On July 25, 2019,
the Ministry of Strategy and Finance (MOSF) of Korea announced the government
tax reform proposals to be implemented from 2020. The proposed tax law changes will
be finalized after the National Assembly passes the bill. We summarized the
major proposed tax law changes in 2020 to keep you updated as follows.
< International Taxation >
l Taxation on royalties for patents
registered outside of Korea
Under the proposals, in order to secure the
Korean taxing rights on payments for use of patents registered outside of
Korea, any payments for manufacturing know-how, technologies or information
contained in patents that are used in manufacturing or production activities in
Korea will be deemed to be Korean source royalty income even if the patents are
not registered in Korea. It shall apply to payments made on or after January 1,
And also, in order to tax on compensation to
overseas patent holder for infringement of a patent registered outside of
Korea, such compensation will be classified as “other income” which shall be
subject to 16.5% withholding income tax rate (15% plus 1.5% surtax). It shall
apply to payments made on or after January 1, 2020.
l Strengthened taxpayer’s burden of
proof regarding abusive transaction
Currently, burden of proof regarding abusive
transaction is not specifically stated in the International Tax Coordination Law
(ITCL) of Korea. Therefore, if the Korea tax authority applies “substance over
form” principle to the taxpayer who enjoys tax treaty benefits unduly though a
cross border transaction which has been indirectly made via a third party or
two or more transactions, the burden of proof regarding such abusive
transaction is on the Korean tax authority who challenges the abusive
Under the proposals, when a transaction
reduces the tax liability by an amount specified in the Presidential Decree of
the ITCL (e.g., 50%), the burden of proof is placed on the taxpayer to prove
that the transaction has a valid business purpose, without an intent of tax evasion.
If the taxpayer fails to prove, “substance over form” principle shall be
applied to the transaction. This revision shall be effective from the tax year
beginning on or after January 1, 2020.
l Totalization of ‘net capital gains’
from transfer of foreign shares
Currently, under the Individual Income Tax Law, capital gains and losses arising
from transfer of taxable shares have been allowed to be offset dividing
domestic shares and overseas shares. And the deduction for capital gains is Won
2.5 million per annum for each division.
Under the proposals, a taxpayer shall totalize the net capital gains from
the transfer of domestic shares and overseas shares. In addition, the deduction
of Won 2.5 million shall be applied to the totalized net capital gains. It
shall apply to the transfer made on or after January 1, 2020.
< Other Items of Interests>
l Eased taxpayer burden on late tax
Currently, a taxpayer who has filed a tax
return by a statutory due date is allowed to file an amended tax return within
a specified period, generally 5 years.
To provide self-correcting opportunity for a
taxpayer who has filed the tax return after the statutory due date, the
proposals shall allow a taxpayer to amend the tax return which was not filed by
the statutory due date. This revision will be effective from the amended return
filed on or after January 1, 2020.
In addition, currently there is a penalty
reduction rate for late tax return filing of 20% or 50% depending on the period
from the due date to the actual filing date. Under the proposals, the penalty
reduction rate of 20% will be increased to 30% for the tax return filed after
one month but within three months from the due date. This revision will be
effective for the late return filing filed on or after January 1, 2020.
n Tax reduction rate for late tax return filing
Within 1 month:
Within 6 months:
n Specified Tax reduction rate:
Within 1 month: 50%
Within 3 months: 30%
Within 6 months: 20%
l Increased threshold for deductible
business car expense without car mileage log
Currently, the entire amount of expenses
incurred for the use of business cars are deductible unless they exceed the
threshold of Won 10 million per annum where a mileage log of the business car
is not prepared.
Under the proposals, the threshold for
deductible business car expense without car mileage log will increase from Won 10
million to Won 15 million. It will be effective from the tax year beginning on
or after January 1, 2020.
l Reduction of securities transaction
To reduce transaction cost for the securities
investors, the proposals include reduction of securities transaction tax rate
from 0.5% to 0.45% for over-the-counter and unlisted securities transactions.
The securities transaction tax rate on the listed securities traded in the designated
stock exchange market has been lowered by 0.05% since June 3, 2019, current
effective rate being 0.25% (including surtax) for the securities listed on
KOSPI and KOSDAQ, through the revision of Presidential Decree of Securities Transaction
Tax Law in Korea. Please be noted that special rules apply to the securities
transactions of majority shareholders (defined).
This revision will be effective from April 1,
l Reduction of withholding income tax
rate for the deferred retirement income