tax law changes announced by the Korean government in July 2021 were approved
by the National Assembly in December 2021 with several amendments and
additions. We summarized below some of the major tax law changes for 2022 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, 2022 unless indicated otherwise.
Income Tax Law (CITL)
l Introduction of reporting requirements of
liaison offices of foreign corporations
For Korean tax purposes, liaison offices of foreign (non-Korean)
corporations may engage in non-revenue generating liaison activities
exclusively for the entity of which the liaison offices are a part (i.e., the
head office). The non-revenue generating activities include conducting
advertising, public relations, collection and supply of information, scientific
research, or other similar activities of a preliminary or auxiliary nature and
other liaison activities solely for the head office. Since a liaison office, by definition, acts
only for its home office and does not generate revenue in Korea, it is not
subject to the Korean corporate income tax and need not file a corporate income
tax return in Korea.
Under the tax law changes, the liaison offices of foreign
corporations shall be required to submit certain information on the status of
the liaison office by February 10th of the following year. The
required information includes basic information of the liaison office, its
representative, information relating to its headquarters, other branches of the
foreign corporation in Korea, list of domestic customers, etc. The purpose of this
new reporting requirements of liaison offices in Korea is to prevent avoidance
of corporate income tax liability of foreign corporations through their liaison
offices in Korea, when in essence it is operated as a permanent establishment
(PE) of the concerned foreign corporation.
This 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
In order to prevent tax avoidance through a business
transfer, under the tax law changes, 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% or more of the total assets and 90%
or more of net assets are transferred to the transferee company.
The amended rule shall apply to the business
transfer made on or after January 1, 2022.
l Introduction of a new penalty for
non-submission of expense details related to business cars
Currently, a taxpayer who claims a deduction for expenses
incurred for the use of business cars is required to submit expense details
related to business cars. However, there is no penalty for the non-submission
of such expense details.
Under the tax law changes, if a taxpayer claims a
deduction for expenses incurred for the use of business cars, but fails to
submit or inaccurately submit expense details related to business cars, a
penalty of 1% on the non-reported or inaccurately reported amount shall be imposed.
The revised provision will become effective from the tax
year beginning on or after January 1, 2022.
Income Tax Law (IITL)
l Introduction of tax credit limit for
voluntary tax payment through a taxpayers’ association
Class B earned income means employment income
received from a foreigner or foreign corporation outside Korea, excluding those
claimed as a deductible expense for a Korean place of business of a
non-resident or a foreign corporation. Class B earned income can be reported by
respective employees either (1) through a Class B taxpayers’ association by the
10th day of the following month or (2) through the individual income
tax return filing by May 31 of the following year. Currently, employees can
enjoy a 5% tax credit if they voluntarily report their monthly Class B earned
income through a taxpayers’ association.
Under the tax law changes, the tax credit will be subject
to annual limit of KRW 1 million. Further, the tax credit will be applicable
until December 31, 2024.
This change will be applicable to income earned from
January 1, 2022.
l Increase in a threshold of capital gains tax
exemption on real estate sales for single-house owners
Under the tax law changes, the threshold of
capital gains tax exemptions for single-house owners on the sales of houses
which meet certain criteria prescribed by the Presidential Decree of IITL will
be raised to KRW 1.2 billion from the previous KRW 900 million.
This change will take effect to capital gains from the
transfer made on or after December 8, 2021.
l Extension of time for the issuance of amended
Currently, where any requisite information of
VAT invoice is wrongly stated due to reasons other than an error, an amended
VAT invoice can be issued no later than the filing due date of the VAT return for
the taxable period in which the date of supply of goods or services falls.
Under the tax law changes, the due date of the
issuance of amended VAT invoice is extended to one (1) year after the filing
due date of the VAT return.
This change will be applicable to goods or
services supplied on or after the effective date of the relevant Presidential
Decree of VAT Law.
l Ease of conditions for issuing an advance VAT
Currently, to be deemed as a lawful VAT
invoice, an advance VAT invoice should satisfy one of the following conditions:
The sales consideration is paid within 7
days from the VAT invoice issuance date;
Both of the following condition a. and b. are
satisfied for the advance VAT invoice:
The agreement entered into between the seller
and the purchaser prescribes the fixed timings of invoicing
and of payment separately; AND
The period between invoicing and payment
timing under contract is 30 days or shorter.
Where the time for supplying goods or
services arrives during the taxable period that includes the date of issuance
of the tax invoice and an amount stated in the tax invoice is
verified to have been paid.
Under the tax law changes, the above
requirement (iii) will be eased, whereby the payment in the same taxable period
is not necessary.
l Reduction of late payment interest charge
Currently, the interest charge for late
payment of taxes is 0.025% per day (9.125% per annum) of the amount unpaid or
underpaid. Under the tax law changes, the late payment interest charge will be
decreased to 0.019% ~ 0.022% per day (6.94% ~ 8.03% per annum).
This amendment will be applicable to a late
payment interest charge imposed after the enforcement date of new Presidential
Decree of National Tax Basic Law. However, former provision shall apply in the
case where tax payment due date has already passed before the enforcement date
of new Presidential Decree.
l Increase in low tax rate threshold for Controlled
Foreign Corporations (“CFC”) rule
Currently, the undistributed earnings of CFCs
located in the jurisdictions where the tax burden does not exceed 15% of the
income actually earned by the CFCs shall be deemed a dividend paid to the
Korean shareholder. In order to prevent offshore tax avoidance through CFCs,
the threshold for low tax rate for determining a CFC will be increased from the
current 15% to 70% of the Korean top marginal corporate income tax rate (25% at
present). In addition, the scope of CFC will be expanded to include certain
types of foreign trust (e.g., purpose trust, trust with beneficiary
certificates, limited liability trust under the Korean Trust Act).
The amendment will apply from the tax year
commencing on or after January 1, 2022.
l Introduction of documentation requirement for
foreign company or non-resident providing electronic services
Currently, if a foreign company not having a
PE in Korea provides electronic services (e.g., games, sounds, video files,
electronic documents, software, advertising, brokerage, cloud computing, etc.)
to the Korean consumers (excluding
registered VAT leviable or exempt taxpayers), the concerned foreign company shall
be required to make a special VAT registration with the Korean tax authorities
within 20 days as from its Korean business commencement date and to prepare and
file its quarterly VAT returns with the Korean tax authorities by the 25th day
following the calendar quarter-end.
Under the tax law changes, the foreign company
which provides electronic services to Korean customers shall be required to
maintain transaction details such as the type of services provided, service
recipients, considerations, numbers of transactions and the timing of supplies
for 5 years. In addition, if requested by the tax authorities, such transaction
details should be submitted within 60 days as from receiving the request.
This amendment will apply to the electronic
services provided on or after July 1, 2022.
l Extension of sunset period of flat income tax
rate for foreigner workers
Currently, the individual income tax
liabilities of foreigner workers (excluding daily employed workers) on
earned income from the rendering of his/her services to companies in Korea
including foreign invested companies can be finalized by
applying the 19% flat income tax rate (excluding local income tax equal to
10% of income tax) on gross earned income for the first five (5) year
period. This rule was supposed to expire at the end of 2021.
Under the tax law changes, this rule will be
extended to December 31, 2023.