government’s tax reform bill (“government’s bill”) was sanctioned by the National
Assembly on December 23, 2022 with several amendments and additions. We
summarized below some of the major tax law changes for 2023 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, 2023
unless indicated otherwise.
l Adjustment of corporate income tax rates
The marginal tax rate shall be lowered by one percentage
point for each tax base bracket by revising the government’s bill.
* Local (provincial) income tax is separately imposed at 10% on
the corporate income tax liability.
l Adjustment of Dividend Received Deduction (DRD)
ratios for dividends from domestic subsidiaries
The government’s bill proposed a simplification of DRD
ratios which differ depending on the type of corporation (i.e., listed or
unlisted subsidiary / holding company or other company) and the ownership
percentage of the parent company on a subsidiary.
The DRD ratios shall be adjusted only based on the
ownership percentage regardless of the type of corporation as follows.
20% ~ 50%
The amended DRD shall be applied for dividends received on
or after January 1, 2023. But taxpayers can apply the DRD regulation before
revision for dividends received in 2023.
l Change in the applicable period of flat income
tax rate for foreign workers
Currently, individual income tax
liabilities of foreign (non-Korean) workers (excluding daily employed
workers) on earned income from the rendering of his/her services to
companies in Korea 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 without applying any other income deductions, tax
exemption, and tax credits.
Before the revision, this special taxation for
foreign employees could be applied only for five years from the first day of
their work, but this five (5) years applicable period limitation is extended to
20 years by revising the government’s bill, which proposed to eliminate
the limitation on the applicable period.
l Expansion of income tax reduction or exemption limitation
for employees of small and medium enterprises (“SMEs”)
Currently, youth, a person aged at least 60, a
person with disability, or a career-interrupted woman employed by a SME
prescribed in relevant regulation is entitled to income tax reductions or
exemptions for his/her earned income from the SME.
Before the revision, the limitation for the
income tax reduction or exemption was KRW 1.5 million for each taxable period,
but the limitation is increased to KRW 2 million for each taxable
l New rules for special tax treatment on income
attributed to overseas pass-through entities
In the amended International Tax Coordination
Law (“ITCL”), there is a new provision to apply a special tax treatment to
income attributed to an overseas pass-through entity invested by domestic
The term ‘overseas pass-through entity’ which
is eligible for the special tax treatment refers to an entity that meets the
following two requirements:
It should be a foreign
corporation, an overseas investment vehicle or a non-corporate entity
established in a foreign country
A shareholder, an investor or a
beneficiary in the foreign corporation, etc. rather than foreign corporation itself
should be directly liable for tax on income derived by the foreign corporation
under the tax laws of the jurisdiction governing the foreign corporation.
Under the new regulation, income attributed to
an overseas pass-through entity above shall be treated as income attributed to
the shareholder, etc. in the overseas pass-through entity and be subject to
corporate or individual income tax accordingly.
l Exception to applying premium rate for the
largest shareholder, etc.
In accordance with Article 63(3) of the Korean
Inheritance and Gift Tax Law (“IGTL”), the premium rate of 20% shall be
applicable and added for the largest shareholder and its related parties in
calculating inheritance or gift taxes. However, a company which falls under the
category of a SME or which suffered a loss continuously within three years
before the fiscal year in that the date of transfer or acquisition falls shall
not be subject to applying the premium rate.
After revision, the scope of the exception to
applying the premium rate for the largest shareholder, etc. is expanded to
shares issued by a medium-scale company defined in the Presidential Decree of
the IGTL, in addition to a SME.