Foreign tax credit
Taxes imposed by foreign governments on income recognised by a resident taxpayer are allowed as a credit within the limit against the income taxes to be paid in Korea, or as deductible expenses in computing the taxable income. The excess foreign tax credit can be carried forward five years.
Indirect foreign tax credit is also available for a Korean parent company in cases where the dividends from a foreign subsidiary are included in the taxable income of the Korean parent company. The conditions on indirect tax credit exclude the overseas grandson subsidiary and raise the shareholding ratio from 10% or more to 25% or more.
Special tax deductions for SMEs
A special deduction on corporate taxes is available for SMEs when they are engaged in a qualified business. The tax deduction ratio range from 5% to 30% depending on corporate location, size, business types, etc. This incentive will be applied to taxable income arising in the tax years that ends before 31 December 2017.
Tax credits are generally available for qualified investment in facilities for productivity enhancement, safety, job-creating investments, etc.
Tax credit for investment in facilities for productivity enhancement
If a resident makes an investment in facilities or equipment to increase productivity by no later than 31 December 2017, then 3% (5% and 7% in the case of medium-scale companies and SMEs, respectively) of such investment amount shall be deducted from CIT. The unused tax credit can be carried forward to the next five years.
Tax credit for investment in facilities for safety
If a resident or a domestic corporation makes an investment in a facility (excluding any investment in used assets) for safety that is considered necessary for industrial purposes no later than 31 December 2017, then an amount of 3% (5% and 7% in the case of medium-scale companies and SMEs, respectively) of such investment shall be deducted from CIT. The unused tax credit can be carried forward to the next five years.
Tax credit for investment for commercialisation of new growth-engine and core technologies
The amended tax law has introduced that a new tax credit in respect of investment in facilities designed to promote the commercialisation of new growth-engine or core technology (e.g. facilities for the manufacturing of new drugs for which patents are obtained by a company based on clinical trials). The tax credit rate is 10% of the amount of investment for SMEs, while the rates are adjusted to 7% for medium-scale companies and 5% for large corporations. This change will be applied to investment made on or after 1 January 2017.
Tax credit for job-creating investments
The tax credit for job-creating investments consists of a basic credit and an additional credit. The basic credit is not available at all in the event of decreased employment by any one person with an exception to SMEs, which may claim the basic credit after a certain amount (KRW 10 million for each decreased employee) is subtracted. The basic credit includes a 0% to 3% tax credit for a company maintaining a status quo employment and an additional 3% to 6% tax credit for new job-creating investments. The additional tax credit for job creation does not exceed the ceilings set at KRW 10 million (KRW 15 million per youth employee between the ages 15 and 29, KRW 20 million per specified occupational high school graduate employee) multiplied by the amount of new employment in net. For SMEs, the ceiling for creating new jobs has been increased by KRW 5 million per new employee for fiscal years starting on or after 1 January 2017. The amended tax law has adopted a negative list approach in providing the above tax credit, applying to most of the business. This change will apply to job creation and investment made on or after 1 January 2017. This credit will apply to investments made no later than 31 December 2017. The unused tax credit can be carried forward to the next five years.
Tax credit to support youth job creation
To support youth job creation, the STTCL has allowed a company to claim a tax credit worth KRW 5 million (KRW 2 million for a large company) for the increased number of youth employees aged between 15 and 29. The tax credit will be available from the fiscal year that includes 31 December 2015 to the year that includes 31 December 2017. The unused tax credit can be carried forward to the next five years.
Temporary tax credit for increase in corporate payroll
The amended law applies a temporary 10% tax credit (5% for large corporations) on the incremental amount in average corporate payroll over a certain base level calculated in a prescribed manner by taking into account either the average corporate payroll over the previous three years or the average payroll increase among the SMEs in Korea. This is conditional on there being no decline in the number of full-time employees from the previous year. The temporary credit is implemented from 1 January 2015 through 31 December 2017. The unused tax credit can be carried forward to the next five years.
Special tax treatment to facilitate dividend payments
In order to facilitate dividend payments to shareholders of listed companies to try and boost the growth of the stock market, a provision lowers the withholding rate on dividend income distributed by high-dividend paying listed companies from 14% to 9% (which will be reported per the final tax return of the shareholders) and allows the segregated taxation of such dividend income if those listed companies meet the requirements as prescribed in the tax law and the shareholders apply for the segregated taxation (in this case, 25% final tax rate applies). This special tax treatment applies to eligible dividend income from earnings of high-dividend paying listed companies for tax years beginning on or after 1 January 2015 and ending on 31 December 2017.
Tax credit for re-hiring retired female employees of SMEs
The amended law introduces a tax credit to promote the re-employment of female employees of SMEs who retired for pregnancy, childbirth, or care and other personal reasons as prescribed in the Presidential Decree. The tax credit is designed to allow SMEs to subtract the amount, as much as 10% of labour costs paid per re-hired female employee, from their corporation tax payable for the period of two years following the month of re-employment if prescribed conditions are met. This credit applies if the SME executes an employment contract for one year or more until 31 December 2017. The unused credit can be carried forward to the next five years.
Research and development (R&D) tax incentives
The STTCL provides various tax incentives to stimulate R&D activities. These include a tax credit for research and manpower development expenses, a tax credit for technology transfer, and tax credits for merger or acquisition of technology innovative SME.
Tax credit for development of research and manpower
Companies presently claim a tax credit in relation to qualifying R&D expenditure to the extent of either (i) 1% to 3% (8% to 15% for medium-scale companies, 25% for SMEs) of the current R&D expenses or (ii) 30% (50% for SMEs) of the incremental portion of the current R&D expenses over the average of the previous four years. The incremental method can be applied only when the R&D expenses for the prior year exceed the average R&D expenses for the previous four years. The credit rate for the current R&D expenditure is 30% (20%+(R&D expenditure for qualified technology/total sales x 300%)) (30% for SMEs). The amended tax law has adjusted the eligible scope of qualifying R&D expenditure with an increased focus on new technology in 11 emerging industries, such as future-generation motor vehicles, intelligent information, next-generation software and security, etc. This change will be applied to R&D expenditure incurred on or after 7 February 2017. The unused credit can be carried forward to the next five years.
Tax credit for technology transfer among SMEs (Korean patent box regime)
Tax credit and reductions have been introduced to facilitate the transfer of technology between companies so as to enhance technical competencies and the recovery of funds invested in technology more efficiently. CIT on income derived by SMEs and specified medium-scale companies from the transfer of patents, etc. to a Korean national is reduced by 50%. The tax law grants a 25% tax credit for income derived by SMEs and medium-scale companies from the leasing of patents or utility model rights where the company has first filed a registration of such rights. The tax credit is 5% (10% for SMEs) of the amount paid to acquire patents, etc. (ceiling at 10% of CIT). This temporary credit is applicable to transfers, purchases, or leases taking place until the end of December 2018. The unused credit can be carried forward to the next five years.
Tax credit for merger or acquisition of technology innovative SME
In cases where a domestic company merges with a technology innovative SME in a qualified manner, the merger company shall be permitted to take a 10% tax credit with respect to the payment made in such a merger, up to the value of the acquired technology. This 10% tax credit will also be available for a company that acquires shares in a technology innovative SME in a qualified manner no later than the end of December 2018. In this case, if any of requirements for a qualified manner fails to be met, the amount of tax credited will be collected. The unused credit can be carried forward to the next five years.
Tax credit for investment in facilities for technology and human resources development
A corporation purchasing facilities no later than 31 December 2018 prescribed in the Presidential Decree with the purpose of R&D and job training is eligible for a tax credit of up to 1% (3% for medium-scale companies, 6% for SMEs) of such investment. The unused tax credit can be carried forward five years.
Tax credit for investment in energy-saving facilities
If a resident makes an investment (excluding any investment in used goods) no later than 31 December 2018 in energy-saving facilities, 1% (3% for medium-scale companies, 6% for SMEs) of such investment shall be deducted from CIT. The unused tax credit can be carried forward five years.
Tax credit for investment in facilities for environmental protection
If a resident makes an investment (excluding any investment in used goods) in any facility for the purpose of environmental conservation no later than 31 December 2018, then 3% (5% for medium-scale companies, 10% for SMEs) of the investment amount shall be deducted from CIT. The unused tax credit can be carried forward five years.
Inbound investment incentives
The Korean government provides various incentives and benefits for inducing foreign investment under the Foreign Investment Promotion Law.
Among others, foreign-invested companies that engage in certain qualified high-technology businesses can apply for 100% exemption from CIT for five years, beginning from the first year of profitable operations (from the fifth year, if not profitable until then) and a 50% reduction for the following two years in proportion to the foreign shareholding ratio. An exemption from WHT on dividends, which was available for foreign investors in the same manner as above during the same grace period, is no longer granted for tax exemption applications filed on or after 1 January 2014. However, the WHT exemption on dividends already approved will not be affected by the tax law change. In addition, the taxpayer can apply for 100% exemption from acquisition tax and property tax on assets acquired for their exempt business for five years after the business commencement date and 50% reduction for the following two years. For local tax exemption, some local governments grant longer exemption periods (up to 15 years) and higher exemption ratios in accordance with their local ordinances. Qualified foreign investment also can be eligible for exemption from customs duties, VAT, and individual consumption tax on imported capital goods.
In addition, foreign investors satisfying specified criteria are provided with tax incentives and other benefits for investment in specially designated areas, including foreign investment zones (FIZs), free economic zones (FEZs), free trade zones (FTZs), and strategic industrial complexes exclusively developed for foreign invested companies. The tax incentives for qualifying foreign investors in individual type FIZs and FEZs and certain strategic industrial complexes that are approved by the related committee under laws governing the operation of the zones are similar to those of the above foreign invested high-tech companies. Qualifying investors in complex type FIZs, FEZs, FTZs, and strategic industrial complexes may receive the 100% exemption from corporate or individual income tax as well as local taxes for the first three years and 50% reduction for the next two years. They also receive exemption from customs duties on imported goods.
The amended tax law has reformed the scope of businesses eligible for foreign investment tax incentives to be aligned with those that qualify for the foregoing R&D tax credit. This change is applied to foreign investment for which tax incentive is applied on or after 7 February 2017.
To receive tax incentives for inbound investment, an application for tax incentives, together with supporting documents, should be filed with the tax authorities by the end of the fiscal year that the business commencement date belongs to. In addition, foreign investment made via specific countries is excluded from the exemption from corporate or individual income tax and local taxes for inbound investment. They include those countries with which Korea has not entered into income tax treaties (including tax information exchange agreements [TIEAs] and investment promotion and protection agreements), such as Botswana, Republic of Cyprus, Dominican Republic, Guatemala, Lebanon, Nauru, Niue, Seychelles, and Trinidad and Tobago.
Foreign direct investment (FDI) incentive limitations
The FDI credit limits incentives granted to qualified FDIs. The ceiling has been set to encompass both investment amount and job-creation. In terms of investment amount, for applications filed from 1 January 2016 or the case where the first foreign investment per the application filed before 1 January 2016 is not made before 1 January 2016, the level of incentives for FDI has been reduced to 50% of the aggregated FDI amount for companies benefiting from a seven-year incentive period (30% ceiling for companies enjoying a five-year incentive period). In terms of job-creation, the level of incentives for FDI has been reduced to the lower of 40% of the aggregated FDI amount for companies benefiting from a seven-year incentive period (30% for companies enjoying a five-year incentive period) or KRW 10 million times the company’s net increase in employment.
Companies that have enjoyed tax benefits based on job-creation will be subject to tax assessment in cases where there is a net decrease in employment within the subsequent two years in comparison to the year that the relevant tax credit was obtained.