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Korea announces 2024 tax reform proposals, including clarifications of global minimum tax rules
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Executive summary
On 25 July 2024, the Ministry of Economy and Finance of Korea announced the 2024 tax reform proposals (the 2024 Proposals). Unless otherwise specified, the 2024 Proposals will become effective for fiscal years beginning on or after 1 January 2025.
This Alert summarizes the key proposals.
Detailed discussion
Clarifications of the global minimum tax rules
The 2024 Proposals introduce and clarify the Global Anti-Base Erosion (GloBE) rules under Korea's current Adjustment of International Taxes Act (AITA) to reflect the administrative guidelines and commentary of the Organisation for Economic Co-operation and Development's (OECD's) Pillar Two GloBE model rules. This rule will be effective for the reporting years beginning on or after 1 January 2025.
Details regarding the GloBE rules in the 2024 Proposals are outlined below.
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2024 Proposals |
Details |
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Special provisions for loss treatment in the first year of application |
Constituent entities (CEs) may select 15% of net GloBE losses as a deferred tax asset in lieu of the total deferred corporate tax adjustment amount (exceptions do apply). |
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Introduction of new allocation methods for the additional top-up taxes under supplementary rules for income inclusion (known as Undertaxed Profit Rule (UTPR)) by CEs |
New allocation method applies in case of nonpayment after applying the designated allocation, e.g., allocating the unpaid tax entirely to the ultimate parent entity if located in Korea. New allocation method applies in case of additional top-up tax amounts are not paid until the previous fiscal year. |
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Exception to de minimis exclusion |
De minimis exclusion would not apply for the fiscal year in certain cases and conditions if there is any change in the country's status of meeting the conditions (e.g., post-filing adjustments after the GloBE return is filed). |
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Introduction of new provision for the safe harbor rules |
Top-up tax of the qualified country may be deemed to be zero, subject to conditions stipulated in the Presidential Decree of the AITA. Top-up tax of the UTPR country is deemed to be zero during a transition period starting on or before 31 December 2025, and ending on or before 30 December 2026, subject to conditions. |
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Special provision on GloBE information return filing due date |
If the return filing due date falls before 30 June 2026, the reporting due date will be extended to 30 June 2026. |
Elimination of the share premium for shares held by major shareholders
Based on the Korean Corporate Income Tax Law (CITL), the transfer price in return for the share transfer between related party transactions shall be no less than at arm's length (or FMV). However, where the arm's-length price is not applicable or where no transfer price has been identified, supplementarily, the share value should be determined under the Individual Income Tax Law or Inheritance and Gift Tax Law (IGTL). In addition, by the provision of the IGTL, the value of shares held by the largest shareholders and their related parties is subject to 20% share premium, unless exceptions apply.
The 2024 Proposals eliminate the addition of share premiums for the computation of share value under the IGTL without any exceptions.
Extends application period for R&D and Integrated Investment tax credits
The 2024 Proposals extends the sunset period of the current research and development (R&D) tax credit from 20% to 50% for national strategic technologies (seven categories) and new growth/original technologies (14 categories) from 31 December 2024 to 31 December 2027. This three-year extension will also apply to the current integrated investment tax credits from 15% to 25% (excluding 4% additional credits) related to national strategic technologies.
Additionally, the 2024 Proposals include an increment in the deduction rate for investments exceeding the average investment amount of the previous three years, from 3%-4% to 10%, for integrated investment tax credits.
Adds tax incentive to promote the return of earnings to shareholders
The 2024 Proposals introduce a special tax incentive for listed corporations (excluding corporations such as real estate investment trusts (REITs) aimed at investment dividends) that (1) disclose a plan to enhance corporate value by the end of the fiscal year, and (2) increase the shareholder return amount by more than 5% compared to the average of the previous three years.
The increased amount will be eligible for a corporate tax deduction of 5% (limited to 1% of the total shareholder return amount). Meanwhile, individual shareholders (excluding nonresidents and corporate shareholders) of companies that receive this corporate tax exemption will be able to separately withhold a portion of the cash dividends received at a reduced rate.
The corporate tax special provision will apply to dividends distributed or treasury shares cancelled in fiscal years starting after 1 January 2025, and the tax exemption for individual shareholders will apply to dividends received after 1 January 2026.
Adds new rules for foreign investors with domestic exemptions on government bonds
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Items |
Current tax rule |
2024 Proposals |
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Simplification of withholding tax procedures for exemption on government bonds for foreign investors investing through overseas investment vehicles (OIV) |
Under the current Korean CITL, submission of the tax resident certificate along with the exemption application is required to claim a domestic withholding tax exemption for interest and capital gains derived from government bonds and monetary stabilization bonds by foreign individual or corporate investors investing through private OIV; the public OIV may apply the exemption application as a deemed beneficial owner without disclosure of the ultimate foreign individual or corporate investors. |
The 2024 Proposals simplify the withholding tax procedure where foreign individuals or corporate investors investing in government bonds and monetary stabilization through either private or public OIVs may apply for the domestic withholding tax exemption by submitting the exemption application with the OIV's resident tax certificate as a deemed beneficial owner. |
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Introduction of new refund claims rule for foreign investors on domestic tax exemption for government bonds |
Under the current Framework Act on National Taxes, foreign individuals and corporations may make refund claims only through Korean withholding tax agents upon failure to receive a withholding tax exemption on income derived from government bonds. |
To ease the tax refund process for foreign investors, the 2024 Proposals allow foreign investors to make the relevant refund claim directly. |
Requires tax-exemption applications and payment statements for Korean-sourced personal service income
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Items |
Current tax rule |
2024 Proposals |
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Tax exemption application requirement for Korean-sourced personal service income |
Under the current Korean CITL, Korean-sourced business income and personal-service income paid to foreign individuals and corporations having no permanent establishment are entitled to receive the Korean tax exemption without application procedures. |
According to the 2024 Proposals, it is mandatory to submit tax-exemption applications/payment statements for Korean-sourced personal service income paid to foreign individual or corporation effective for income/payment paid on or after 1 January 2026. |
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Tax payment statement requirement for Korean-sourced personal-service income |
Currently, Korean-sourced personal-service income is excluded from submission of the payment statement to the competent tax office. |
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Changes withholding taxation for foreign professional athletes
Under the current Korean CITL, business income paid to individuals is generally subject to the Korean withholding tax (WHT) at the rate of 3.3%, inclusive of 10% local income tax, and business income paid to foreign professional athletes for a contract period of three years or less is subject to a 22% WHT, inclusive of 10% local income tax.
The 2024 Proposals stipulate that business income paid to foreign professional athletes after 1 January 2025 will be subject to a 22% WHT rate, inclusive of 10% local income tax, regardless of the contract period.
For additional information concerning this Alert, please contact:Ernst & Young Han Young, Seoul
Ernst & Young LLP (United States), Korean Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
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Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert. |