Proposed South Korean Tax Law Changes in 2022

On July 26, 2021, the Ministry of Economy and Finance (MOEF) of Korea announced the government tax reform proposals to be implemented from 2022. The proposed tax law changes will be finalized after the National Assembly passes the bill. We summarized the major proposed tax law changes in 2022 to keep you updated as follows.

 

l Revision of interest deduction limitation rule

Currently, interest expense on loan from foreign (non-Korean) related parties are not deductible if the net interest expense exceeds 30% of the earnings before interest, taxes, depreciation and amortization (“adjusted taxable income”).

Under the proposal, if the adjusted taxable income is less than zero, the adjusted taxable income will be deemed to be zero and thus, all the net interest expense shall not be deductible. In addition, the proposal clarifies the order for the calculation of non-deductible interest expense. If there are debts with different interest rates, the interest deduction denial is applied starting with the higher interest rate. If both have the same interest rate, the debt with the most recent borrowing date will be denied first. If the interest rate and borrowing date are the same, then the limitation shall be calculated in proportion to the amount borrowed.

The proposed change will become effective from the fiscal year beginning on or after January 1, 2022.

 

l Introduction of a new deduction limit for the existing net operating losses (“NOL”) in case of business transfer

Under the proposal, the existing NOL of the transferee company cannot be utilized to offset the taxable income from the business transferred from the acquired company if the following conditions are met:

(i) The business transfer is made between related parties, and

(ii) 70% of more of the assets and 90% or more of net assets are transferred to the transferee company.

The proposal shall apply to the business transfer made on or after January 1, 2022.

 

l Extension of applicable period of tax credit for enterprises increasing jobs

Currently, a fixed amount of tax credit has been provided to companies who increase employment for a given period (for 2 years for Large-sized companies, for 3 years for Middle-sized companies/SMEs) until the taxable year in which December 31, 2021 falls.

Under the proposal, additional tax credit will be provided temporarily for companies hiring youth, the disabled and seniors in the non-metropolitan area. Further, the tax credit will be applicable until the taxable year in which December 31, 2024 falls.

(Unit: Thousands of Korean Won)

Types of employee	SME		Middle-sized		Large-sized
	Metropolitan area	Non-metropolitan area	Metropolitan area	Non-metropolitan area	Metropolitan area	Non-metropolitan area
Youth*, the disabled, seniors**	11,000	12,000 ➜ 13,000	8,000	8,000 ➜ 9,000	4,000	12,000 ➜ 13,000
Other full-time employees	7,000	7,700	4,500	4,500	-	-

* Youth employees: Employees aged between 15 and 29 years. If the relevant employees have completed military service, the employees each of whose age calculated by deducting the period of military service from the present age does not exceed 29 shall be included.

** Seniors: employees aged 60 or older as of the employment contract date. Effective from the tax year starting on or after January 1, 2021.

The proposed change shall apply to the increase in employees made in the taxable year in which December 31, 2021 and 2022 falls.

 

l Extension of sunset period of income tax reduction benefit available for employees of small and medium companies

Currently, individual income tax reduction benefit has been provided for certain employees who are hired by SMEs. This rule was supposed to expire at the end of 2021. Under the proposal, this rule will be extended to December 31, 2023.

	Current	Proposed
Employees eligible for this income tax reduction benefit	Youth employees aged 34 or younger, employees aged 60 or older, employees with disability, and career-interrupted female employees who are hired between Jan 1, 2012 and Dec 31, 2021 (or between Jan 1, 2014 and Dec 31, 2021 for employees aged 60 or older, employees with disability)	(Same)
Income tax reduction rate	70% (90% for youth employees) (up to KRW 1.5 mil max limit for each taxable period)	(Same)
Reduction period	3 years from the initial employment date (5 years for youth employees)	(Same)
Applicable period	Until December 31, 2021	Until December 31, 2023

 

 

l Expansion of scope of stock options eligible for a deduction of the difference between the exercise price and the fair market value of the stock

Current	Proposed
Scope of stock options eligible for a deduction of the difference between the exercise price and the fair market value of the stock o Stock options granted pursuant to the Korean Commercial Law, the Act on Special Measures for the Promotion of Venture Businesses, and the Act on Special Measures for the Promotion of Specialized Enterprises for Materials and Components o <Addition>	(Same)                   o Stock options granted pursuant to the Labor Welfare Framework Act

The proposed change shall apply to stock options exercised on or after the enforcement date of the Presidential Decree.