITL comes into force for the retirement income earned on or after January 1, 2016.
4. Value-Added Tax Law (VATL)
Under the current VATL, nonresidents providing electronic services (e.g., games, sounds, video files, software, etc) in Korea must register for VAT purposes using a simplified online VAT registration method and pay the 10% VAT on its supply of electronic services from July 1, 2015. Under the amended VATL, the new VAT regime on electronic services will not apply if the electronic services are rendered to a domestic entrepreneur who is registered for VAT purposes in Korea (i.e., business to business(B2B) transactions). The amended VATL on electronic services is effective from the taxable period covering July to December 2015.
The zero-rate VAT applicable to certain services rendered to a nonresident person such as professional services (i.e., legal, accounting, tax, advertising, market survey, management consulting services, etc.) and business support services (i.e., manpower supply, employment delivery, and other business supporting services) will apply only in the case where a country where a counterparty is a resident of applies the same zero-rate VAT or exemption on such services (on a reciprocal basis). The amended VATL will be finalized after a presidential approval and shall apply to the supply of such services on or after July 1, 2016.
5.Other Items of Interest