On July 30, the
Ministry of Strategy and Finance (MOSF) of Korea announced the government’s 2018
tax reform proposals. The reform proposals include tax incentives for
qualifying foreign engineers and changes in line with OECD standards such as BEPS
(base erosion and profit sharing). The proposals will be finalized by the end
of 2018 after deliberation by the National Assembly.
Provided below is
a summary of key tax reform proposals which we believe shall affect foreign
companies doing business in Korea on or after January 1, 2019.
Income Tax Exemption for Qualifying Foreign (non- Korean) Engineers
proposals, in order to attract more foreign engineers into the country, the tax
exemption period for qualifying foreign engineers currently for 2 years will be
extended to 5 years. It shall apply to those who enter into an employment contract
between January 1, 2019 to December 31, 2021.
tax exemption is applied, 50% of wages received by foreign engineers would be
exempt from individual income tax in Korea. In order to apply for tax
exemption, a foreign engineer shall be providing services under technology
inducement agreements or shall work as a research staff in qualifying R&D
centers of foreign-invested companies in Korea. In addition, the R&D
centers should have: (i) more than 5 regular researchers with a bachelor's
degree in the natural sciences with at least three years of R&D experience
or with a master's degree in the natural sciences, (ii) an independent research
facility, (iii) research facility investment of Won 100 Million or more, and (iv)
more than 30% of foreign ownership.
OECD Standards in connection with International Taxation
l Repeal of Individual and Corporate
Tax Exemptions for Foreign Direct Investment
The proposals would repeal the existing individual and corporate income
tax exemptions for foreign-invested companies in Korea for the sake of fair
taxation between domestic and foreign capital.
The current law grants a corporate and individual income tax exemption
for 5 to 7 years to foreign-invested companies engaging in the new growth
sector businesses and in specially designated areas such as foreign investment
zones, free economic zones and free trade zones.
The proposals will be effective for tax incentive applications filed on
or after January 1, 2019. The repeal has no effect on local (provincial) tax
and indirect tax. Therefore, the tax exemption from acquisition tax and
property tax on property acquired and owned by the foreign-invested companies
for up to 15 years will continue to apply. And also, the tax exemption from
customs duties, VAT and individual consumption tax on imported capital goods by
the foreign-invested companies for up to 5 years will continue to apply.
l Expanded Scope of Foreign Companies’ Permanent
Establishment (PE) in Korea and Expanded Scope of Dependent Agent
Under the current Korean tax law, the PE of a foreign company in Korea
shall not include a fixed place used solely for: (i) the purposes of purchasing
goods or merchandise for the foreign company; (ii) the purposes of storing
goods or merchandise belonging to the foreign company; and (iii) the purposes
of maintaining a stock of goods or merchandise belonging to the foreign company
for processing by another company.
The proposals add that the above exemption applies only if the activity
of such fixed place is limited to a preparatory or auxiliary nature. This
revision intends to reflect the contents of revised OECD Model Tax Convention
in November 2017 in line with the BEPS initiatives and will be effective from
the fiscal year beginning on or after January 1, 2019.
Under the proposals, a person or a company may be deemed to be a dependent
agent of a non-resident or a foreign company in Korea if a person or a company habitually
conclude contracts, or habitually plays a principal role leading to the
conclusion of contracts that are routinely concluded by the non-resident or the
foreign company without material modification even if a person or a company has
no legal authority to conclude contracts on behalf of the non-resident or the foreign
Through the existence of such dependent agent in Korea, a non-resident or
a foreign company can be deemed to have a PE in Korea and such PE shall be
taxed in Korea in the same manner as a Korean company in most aspects.
The proposals clarify the types of contracts that are considered to
establish a deemed dependent agent status, which include contracts concluded (i) in
the name of a foreign company, (ii) to transfer ownership of, or to grant
the right to use of, property owned by a foreign company, or (iii) to provide
services of a foreign company.
This revision intends to expand taxation of domestic source income of a
non-resident or a foreign company doing business in Korea directly or
indirectly, and will be effective from the fiscal year beginning on or after
January 1, 2019.
In this respect, foreign companies doing business in Korea, especially in
a form of liaison office, branch office or through an agent, are strongly
recommended to carefully review current business structure in connection with
the expected foregoing changes and reflect in the business plans in advance to
avoid any possible disputes with the Korean tax authority in the future.
l Reduced tax credit allowed to Class B
earned income taxpayers reporting through the Class B taxpayers association
Currently when a taxpayer who has wage and salary income received from an
overseas employer in foreign currency reports his/her earned income through the
Class B taxpayers association and is being withheld income taxes on a monthly
basis, such taxpayer is eligible for a 10% tax credit.
Under the proposals, this tax credit will be reduced from 10% to 5%. This
revision will apply to wage and salary income earned on or after January 1,
This tax alert is
prepared and issued by Hanul Choongjung LLC and intended to timely provide
foreign investors with an update on tax law changes in Korea. The information
provided herein should not form a basis of any decision as to a particular
course of action, nor should it be relied upon as a substitute for a detailed
advice in individual cases.
Please contact any of the following individuals with any inquiries or comments.
K S Han, J W Choi, G S Sim, or S Y Lee at Tax & BPO Services
Hanul Choongjung LLC
Member Crowe Global
Sindo Building, 10th Floor, 14 Teheran-ro 88-gil,
Gangnam-gu, Seoul 06179, Korea
TEL: (82)(2) 316-6600 FAX: (82)(2) 775-5885
(You may find this tax alert and other items of interest at www.crowe.kr)