tax law changes announced by the government in August 2017 were approved by the
National Assembly in December 2017 with several amendments and additions. We
summarized below some of the major tax law changes for 2018 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, 2018
unless indicated otherwise.
I. International Tax Coordination Law (ITCL)
Capitalization - Introduction of New Rule to Reduce Interest Expense Deductions
thin capitalization rules disallow deduction of interest relating to the debt
from an overseas controlling shareholder (and debt from a third party
guaranteed by an overseas controlling shareholder) if the debt to equity ratio
exceeds 2:1 (6:1 in case of financial institutions). The disallowed interest
expense on the debt from a foreign controlling shareholder is further treated
as dividends to the shareholder.
Under the tax
law changes, in line with recommendation of the Organization for Economic
Cooperation and Development on the limitation of interest expense deductions
(Action 4 of Base Erosion and Profit Shifting Project), the following new rules
to restrict interest expense deduction on top of the existing thin
capitalization rule have been introduced:
The new rules apply to the
domestic company having intercompany loans with overseas related parties with
the exceptions for banks and insurance companies.
Net interest deduction claimed
by a domestic company for the international loans will be limited to 30% of the
adjusted taxable income of the domestic company, meaning the interest expenses
in excess of the 30% threshold will not be deductible.
The adjusted taxable income
will be calculated by adding depreciation expense on fixed assets and net
interest expense to the domestic company’s taxable income.
The limitations will apply to
the net interest expenses payable to overseas related parties (i.e., the amount
of interest expense to be paid to overseas related parties minus the amount of
interest income to be received from overseas related parties).
In applying the existing thin
capitalization rule and the new interest expense deduction rule, a domestic company
should apply the rule which would result in a greater amount of nondeductible interest
rules shall be effective from the fiscal year beginning on or after January
II. Corporate Income Tax Law (CITL)
in Marginal Corporate Income Tax Rate to 25% for Tax Base Exceeding KRW 300
tax law changes, a new progressive tax rate has been adopted for the tax base exceeding
KRW 300 billion. However, the tax rates applicable to the taxable income of KRW
300 billion or less will remain unchanged.
Tax rates (*)
Up to KRW
200 million and up to KRW 20 billion
20 billion and up to KRW 300 billion
Over KRW 300
(*) In addition to the corporate income tax, local(provincial) income tax
is assessed at 10% on corporate income tax liability separately.
on Utilization of Tax Loss of Companies Other than Small and Mid-sized
Under the Korean
tax law, the tax loss can be carried forward to the next ten years. Previously,
the tax loss carried over from prior years that can be utilized by a domestic
company in a year was limited to 80% of the company’s taxable income in the
year (100% for small and mid-sized enterprises; “SME”).
Under the tax
law changes, the 80% threshold for the companies other than SMEs has been
gradually reduced to 70% for the fiscal year starting from January 1, 2018 and 60%
for the fiscal year starting from January 1, 2019. However, the 100% threshold
for SMEs will remain the same.
to Special Tax Exemption for SMEs
SMEs engaging in one of 46 businesses including manufacturing were allowed to claim
special tax exemption at 5% ~ 30% of corporate income taxes calculated
depending on the type of industry, corporate scale and company location.
following changes have been made to the special tax exemption:
The tax exemption amount shall
be capped at KRW 100 million and the ceiling shall be reduced by KRW 5 million
per employee in the case where the number of employees is decreased. However,
the tax exemption will be available for qualifying SMEs which also claim tax
credit for job creating investment and/or the tax credit for social security
tax paid for an increase in regular employees. This revised tax exemption will apply
for the year beginning on or after January 1, 2018 until December 31, 2020.
in R&D Tax Credit Rate for Large Corporations
Under the tax
law changes, the R&D tax credit for large corporations has been reorganized
with an increased focus on expanding equality of taxation and securing
corporate income tax base.
regard, the following changes have been made to the R&D tax credit for
The existing R&D credit
rate, which applied to the portion of R&D expenses incurred in current year
exceeding R&D expenses incurred in the immediately preceding year, has
decreased from 30% to 25%.
In addition, the existing 1% of
base R&D credit rate, which was applied regardless of the ratio of the R&D
expenses to the revenue for the current year, was abolished.
R&D Tax Credit for New Growth Engine Business and Core Technology
Under the tax
law changes, the R&D tax credit for new growth engine businesses and core
technologies has been reorganized.
tax credit rate has increased for SMEs from 30% up to 40% (depending on the
R&D expenditure spent on new growth engine industries and core technologies).
Also, the R&D tax credit rate of 25% to 40% has been newly adopted for
medium-scale companies listed on KOSDAQ.
credit will be available in respect of expenses incurred for subcontracted or
joint R&D activities with an expanded scope of organizations, which include
domestic universities or colleges, public research organizations, domestic or
foreign non-profit corporations (including laboratories affiliated with
non-profit corporations), research organizations of domestic or foreign
corporations, and industry technology research associations sponsored by
of Tax Credit for Social Insurance Premiums for New Participants
new law, in case where employees who are hired by SMEs as of January 1, 2018,
newly participate in social insurance by December 31, 2018, SMEs can claim tax
credit amounting to 50% of the insurance premiums paid by the SMEs for 2 years.
III. Individual Income Tax Law (IITL)
in Marginal Individual Income Tax Rate
tax law changes, the top marginal individual income tax rate has increased from
40% to 42%, while the individual income bracket of KRW 300 ~ 500 million is
subject to the tax rate of 40%. The individual income tax rates for the year
beginning on or after January 1, 2018 are as follows:
Up to KRW
12 million and up to KRW 46 million
46 million and up to KRW 88 million
88 million and up to KRW 150 million
150 million and up to KRW 300 million
Over KRW 300
million and up to KRW 500 million
(*) In addition to the individual income tax, local(provincial) income
tax is assessed at 10% on individual income tax liability separately.
Korean Residency Test
a Korean resident was defined as an individual who has an address/domicile in
Korea or who is present in Korea for at least 183 days during the two (2)
consecutive years. In order to promote inbound investment by Koreans living
abroad, these residency criteria were amended. Under the revised law, a Korean
resident shall be an individual who has an address/domicile in Korea or who is
present in Korea for at least 183 days during a year.
This amended rule shall be
implemented from the fiscal year beginning on or after January 1, 2018.
of Gain from Stock Option Exercise for Employees and Executives of Venture
tax law changes, in order to encourage infusion of talent into venture
companies (defined), gain from stock option exercise up to KRW 20 million is
excluded from taxation, if all of the following conditions are
Taxpayers should be employees/executives of venture companies; and
Stock options should be granted on or before December 31, 2020.
of Capital Gains from Disposal of Unlisted Stocks on Korea Over The Counter
capital gains from transferring stocks of unlisted companies constitute taxable
income of the shareholders. Under the tax law changes, in order to stimulate
trading of unlisted stocks on Korea Over The Counter (“K-OTC”) market, certain
capital gains from transferring unlisted stocks on K-OTC market are excluded
from taxation, if all of the following conditions are met:
Stock transfers are made by the minority shareholders; and
Transferred stocks are stocks of SMEs or medium-scale companies other
than large corporations.
Exemption on Payments Received from Performance Compensation Fund for Core
Personnel of Medium-Scale Companies
tax law changes, certain mutual aid payments received from the Performance
Compensation Fund are exempt from individual income tax, if all
of the following conditions are met:
Taxpayers should be employees of medium-scale companies;
Employees and medium-scale companies should join a mutual aid program on
or before December 31, 2018; and
Employees should pay contributions for at least 5 years.
When employees receive mutual
aid payments, the endowment paid by the companies are subject to income tax,
however, eligible for 30% tax exemption.
in Penalty on Fictitious VAT Invoices
amended VAT Law provisions, in case where a VAT invoice is wrongfully issued
without supply of goods or services (which is called a “fictitious” VAT invoice),
a penalty for issuing a fictitious VAT invoice shall be imposed at 3% of the
supply price per the fictitious invoice. Also, if the supply price per VAT
invoice is intentionally overstated, 2% of the supply price per VAT invoice
shall be imposed as the penalty.
for Tax Audit
taxpayer rights in relation to tax investigations, previously the tax
authorities had to give taxpayers an advance notification of a periodic tax
audit at least ten (10) days before the audit starts. In relation to the
advance notification, the following changes have been made:
The advance notification must be given fifteen (15) days before the audit
In case of a partial tax audit, the scope of partial audit should be
specified in the advance notification in addition to a reason for audit,
investigation period, tax items to be audited, etc.
If the advance notification is omitted in an exceptional case where the
audit purpose cannot be achieved due to some reasons such as destruction of
evidence, etc., a notification must be given to a taxpayer at the time of
undertaking the audit. In this case, the notification should include the
information to be specified in an advance notification and the reason for omitting
the advance notification.
The tax authorities will not be allowed to request a taxpayer to submit
the information which is not directly related to an audit. In this context, the
tax authorities will not be allowed to request other records from a taxpayer if
such records are not related to the types of taxes subject to an audit or computation
of tax base and/or tax amount for the years subject to an audit.
take effect from January 1, 2018.
of qualified suspension reason of statute of limitation period for national tax
The Korean tax
authorities' right to collect national taxes shall be extinguished by
prescription, if it is not exercised for either of the following periods from
the time it is exercisable:
National taxes of KRW 500 million or more : 10 years
National taxes other than those prescribed above : 5 years
statute of limitation (extinctive prescription) shall not run during certain
periods prescribed in the National Tax Basic Law, such as period for
installment tax payment, period for deferment of tax collection, period for
suspending disposition of tax in arrears. From January 1, 2018, if a delinquent
taxpayer stays abroad for more than 6 months, the statute of limitation (extinctive
prescription) shall not run during that period.
n Specification on items to be
considered when selecting taxpayers for periodic tax audit based on the
periodic compliance analysis of the National Tax Service
the tax law changes, when the Commissioner of the National Tax Service
acknowledges that a taxpayer is suspected to be non-compliant based on the
periodic compliance analysis of the taxpayer’s tax returns, tax authorities
could select the taxpayer for periodic tax audit. From January 1, 2018, it is
clearly stated that in evaluation of taxpayer’s compliance, not only taxpayer’s
tax information such as tax filing but financial audit opinion should be