2006 tax revision: making Korea more business friendly.
I. Facilitating foreign investment
1. Lower income tax on the earned interest from bonds held by non-resident individuals and foreign incorporation (Art. 156-1, Income Tax Law & Art. 98-1, Corporate Tax Law)
The government aims to facilitate local bond market by lowering the withholding tax rate on the earned interest from bond held by non-residents and foreign incorporation. The revised rate of 14 percent, down from current 25 percent, shall be applicable to interest income generated on or after January 1, 2007.
2. Reduce income tax for foreign engineers and researchers (Art. 18-1, Special Tax Treatment Control Law)
The sunset on income tax exemption for foreign engineers and researchers in Korea shall be extended with a view to supporting introduction of advanced foreign technologies.
As of now, a full tax exemption on earnings generated in Korea is granted to qualified foreign engineers and researchers for 5 years. The qualified engineers and researchers are as follows:
* technology provider in accordance with Engineering and Technology Promotions Act;
* researchers at KAIST; and
* researchers at non-profit research institutes.
The 2006 tax revision has extended the sunset on full tax exemption to December 31, 2009. The revised regulation shall be applicable to income derived from services rendered on or after January 1, 2007.
3. Maintain current tax incentives for foreign direct investment
(Table 1) Requirements Hi-tech or Industry- * to have critical influence in support service strengthening the international businesses competitiveness of domestic industry; and * to be decided (1) after consultation with Foreign Investment Committee Business type Minimum investment Manufacturing US$30 million Foreign invested Tourism US$20 million companies (2) Logistics & US$10 million located in foreign SOC investment zone R&D centers US$5 million Two or more US$30 million foreign businesses Tax incentives Corporate Property, Customs duties and Income Acquisition and etc on tax and imported capital Registration goods tax Hi-tech or Industry- Full exemption of support service Full exemption for 5 customs duties, businesses years & 50% reduction for special excise tax the next 2 years and value-added Foreign invested tax for 3 years on companies (2) imported capital located in foreign goods investment zone (Table 2) Tax incentives Business types Requirements * Manufacturing and tourism business with investment of Foreign invested US$10 million or more; or companies located in free economic zones * Logistics and medical institutes with investment of US$5 million or more * Minimum investment of (1) Full US$30 million; or exemption for 3 Business developers in years & 50% free economic zones * Ratio of foreign reduction for investment in the foreign the next 2 invested company being 50% years (3) or more for projects worth US$500 million or more * Minimum investment of US$10 million; or Business developers in Jeju trade zone * Ratio of foreign investment in the foreign invested company being 50% or more for projects worth US$100 million or more * Manufacturing business Foreign invested with investment of US$10 companies located in million or more; and the exclusive zones for foreign investment * Logistics business with investment of US$5 million or more * Manufacturing and tourism businesses with investment (2) Full Foreign invested of US$10 million or more; exemption of companies located in and customs duties the company town zone for 3 years on * Logistics business and imported R&D centers with investment capital goods of US$5 million or more * Minimum investment of US$30 million or more; or Business developer in company town * Ratio of foreign investment in the foreign invested company being 50% or more for projects worth US$500 million or more * Manufacturing business with investment of US$10 Foreign invested million or more; and companies in the free trade zone * Logistics business with investment of US$5 million or more (1) Total 637 services are eligible for the FDI tax incentives, in which 149 businesses are the industry support services while 488 businesses being concomitant with the high tech industry. (2) Foreign-invested companies are domestic companies and their accounting and settlement are independent of those of their parent companies and are subject to Foreign Investment Promotion Act. (3) The exemption and reduction are with respect to corporate, income, property, acquisition and registration tax. NOTE: All FDI tax incentives are subject to Special Tax Treatment Control Law.
II. Strengthening industry competitiveness through revising base tariff rates on 893 items
1. Ease customs duties burden on basic 310 raw materials
Basic raw materials Non-competitive Competitive Basic tariff rates are to be zero- Basic tariff rates shall be based for items with high industry lowered to boost industry linkage (backward or forward), for competitiveness. such items as naphtha, zero tariff concession items (i.e., pulps) and items with tight supply and demand (i.e., copper mine).
Basic customs duty on major energy items such as crude oil, LNG and LPG shall be lowered from current 5 percent to 3 percent. However, for the sake of price stability, flexible tariff rates shall be applied for the time being. Accordingly, for crude oil, LNG and LPG, current quota tariffs of 1 percent, 1 percent and 1.5 percent shall be maintained respectively. Petroleum goods
As for the petrochemical goods, applied tax rate (currently 5 percent quota tariff) shall replace the base duty of 8 percent on gasoline. Intermediaries or raw materials for petrochemical goods
Intermediaries or raw materials for petrochemical goods
Basic customs duty on intermediaries and raw materials for petrochemical goods (i.e., xylem) will be lowered to an appropriate level (from 5 to 3 percent) to foster a level playing ground with other competing economies.
III. Strengthening the service sector competitiveness
1. Facilitate restructuring of small and medium sized logistics companies
(1) Relaxing requirements for tax deferral
When self-run logistics business unit is spun off from the mother company and merged into a specialized logistics company, requirements for tax deferral on the valuation profit from the spin-off shall be softened (Art. 46-4, Special Tax Treatment Control Law).
Current Revised (Eligibility requirements) (Relaxed eligibility requirements) a. spin-off of a local company a. spin-off of a local company (mother company) going concerned (mother company) going concerned for 5 years or more for 1 year or more b. the compensation for spin-off * Relaxed requirements are not payable to the shareholders of applicable to the case where mother company to be made via special relations exist between stocks of the new company after the spin-off business unit and the spin-off acquisition company. c. the new company after the * Sunset on the relaxed spin-off to continue mother requirements is set on Dec 31, company's business till the end 2009. fiscal year of the spin-off date Item b and c remain unchanged. (Deferral method) (Deferral method) Tax can be deferred till disposal Remain unchanged or amortization of tangible fixed assets for business purpose.
The revision has been initiated to facilitate cost reduction in logistics by way of converting current system into 3rd party logistics. The relaxed requirements shall come into effect to mergers of spin-off logistics business unit on or after January 1, 2007.
(2) Relaxing requirements for succeeding carried-over deficit (Art. 46-5, Special Tax Treatment Control Law)
In case of merger between logistics companies, current requirements for the acquisition company to take over carried-over deficit of the merged company shall be relaxed.
The revision aims to support logistics companies to become bigger in terms of its operation scheme. Meantime, merger between local venture companies also recognizes a minimum 3 percent share holding, a substantial dip from the current 10 percent requirement, by the existing shareholders of the merged company in accordance with the Art. 47-3 of the Special Tax Treatment Control Law. The relaxed requirements shall be applied to companies with merger and acquisition on or after January 1, 2007.
Current Revised (Succession requirements) (Relaxed succession requirements) a. to be qualified for the Item a, b and d remain unchanged. requirements of tax deferral on valuation profit from merger * both the merging and merged companies going concerned for 1 year or more; * 95% or more of the merger price being paid off at the par value of stock price; and * merging company to be engaged in the business taken over till the end of fiscal year when the subjet merger has been completed. b. assets of the merged company to be taken over by the merging company at the book value c. the total stocks paid off to c. the total stocks paid off to the existing shareholders of the the existing shareholders of the merged company for the merger merged company for the merger price to be at least 10% of the price to be at least 3% of the value of total number of stocks value of total number of stocks issued by the merging company as issued by the merging company as of the registered merger date of the registered merger date d. existing business under the Sunset on the relaxed requirements merging company and the one has been newly established as succeeded from the merged company December 31,2009. to be separately managed after merger
(3) Extending sunset on the deferred tax benefits to boost strategic alliance among logistics companies (Art. 46-3, Special Tax Treatment Control Law)
The government has extended sunset clauses on the tax benefits given to logistics companies with strategic alliances. This will support inter-logistics M&As and restructuring within the sector. The extended sunset will be applied to share-exchange or investment in kind by and between logistics companies on or after January 1, 2007.
Currently, in case where a logistics company exchanges stocks with the alliance partner or makes investment in kind in the alliance partner company in accordance to the strategic alliance plan, the capital gains tax from the alienation of shares shall be deferred till the selloff of the shares of alliance partner company .
The sunset shall be extended from December 31, 2006 to December 31, 2009.
2. Boost bond and stock markets
(1) Extending sunset on tax exemption for securities transaction by public funds (Art. 117-18, STTCL)
With a view to supporting investment in securities by public funds (1), the sunset on tax exemption for securities transaction is to be extended. The sunset extension shall be applied to alienation of shares on or after January 1, 2007.
In specific, securities transaction tax is exempted when the public fund transfers its purchased securities at the securities market. The sunset on the tax exemption is set on December 31, 2006, which is to be extended to December 31, 2009 under the revised STTCL.
(2) Offering tax assistance to high risk-high yield funds (Art. 91-6, STTCL)
Tax assistance to high risk-high yield funds is to be established. The purpose of the new provision is to address polarization in corporate bond market by facilitating bond issuance and to promote foreign investment. The revision shall be applied to the eligible bond issuance on or after January 1, 2007.
In specific, a separate low tax rate will be levied on interest or dividend income from the junk bond (2) held by bond investment funds with a certain percentage of portfolio investment being made to junk bonds. Both residents and non-residents including foreign corporate are eligible for the tax assistance provided that they have:
a. acquired 10 percent or more of junk bonds with BB+ or lower credit ratings; and
b. invested 60 percent or more of fund assets in local bonds in Korea.
With regard to the actual tax assistance, 5 percent separate taxation will be applied to investment principal of 100 million won or less for non-residents. The tax assistance shall be provided to non-residents regardless of the investment amount.
The new tax assistance shall be applied to funds making investments on the junk bonds on and after January 1, 2007 and shall be valid through December 31, 2009.
IV. Rationalizing and advancing the tax regime
1. Foster business-friendly environment
(1) Adjusting the dividend ratio eligible for alienation from gross income of a holding company (Art. 18-2 of the Corporate Tax Law)
The government decided to lift up the proportion of dividends eligible for alienation from the gross income and standardized to the level of those in advanced countries. This revision is to facilitate conversion into the holding company system, which is expected to enhance corporate transparency.
The revised rule is applied to dividends paid out on or after January 1, 2007.
Current Where a holding company is paid dividends by its subsidiary, a certain proportion * of the dividend amount can be excluded from gross income. * to be calculated based on percentage of shares held by the holding company Holding company Subsidiary Share Proportion of type percentage (%) dividends (2) Listed 100 100 company 40-100 90 30-40 60 Less than 30 (1) 30 Unlisted 100 100 company 80-100 90 50-80 60 Less than 501 30 (1) Ordinary company (2) Excludable from gross income (%) Revised The proportion of dividends eligible for alienation from gross income shall be upwardly adjusted by phases. Proportion of dividends excludable from gross income (%) Percentage of shares 2007 2008 2009 40-100 (1) 90 90 90[right arrow]100 30-40 (2) 60[right 70[right 80 arrow]70 arrow]80 (1) Over 80%-less than 100% in the case of unlisted company (2) Over 50%-80% or less in the case of unlisted company
(2) Repealing preferential tax benefits granted to institutional investors with respect to legitimate alianation of dividends from gross income (Art. 18, Corprate Tax Law)
The existing preferential tax treatment, which allows institutional investors holding less than 10 percent of total shares to exclude 90 percent of dividends from their gross income, runs counter to the general taxation principle where the actual proportion of dividend to be excluded from the gross income is automatically determined on a pro rata basis with the actual share holding ratio.
In specific, currently, the law stipulates that where a qualified (3) institutional investor such as a financial institution is paid dividends from a listed company, the amount equivalent to 90 percent of the dividend amount is excluded from its gross income.
The 2006 tax reform mandates that such preferential treatment shall be repealed. Instead, institutional investors shall be subject to the same principle applied to ordinary companies. Therefore, under the revised rule, institutional investors and ordinary companies all together are subject to maximum 30 percent of dividend eligible for alienation from gross income.
In particular, in case where a parent company holds a larger number of subsidy shares, the rationale for preventing double-taxation (in this case the exclusion of parent company's dividend from gross income) gets more justified taking into account the higher sameness between the two. That is exclusion ratio on the pro rata basis with the holding share ratio makes much more sense for this case.
This revision shall be applied to dividends paid out on or after January 1, 2007.
(1.) Public fund refers to National Pension Fund, Civil Service Pension Fund and Pension Fund for Private School Teachers.
(2.) Junk bond means bond issued by companies with BB+ or lower credit ratings according to the local credit agency designated by the government.
(3.) All institutional investors are eligible for the tax benefit as long as they hold less than 10% of the total shares issued by the listed company.
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|Title Annotation:||Policy Issues|
|Publication:||Economic Bulletin (Korea)|
|Date:||Sep 1, 2006|
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