Tax Law Changes in 2019
tax law changes announced by the Korean government in July 2018 were approved
by the National Assembly in December 2018 with several amendments and
additions. We summarized below some of the major tax law changes for 2019 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, 2019 unless indicated otherwise.
Tax Treatment Control Law (STTCL)
l Repeal of individual and corporate
tax exemptions for foreign direct investment
The tax law changes have repealed
individual and corporate income tax exemptions for foreign-invested companies
in Korea for the sake of fair taxation between domestic and foreign capital.
Previously, the foreign-invested companies
which meet certain conditions were granted corporate and individual income tax
exemption for 5 to 7 years provided that the foreign-invested companies engaged
in the new growth sector businesses or invested in specially designated areas
such as foreign investment zones, free economic zones and free trade zones.
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 eligible
foreign-invested companies for up to 15 years would continue to apply. And
also, the tax exemption from customs duties, VAT and individual consumption tax
on imported capital goods by the eligible foreign-invested companies for up to
5 years would continue to apply.
l Extended income tax exemption for
qualifying foreign (non- Korean) engineers
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
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.
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%
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.
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
n Previous statute of limitation
Fraud or other
fraudulent acts: 15 years
n Cross-border transaction concept is newly introduced and the statute of
limitation period is extended:
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