Proposed South Korean Tax Law Changes in 2020

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, 2020.

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 transaction.

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 return filing

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.

Current	Proposed Changes
n Tax reduction rate for late tax return filing · Within 1 month: 50% · Within 6 months: 20%	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 tax rate

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, 2020.

l Reduction of withholding income tax rate for the deferred retirement income

To encourage retiree to receive retirement benefit in the form of long-term pension scheme, the proposals include reduction of withholding income tax rate from 70% of withholding retirement income tax rate to 60% of withholding retirement income tax rate for the retirement income which will be received by long-term pension scheme for more than 10 years. This revision will be effective from the receipt of the pension on or after January 1, 2020.