Korea, Republic of

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. The excess foreign tax credit can be carried forward for up to ten years from the fiscal year starting 1 January 2021.

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. For dividends received on or after 1 January 2023, the conditions on the indirect tax credit loosen the required shareholding ratio for a foreign subsidiary to 10% or more from 25% or more. Foreign subsidiaries eligible for the indirect foreign tax credit shall be limited to those where a domestic parent has been directly holding 10% of the subsidiary’s outstanding shares for at least six months as of the dividend record date, effective 1 January 2023.

Special tax exemptions for SMEs

A special deduction on corporate taxes is available for SMEs when they are engaged in a qualified business. The tax deduction ratio ranges from 5% to 30%, depending on corporate location, size, business types, etc., with a cap of KRW 100 million if the number of regular employees does not decease. This incentive is applied to taxable income arising in the tax years that end before 31 December 2022.

A 50% to 100% reduction of CIT is available for new start-up SMEs for the first five years, provided that they are located in areas other than metropolitan and overpopulated ones and engage in specified businesses (including but not limited to manufacturing, mining, restaurants, audio-video production, telecommunications, computer programming, advertising, and amusement facilities, excluding a company trading crypto currency).

Investment incentives

Integrated investment tax incentive system

Under the previous investment tax incentive schemes, various tax credits were available for qualified investments in some specified categories of facilities for research and testing, vocational training, productivity enhancement, safety and protection, energy saving, new growth-engine technology commercialisation, etc. as well as qualified investments in certain business assets acquired by SMEs, etc. Under the new tax credit scheme effective from 1 January 2021, they have been simplified and integrated into a single investment tax incentive scheme. 

The integrated investment tax credit scheme has replaced the previous positive list of qualified investments with a negative list system whereby the investment tax credit should be generally available for most of business-purpose tangible assets and certain listed intangible assets.

However, specified industries and assets will be excluded from the integrated investment tax incentive if they are specifically prohibited under tax laws or subordinate rules. The scope of specified industries ineligible for the integrated investment tax incentive includes real estate rental and supply, as well as consumption service businesses hotels, certain entertainment bars, and other businesses for entertainment purposes, etc. The scope of the assets for business purposes ineligible for the investment tax credit (‘non-qualifying business assets’) includes land, buildings, and other tangible business assets as listed in the enforcement rule (e.g. vehicles, carriages, tools, appliances and fixtures, ships, aircraft, buildings, including auxiliary installations and structures). It also contains the scope of the business assets to which the integrated tax credit will exceptionally apply even if they fall in the category of non-qualifying business assets. They include:

• facilities used for research and development (R&D) and human resources development, energy conservation, and environment preservation, as specified in the enforcement rule, and
• certain vehicles and transport equipment and vessels directly used by SMEs mainly engaging transportation business, vessels directly used by SMEs mainly engaging in fishing industry, certain construction machinery directly used by a construction company, etc.

This tax credit scheme allows a basic credit for qualifying investment for a current year plus an additional credit of 3% (limited to twice the basic credit amount) for incremental investment over the average investment for the previous three years. The basic credit rate is 1% (5% for middle-scale companies and 10% for SMEs), while the higher rate of 3% (6% for middle-scale companies and 12% for SMEs) shall apply to investment in facilities to commercialise new growth and source technologies. For qualified investment to commercialise national strategic technologies, such as semiconductor, secondary battery, and vaccine, the basic tax credit of 15% (25% for SMEs) shall be applied to such investment made after 1 January 2023 until 31 December 2024. In addition to the base credit, the additional tax credit at a rate of 3% (4% for investment in national strategic technologies) shall be applied to such investment while it shall not exceed two times the amount of basic credit. Under the temporary investment tax credit reintroduced in 2023 since it expired 12 years ago, further hiked basic credit rates of 3% to 25% and additional credit rate of 10% will only be applicable to investment made in a fiscal year that 31 December 2023 belongs to.

Tax credit for production costs of video contents

The Korean tax law provides tax credits for expenses incurred to product or manufacture specific broadcasting programs and films, such as television dramas, animations, documentaries, etc., and theatre movies ('video contents including video on over-the-top service') until the end of December 2022. On qualifying production costs of video contents, the applicable credit rates are 5% for large companies, 10% for middle-scale companies, and 15% for SMEs. With effect from 1 January 2024, an additional tax credit of 10% will be extended to large and middle-scale companies, with a further incentive of 15% for SMEs, provided they fulfil the criteria outlined in the Presidential Decree.

New tax credit for investment in cultural content business

Where an SME or a middle-scale company invests in films, TV series, and over-the-top (OTT) contents through a specialised cultural contents business company during the period between 1 January 2024 and 31 December 2025, a tax credit is available at 3% of the investment amount multiplied by the ratio of qualifying expenditures to the invested amount. Qualifying expenditures refers to certain expenditures used for the production of video contents prescribed in the Enforcement Decree, excluding entertainment expenses, advertising and public relations costs, and specific labour-related expenses, such as severance allowances. 

Tax credit for increasing employment

The STTCL provides for a tax incentive for increasing the number of full-time employees from the preceding year, with certain limits. The tax credit will not apply to companies engaged in businesses falling under the category of consumption-oriented services (e.g. entertainment and beverage service). In case of certain employees, including youth employee, disabled employee, or employee over 60 years old, the amount of tax credit varies up to KRW 11 million (KRW 12 million in non-metropolitan area) per increased full-time employee for SMEs, up to KRW 8 million for middle-scale companies, and up to KRW 4 million for large companies. In case of new hire of other full-time employees, the tax credit amount (subject to ceiling based on the total number of increased full-time employee) is KRW 4 million per increased full-time employee for middle-scale companies and KRW 7 million for SMEs (KRW 7.7 million for SMEs in non-metropolitan area). The tax credit is applied to taxable income of the fiscal year of employment increase and the two subsequent years (for a large company, only one subsequent year). The unused tax credit can be carried forward to the next ten years. This tax credit is applicable for increase in full-time employment until the end of the 2024 fiscal year.

Tax credit for increase in corporate payroll

The tax law applies tax credits at 10% for middle-scale companies and 20% for SMEs on the excess of an increase in corporate payroll in a year over an increase in average corporate payroll in the preceding three years (subject to certain requirements, including an increase in the number of full-time employees in a year as compared to the number of the employees in the preceding year). The tax credit is applicable until the year that 31 December 2025 belongs to. The unused tax credit can be carried forward to the next ten years.

Integrated employment-related tax credit

An integrated employment tax credit regime has been introduced in January 2023 to replace various tax credits aimed at encouraging employment and job creation. Previously, a number of tax credits separately applied to qualifying companies where there was an increase in the number of full-time employees from the preceding year, retired female employees were re-hired in SMEs and middle-scale companies, non-regular jobs were transitioned into regular ones, or employees returned to their job after parental leave. Under the integrated tax credit system, most companies, except those operating in consumption-oriented service businesses, will be entitled to a tax credit (subject to a ceiling) for an increase in certain qualifying employees, including youth employee, disabled employee, etc., at KRW 4 million for large companies, KRW 8 million for middle-scale companies, and KRW 14.5 million for SMEs (KRW 15.5 million for SMEs relating to the increase in a non-metropolitan area) and a tax credit for an increase in other full-time employees at KRW 4.5 million for middle-scale companies and KRW 8.5 million for SMEs (KRW 9.5 million for SMEs relating to the increase in a non-metropolitan area) in the year of employment and the following one year (the following two years for SMEs and middle-scale companies) in the event of a net increase in the number of employees until the year that 31 December 2025 belongs to. For this tax credit, the age range of youth employee is expanded to be between 15 and 34 years (rather than 29 years previously) to promote the youth employment, while the tax credit will also be applicable to women with career interruptions. However, if the number of full-time workers decreases within two years after applying the credit, an amount equal to the tax credit claimed will be collected.

Research and development (R&D) tax incentives

To stimulate R&D activities, the STTCL provides tax incentives of tax credits. Among many other available incentives, tax credits for R&D activities are favoured by many Korean companies. 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 a technology innovative SME. As a percentage of total tax incentives for corporate investment in Korea, the R&D tax credit is the largest. Korea was placed in 2020 among the OECD countries that provide the largest level of total government support to business R&D as a percentage of GDP, at a rate equivalent to 0.29% of GDP, according to the latest report published by the OECD ('R&D Tax Incentives: Korea, 2023'). Moreover, business enterprise expenditures on R&D amounted to 3.9% of gross domestic product in Korea in 2021, which is more than double the OECD average and the second highest business R&D intensity according to the OECD Reviews of Innovation Policy: Korea 2023.

Tax credit for development of research and manpower

Under the STTCL, R&D expenditures qualified for tax credit shall be categorised into three technology areas, such as the general area, new growth engine and core technology area, and national strategic industry technology area. The category of technologies for national strategic industry that has been introduced for R&D expenditures incurred on or after 1 July 2021 specifically includes the semiconductor, secondary battery, vaccine, hydrogen, and future mobility sectors, which are fundamental to the national economy and other industries.

Companies presently elect to claim a tax credit in relation to qualifying R&D expenditure at either (i) 0% to 2% (8% for middle-scale companies, 25% for SMEs, and 15%/10% for companies disqualified from SMEs during the grace periods) of the current R&D expenses or (ii) 25% (40% for middle-scale companies, 50% for SMEs) of the incremental portion of the R&D expenses in a current year over the expense in the previous year. 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. However, for the R&D expenditures in qualified new growth engine and core source technology areas designated in the Presidential Decree (e.g. future automobile technology, artificial intelligence including block-chain technology and quantum computing, next generation software and information security, robotics including wearable robots, air and aerospace technology, bio-health, and carbon-neutral, etc.), the preferred credit rates ranging from 20% to 40% will apply, depending on the type of company. The highest rates of tax credit (that are 10% higher than the credit rates for new growth or source technologies) shall be allowed for qualifying R&D expenditure related to national strategic industry technologies prescribed in the Presidential Decree, applicable to expenditure incurred on or after 1 July 2021. The unused credit can be carried forward to the next ten 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 middle-scale companies from the transfer of patents, etc. to a Korean national is reduced by 50%. The tax law also grants a 25% exemption of CIT on income derived by SMEs and middle-scale companies from the leasing of patents or utility model rights where the company has first filed a registration of such rights. This temporary credit is applicable to transfers or leases taking place until the end of December 2026. The unused credit can be carried forward to the next ten years.

Tax credit for merger or acquisition of a 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 for the 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 2024. 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 ten years.

Corporate restructuring incentives

Tax deferral for qualified merger

In principle, a merger is considered a taxable transfer of assets and liabilities of a merged company to a surviving company or a new company. Mergers of two domestic corporations are eligible for deferred taxation on the gain from the taxable transfer when meeting certain requirements (e.g. business operation for at least one year prior to the merger registration date, at least 80% of the merger consideration must be paid in the stocks of the surviving company, business continuation until at least the last day of the fiscal year when the merger is registered, and continuous employment of at least 80% of employees of the merged company by the surviving company).

For those mergers meeting the requirements for tax deferral (‘qualified merger’), the recognition of gain from the transfer of assets and liabilities from a dissolving company is deferred unless a certain event occurs.  If, within two years from the date of the merger, the surviving company disposes of or discontinues the business of the merged company, or the shareholders of the merged company dispose of their shares, or, within three years from the date of the merger, the number of employees of the surviving company falls under 80% of the aggregate number of employees of the merged and surviving companies as of one month before the registration date, the tax deferral on the gains upon a qualified merger shall be immediately terminated and deferred taxes shall be recaptured, while the gain for the fair market value of the assets and liabilities transferred from a dissolving over their tax book value will be included in taxable income of a surviving company and other tax attributes (e.g. tax credits carried over from a dissolving company) claimed by a surviving company will be recaptured.

Inbound investment incentives

The Korean government intends to embrace the BEPS initiatives taken by the OECD. In the tax reform for 2019, most inbound incentives and benefits available for foreign direct investment (FDI) have been abolished. Based on the former STTCL, they include 100% exemption from individual or corporate income tax for the first five years and a 50% reduction in such taxes for the following two years in proportion to the foreign shareholding ratio for foreign-invested companies that engage in certain qualified high-technology businesses and foreign investors in specially designated areas, such as foreign investment zones, free economic zones, free trade zones, and strategic industrial complexes exclusively developed for foreign invested companies.

However, the existing local tax, customs duty, and VAT exemptions have been sustained for qualifying foreign investment. They include the exemption from local taxes, such as the acquisition tax and the property tax on the property acquired by a qualified foreign invested company for up to 15 years, as well as the exemption from customs duties, import VAT, and individual consumption tax on imported capital goods.