SAMIL COMMENTARY KOREAN TAX UPDATE - PWC
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Korean Tax Update
Samil Commentary
February 19, 2019
Government Finalizes a Bill to Amend the Presidential Decrees of Tax Laws with
a Few Modifications
Bill to Amend the Enforcement Rules to Set out Details of Tax Law Changes
NTS to Amend Internal Rules for the Administration of Corporate Taxation
Foreign Exchange Transaction Regulations Amended to Take Effect on January
1, 2019
Customs Service Opens the Brexit Service Desk
Rulings Update
Government Finalizes a Bill to Amend the Presidential Decrees of Tax Laws
with a Few Modifications
The amended Presidential Decrees of tax laws were proclaimed on February 12, 2019 after
being approved by the Cabinet meeting with a few modifications on February 7, 2019.
Provided below is a summary of selected major modifications to the government’s bill to
amend the Presidential Decrees of tax laws announced in January 2019.
The recently amended Special Tax Treatment Control Law (STTCL) introduces a new
tax credit for small- and medium-sized enterprises (SMEs) that share or agree to share
their profits with their employees. Under the new tax incentive scheme, SMEs are
entitled to a 10% tax credit for the incentives they pay to their employees based on
their business performance (except certain employees earning income in excess of a
prescribed threshold) while the employees receiving the incentives can enjoy a 50%
reduction in payroll tax withheld from the incentives. According to the amended
Presidential Decree of the STTCL, the new tax credit shall only apply to such payment
offered by SMEs recording an operating profit, taking into account the intended purpose
of the introduced profit sharing between SMEs and employees. It was initially proposed
to cover the incentives paid to employees based on the business performance (i.e.,
incentives under the standard profit sharing system as developed by the Ministry of
SMEs and Startups) as defined under Article 26-2(1)(1) of the Presidential Decree of
the Special Act on Support for Human Resources of SMEs.Samil Commentary February 19, 2019
Korean Tax Update
The government’s bill proposed changes to clarify the scope of design-related R&D
expenditure that is eligible for the set-up of a deductible tax reserve or R&D tax credit
as prescribed in Articles 8 and 9 of the Presidential Decree of the STTCL by deleting
‘unique design development expenses’ from the eligible scope but adding personal
costs of staff dedicated to design R&D in a certified professional design service
company to the eligible scope. The implementation of the proposed changes will be
deferred by one year in light of the time required for the preparation of being certified
as a professional design service company, etc. Consequently, from fiscal years
beginning on or after January 1, 2020, the expenditure for the development of a unique
design will no longer qualify for the tax incentives.
According to the Inheritance and Gift Tax Law (IGTL), where the ratio of a domestic
company’s income from sales to its controlling shareholder and related parties to the
company’s total sales revenue for a year exceeds a prescribed ratio, the controlling
shareholder and related parties would be deemed to receive a gift or donation from the
domestic company for an amount determined as prescribed in the IGTL (‘deemed gift
taxation’). For deemed gift taxation purposes, it was initially proposed to allow a certain
part of the sales revenue to be excluded from gift taxation if the revenue is derived from
related party transactions of parts or materials and the related party constitutes part of
a downstream or upstream business of the domestic company due to technical
characteristics like specifications and quality of parts or materials (i.e. patented parts
or materials). This proposal was deleted and will not be implemented until the
government revisits the scheme by examining and analyzing the related transactions.
Bill to Amend the Enforcement Rules to Set out Details of Tax Law Changes
Following the proclamation of the amended Presidential Decrees of tax laws, the
government announced the bill to amend enforcement rules to set out details as required in
the amended Presidential Decrees of tax laws. The following proposed amendments to the
enforcement rules will be enforced in March 2019 after being finalized via the review of
competent government ministries and the Ministry of Government Legislation at the end of
February.
According to the Corporate Income Tax Law (CITL), in case of a qualified spin-off or
demerger, the demerging entity can transfer shares to the new entity established via a
spin-off only if: i) they are related to the business of the new entity (i.e. shares in a
company where the divested business in a demerger accounts for at least 30% of the
company’s total sales or purchases, or shares in a company engaged in the same line
of business as that of the divested business); or ii) they are held for purpose of
corporate control (*held in the capacity of a controlling shareholder for at least three
years) including shares related to the business of the demerging entity. However,
according to the bill, even for shares held for the purpose of corporate control, the
demerging entity may not transfer such shares to the new entity if they are related to
the demerging entity’s business. The amended enforcement rule is applicable to a
spin-off or demerger taking place after the related enforcement date.
The interest rate for national tax refunds will be raised from 1.8% to 2.1% per annum
@Samil PricewaterhouseCoopers Page 2Samil Commentary February 19, 2019
Korean Tax Update
by reflecting the average one-year term deposit rate of commercial banks in Korea.
According to the Korean controlled foreign corporation (CFC) rule, undistributed
earnings of a domestic company’s foreign subsidiaries located in low-tax jurisdictions
are taxed as deemed dividends paid to the domestic company that holds 10% or more
of shares or interests in such a subsidiary. The CFC rule currently waives the taxation
of such deemed dividends for certain CFCs engaging in wholesaling if more than 50%
of their total sales revenue come from sales to third parties in the same jurisdiction or
region as specified in the law. In this regard, the bill will expand the scope of the same
region to include the Association of South-East Asian Nations, in addition to the EU and
China/Hong Kong, effective from fiscal years beginning on or after January 1, 2019.
NTS to Amend Internal Rules for the Administration of Corporate Taxation
The National Tax Service (NTS) announced a draft of amendments to the internal rules for
the administration of corporate income taxation on February 1, 2019. Two significant draft
amendments include:
Public-benefit corporations subject to a statutory external audit in accordance with the
Act on External Audit of Stock Corporations will be excluded from the list of those who
must submit the documents of tax verification by external experts.
As prescribed in Article 81-6 of the Basic National Tax Law, as part of the tax audit
target selection for periodic NTS audits, certain selected companies shall be in principle
subject to a five-year cycle of audit. Under the current tax law provisions, the
companies with annual sales revenue in the amount of KRW100 billion or more are
subject to the five-year periodic audit. The annual sales revenue threshold will be
raised to KRW150 billion, ensuring that SMEs are excluded from the five-year periodic
audit targets.
Foreign Exchange Transaction Regulations Amended to Take Effect on
January 1, 2019
Effective from January 1, 2019, the foreign exchange transaction regulations were amended
to facilitate innovative growth and provide more of transactional convenience in the foreign
exchange field. The amended regulations include the following changes to improve the
overseas remittance.
Securities or credit card companies are allowed to provide small-amount overseas
remittance services (i.e., up to USD3,000 per case and USD30,000 per year); the
service had only been provided by banks before the amendment.
The annual limit on overseas remittance for local Agricultural Cooperatives and
Fisheries Cooperatives is raised from USD30,000 to USD50,000 per person to provide
more convenience in remittance for farmers and fishermen with insufficient access to
financial infrastructure.
Besides banks, securities and credit card companies are allowed to provide financial
@Samil PricewaterhouseCoopers Page 3Samil Commentary February 19, 2019
Korean Tax Update
settlement services, essential for the operation of small money transfers.
In addition, the amended regulations accept new means of overseas payments. They
include QR codes of banks and prepaid electronic payment means of credit card companies.
These new means are the electronic payment means as prescribed in the Electronic
Financial Transactions Law.
Customs Service Opens the Brexit Service Desk
After the UK Parliament rejected the Brexit agreement, the Customs Service opened the
Brexit Service Desk to help minimize confusion that domestic exporters and importers might
have and to compile feedback and responses of traders. The Service Desk has been
operated in full scale since January 23, 2019 in five major customs offices located in
Incheon, Seoul, Busan, Daegu and Gwangju.
According to an official of the FTA Planning Office at the Customs Service, from a positive
perspective, if a new Brexit agreement is reached, Korea and the UK would be able to
benefit from the preferential tariffs applicable under the Korea-EU FTA until 2020 while
companies would have sufficient time to analyze and handle effects of a new FTA reached
between Korea and the UK. However, it is also possible that ‘No deal Brexit’ could occur.
In preparation against such a worst-case scenario, the Customs Service will seek to identify
and communicate developments surrounding Brexit issues in a prompt manner. Also, it will
come up with clearance measures to ensure that traders are not negatively affected by the
results of the FTA negotiations taking place between Korea and the UK.
Rulings Update
Whether the payment for a patent registered outside Korea which is beneficially
owned by a US company would be subject to Korean withholding tax
As regards the controversy on whether the payment by a Korean company for the use of
patents registered outside Korea that are beneficially owned by a US company would be
treated as the Korean source royalty income of the US company thereby subject to Korean
withholding tax, the Supreme Court upheld the lower court’s decision by ruling that the
payment would not be considered as Korean source royalty income under the Korea-US
tax treaty and only the payment attributable to the patents registered in Korea could be
taxed as Korean source royalty income. (Daebeop2016du42883, 2018. 12. 27.)
Specifically, the Supreme Court explained the reasoning of its decision that: i) according to
item 9 of Article 93 of the previous CITL (effective prior to the amendment on December 30,
2010), payments received by a foreign corporation for the use or a right to use patents,
models, trademarks, etc. (‘patents, etc.’) which require registration to enforce rights in
patents, etc. shall constitute Korean source royalty income of the foreign corporation if the
patents, etc. are used for manufacturing or sales activities in Korea, although they were not
registered in Korea; ii) however, Article 28 of the Law for Coordination of International Tax
Affairs (LCITA) stipulates that despite Article 93 of the CITL, tax treaties take precedence
@Samil PricewaterhouseCoopers Page 4Samil Commentary February 19, 2019 Korean Tax Update over domestic tax laws with respect to the classification of Korean source income; iii) thus, whether the payment for the use of patents, etc. that were registered only outside Korea but were used for manufacturing or sales activities in Korea would constitute Korean source royalty income must be determined according to the Korea-US tax treaty; iv) considering the context of and ordinary meaning of the terms of the Korea-US tax treaty, Paragraph 3 of Article 6 and Paragraph 4 of Article 14 of the tax treaty postulate that given the nature of territorial rights, patent rights have effect only in the territory of the country where they are registered and accordingly, only the payment to a US company registering its patents in Korea and acquiring the patent rights in Korea for the use of such patents rights would constitute Korean source royalty income (Daebeop2005du 8641, 2007.9.7, etc.) and so, in the interpretation of the Korea-US tax treaty, there would be no notion of the use of or the payment for the use of patents in the countries other than the country of the patent registration; and v) as a result, in case where a US company has registered its patents outside Korea without registering them in Korea, the related payment for such patents could not constitute the payment for use of the patents in Korea (i.e., thereby not forming Korean source royalty income). With the latest decision, the Supreme Court reaffirmed its earlier position (Daebeop2012du18356, 2014. 11.27.) that despite Article 93 of the CITL, payments to a US company for the use of or a right to use the patents registered outside Korea cannot constitute Korean source royalty income of the US corporation. For similar cases, it may be necessary to refer to the latest Supreme Court decision along with its past judgment. However, since Article 28 of the LCITA was deleted at the end of 2018 from the revised LCITA which became effective from January 1, 2019, there may be a need to monitor whether the Supreme Court position would be sustained in future court decisions. Whether a heavy tax rate would apply in case of relocating a head office to Seoul from another metropolitan area Under Paragraph 2 of Article 28 of the previous Local Tax Law (effective prior to the amendment on January 1, 2014), where a company relocates its head office or principal office located outside a metropolitan area to a metropolitan area, the registration tax shall be three times the standard tax rate. For registration tax purposes, a metropolitan area refers to the overconcentration control area as designated in Article 6 of the Metropolitan Area Readjustment Planning Act. Further, concerning the scope and criteria for the application of the heavy tax rate, Article 45 of the Presidential Decree of the Local Tax Law provides that the scope of the relocation into a metropolitan area for the purpose of applying Paragraph 2 of Article 28 of the Local Tax Law refers to the provision in Paragraph 3 of Article 27 of the Law. Paragraph 3 of Article 27 stipulates that the relocation of a head office or principal office from a metropolitan area other than Seoul into Seoul should be considered the relocation into a metropolitan area. A controversy in this case focused on whether a company would be taxed at the heavy registration tax rate in relocating its head office from a metropolitan area (i.e., Seongnam City) to Seoul. The Seoul Administrative Court and the Seoul High Court decided that, according to the relevant provisions of the Local Tax Law, the heavy tax rate can only apply if a company moved a head office located ‘outside a metropolitan area’ to a metropolitan @Samil PricewaterhouseCoopers Page 5
Samil Commentary February 19, 2019 Korean Tax Update area and therefore, the company at issue should not be taxed at the heavy tax rate for the relocation of its head office from Seongnam City to Seoul in that it was moving within metropolitan areas. However, against the lower courts’ decision, the Supreme Court ruled that considering that the prescribed condition of ‘being outside a metropolitan area’ would be intended to elaborate the requirement of ‘relocation into a metropolitan area’ and the forgoing Article of the Presidential Decree embodied the intention of the Law on the heavy tax rate, it should be reasonable to apply a heavy tax rate in this case and rejected the lower courts’ judgments. (Daebeop2016du65602, 2018. 11. 29.) This ruling may give clarification regarding the application of a heavy registration tax rate in case a company moves its head office or principal office from a metropolitan area other than Seoul into Seoul. @Samil PricewaterhouseCoopers Page 6
Contacts
International Tax Services Domestic Tax Services Transfer Pricing & Private Equity Tax Service
International Trade
Alex Joong-Hyun Lee Yeon-Gwan Oh
Jeong-Soo Tak
709-0598 709-0342 Heui-Tae Lee
3781-1481
alex.lee@pwc.com yeon-gwan.oh@pwc.com 3781-9083
Jeongsoo.tak@pwc.com
heui-tae.lee@pwc.com
Sang-Do Lee Young-Sin Lee
Nonprofit Corporation Service
709-0288 709-4756 Henry An
Center
sang-do.lee@pwc.com young-sin.lee@pwc.com 3781-2594
henry.an@pwc.com YoungSun Pyun
Sang-Woon Kim Jin-Ho Kim 3781-9684
709-0789 709-0661 Won-Yeob Chon youngsun.pyun@pwc.com
sang-woon.kim@pwc.com jin-ho.kim@pwc.com 3781-2599
won-yeob.chon@pwc.com
Small and Midsize Enterprise
Michael Kim Chul-Jin Hwang
and Startups
709-0707 709-0759 Junghwan Cho
Service Center
michael.kim@pwc.com chul-jin.hwang@pwc.com 709-8895
junghwan.cho@pwc.com Bong-Kyoon Kim
Dong-bok Lee Bok-Suk Jung 3781-9975
709-4768 709-0914 bong-kyoon.kim@pwc.com
M&A Tax
dongbok.lee@pwc.com boksuk.jung@pwc.com
Min-Soo Jung
Knowledge & Innovation
Chong-Man Chung Hyungsuk Nam 709-0638
709-4767 709-0382 minsoo.jung@pwc.com Han-Chul Cho
chong-man.chung@pwc.com hyungsuk.nam@pwc.com 3781-2577
Hye-Won Choi han-chul.cho@pwc.com
Hyun-Chang Shin Dong-Jin Nam 709-0990
709-7904 709-0656 hyewon.choi@pwc.com Samil Infomine
hyun-chang.shin@pwc.com dong-jin.nam@pwc.com
Sang-Keun Song
Global Mobility Services 709-0559
Chang-Ho Jo Seungdo Na
(GMS) sang-keun.song@pwc.com
3781-3264 709-4068
changho.jo@pwc.com seungdo.na@pwc.com Jina Park
709-0797 PwC Customs Service
Nam-Gyo Oh Youngsuk Noh jina.park@pwc.com
709-4754 709-0877 Young-Mo Lee
nam-gyo.oh@pwc.com yongsuk.noh@pwc.com 3781-3140
Inheritance & youngmo.lee@pwc.com
Gift Tax Services
Il-Gyu Cha Sun-Heung Jung youngmo.lee@pwc.com
3781-3173 709-0937 Hyun-Jong Lee
il-gyu.cha@pwc.com sun-heung.jung@pwc.com 709-6459
hyun-jong.lee@pwc.com
Kwang-Soo Kim Sung-Wook Cho
709-4055 709-8184 Financial Tax Services
kwang-soo.tls.kim@pwc.com sung-wook.fs1.cho@pwc.com
Taejin Park
Young-Ok Kim Yoon-Sup Shin 709-8833
709-7902 709-0906 taejin.park@pwc.com
young-ok.kim@pwc.com yoon-sup.shin@pwc.com
Hoon Jung
Robert Browell Yu-Chul Choi 709-3383
709-8896 3781-9202 hoon.gp6.jung@pwc.com
robert.browell@pwc.com yu-chul.choi@pwc.com
Soo-Yeon Park
709-4088
soo-yun.park@pwc.com
The information contained in this publication is for general guidance on matters
of interest only and is not meant. The information contained in this publication is
for general guidance on matters of interest only and is not meant to be
comprehensive. The application and impact of laws can vary widely based on the
particular facts involved. For more information, please contact your usual Samil
PwC client service team or professionals listed above.
Ⓒ 2019 Samil PricewaterhouseCoopers. All rights reserved
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