Korean Tax Law Changes in 2019

Under the tax law changes, in order to attract more foreign engineers into the country, the tax exemption period for qualifying foreign engineers currently for 2 years would be extended to 5 years. It shall apply to those who enter into an employment contract between January 1, 2019 to December 31, 2021.

When the 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 KRW 100 million or more, and (iv) more than 30% of foreign ownership.

II. Corporate Income Tax Law (CITL)

l Expanded scope of foreign companies’ permanent establishment (PE) in Korea and expanded scope of dependent agent

Previously, the PE of a foreign company in Korea did 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 tax law changes have added that the above exemption shall apply only if the activity of such fixed place is limited to a preparatory or auxiliary nature. This change intends to reflect the contents of the revised OECD Model Tax Convention in November 2017 in connection with the BEPS.

Under the tax law changes, 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 company.

The changes also 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.

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.

III. Individual Income Tax Law (IITL)

l Reduced tax credit allowed to Class B earned income taxpayers reporting through a Class B taxpayers’ association

Previously when a taxpayer who had wage and salary income received from an overseas employer in foreign currency reports his/her earned income through a Class B taxpayers’ association and was being withheld income taxes on a monthly basis, such taxpayer was eligible for a 10% tax credit.

Under the tax law changes, this tax credit has been reduced from 10% to 5%.

l Strengthened exit tax

Previously, the exit tax was applied by 20% of deemed capital gain to a major shareholder of a domestic corporation who moves from Korea to a foreign country for a reason of immigration, etc.

Under the tax law changes, to prevent overseas tax evasion and secure the right to taxation on domestic property, the exit tax has been newly applied to a major shareholder of corporation with excessive real estate where at least 50% of the assets is composed of real estate (80% for a golf course or ski resort company). In addition, the progressive tax rate scheme has been introduced at 20% on the tax base of KRW 300 million or less and 25% on the tax base exceeding KRW 300 million.

To improve the effectiveness of the exit tax, a penalty has been imposed by 2% on face value of the shares which are non-reported or under-reported. Any major shareholder subject to exit tax shall report the details of shareholding as of one day before the filing due date which is one day before departure.

Above changes have been applied to the immigrants from Korea to a foreign country on or after January 1, 2019. However, the tax rate increase on the small and medium enterprise (SME) shares has been postponed for one year and will take effect to the immigrants from Korea to a foreign country on or after January 1, 2020.

IV. Others

l Expanded scope for electronic services of foreign (non-Korean) company subject to VAT

Previously, if a foreign (non-Korean) company not having a PE in Korea provided electronic services (e.g., games, sounds, video files, electronic documents, software, etc.) to an individual or a company in Korea (except for provision of electronic services to an individual or a company who is registered for VAT purposes in Korea) and received compensation from such customers, the non-Korean company should apply for a special VAT registration to the Korean tax authorities. The changes have expanded the scope of electronic services to include advertising, brokerage and “cloud computing” of foreign (non-Korean) companies. The cloud computing is defined as the services of renting storage space in central computer connected to internet, software stored in central computer, etc.

l Extended statute of limitations on tax assessment for cross-border transactions

Current	Proposed Changes
n Previous statute of limitation · Fraud or other fraudulent acts: 15 years · Non-reporting: 7 years · Under-reporting: 5 years	n Cross-border transaction concept is newly introduced and the statute of limitation period is extended: · Fraud or other fraudulent acts: 15 years · Non-reporting: 10 years · Under-reporting: 7 years

To improve the effectiveness of taxation on overseas tax evasion, the tax law changes expand the range of cross-border transactions to include transactions of overseas assets or services made between residents of Korea. In addition, the statute of limitation on tax assessment for cross-border transactions have been extended from 7 years for non-reporting and 5 years for under-reporting to 10 years for non-reporting and 7 years for under-reporting, respectively.