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 10 years from the fiscal year starting January 1, 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. 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 ranges from 5% to 30%, depending on corporate location, size, business types, etc., with a cap of KRW 100 million. This incentive is applied to taxable income arising in the tax years that end before 31 December 2022.
The tax reform for 2021 has introduced an integrated tax credit scheme focusing on overhauling the existing investment tax incentive schemes to encourage corporate investment and reinvigorating consumer spending.
Integrated Investment Tax Incentive System
Under the previous investment tax incentive schemes, tax credits were available for qualified investments in nine 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, they have been simplified and integrated into a single investment tax incentive scheme. The integrated 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 all types of business-purpose tangible assets. Specified industries and assets will be excluded from 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 R&D and human resources development, energy conservation and environment preservation, as specified in the enforcement rule; and
- assets essential to business operation in consideration of industry-specific characteristics, as prescribed in the enforcement rule. Examples of non-qualifying assets that are exceptionally eligible for the investment tax credit by industry are set out in the table below:
|Category of industry||Assets Qualified for Investment Tax Credit|
|Construction & engineering||Bulldozer, excavator, forklift, dump truck, etc.|
|Transportation||Vehicles (excluding cars for private use) and transportation equipment|
|Wholesale/retail and physical logistics||Transportation trucks, unmanned transportation vehicles, warehouse facilities, etc.|
|Tourist accommodations, international conference & exhibition||Buildings and auxiliary facilities such as elevators|
|Specialised resort and general resort complex||Accommodations, resort facilities and general amusement facilities|
The new investment tax credit will apply for income tax return filings on or after January 1, 2021. Considering that the existing sunset provision on investment tax credits is terminated at the end of December 2021, companies are allowed to elect to claim the tax credits based on types of facilities invested or apply the new investment tax credit for all qualified investment made during 2020 and 2021. However, they would not be allowed to make such an election for the respective type of facilities invested. To encourage investment, the new investment tax credit system allows companies increasing investment to claim further tax credits for increase in investment in addition to basic investment tax credits. For investment in facilities to commercialise new growth-engine technology, higher basic tax credit rates shall apply.
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). The amount of tax credit varies up to KRW 11 million (12 million in non-metropolitan area) per new employee for SMEs, up to KRW 8 million for medium-scale companies, and up to KRW 4 million for large companies. The tax credit is applied to taxable income of the fiscal year of employment and the two subsequent years (for a large company, only one subsequent year). The unused tax credit can be carried forward to the next 10 years. This tax credit is applicable for increase in full-time employment until the end of the 2021 fiscal year.
Tax credit for increase in corporate payroll
The tax law applies tax credits (5% for large companies, 10% for medium-scale companies, and 20% for SMEs) 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 tax credit is applicable until the end of December 2022. The unused tax credit can be carried forward to the next 10 years.
Tax credit for re-hiring retired female employees of SMEs
The tax law allows 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. Where a female worker is re-hired within a certain period (three to 15 years after retirement) by the SME in the same classification of industry she worked prior to retirement, this tax credit shall be allowed. The tax credit is designed to allow SMEs to subtract the amount, as much as 30% of labour costs of SMEs (15% for a medium-scale companies) 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. The tax credit applies if a company executes an employment contract until the end of December 2022. The unused credit can be carried forward to the next 10 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 a 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) 0% to 2% (8% for medium-scale companies, 25% for SMEs) of the current R&D expenses or (ii) 25% (40% for medium-scale companies, 50% for SMEs) of the incremental portion of the current R&D expenses over 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 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, etc.), the preferred credit rates ranging from 20% to 40% will apply, depending on the type of company. The unused credit can be carried forward to the next 10 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. This temporary credit is applicable to transfers or leases taking place until the end of December 2021. The unused credit can be carried forward to the next 10 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 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 2021. 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 10 years.
Corporate restructuring incentives
Tax deferral for qualified merger
In principle, a merger is considered a taxable transfer of assets and liabilities of the merged company to a surviving company or a new company. Mergers of two domestic corporations are eligible for deferred taxation when meeting certain requirements (e.g. business operation for at least one year prior to the merger registration date, business continuation until at least the last day of the fiscal year when the merger is registered, at least 80% of the paid consideration must be paid in the stocks of the surviving company, and continuous employment of at least 80% of employees of the merged company by the surviving company).
For those mergers meeting the requirements (‘qualified merger’), the recognition of gain is deferred until the surviving/acquiring company disposes of the assets. 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, any deferred gains will be recaptured within five years of the merger.
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. 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 and indirect tax incentives will be sustained for qualifying foreign investors. They will continue to enjoy the exemption from local taxes, such as the acquisition tax and the property tax on the property acquired and owned for up to 15 years, as well as the exemption from customs duties, VAT, and individual consumption tax on imported capital goods.