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. 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 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. This incentive is applied to taxable income arising in the tax years that end before 31 December 2022.
The tax reform for 2022 aims to help drive recovery from the COVID-19 pandemic crisis, to increase fiscal support to drive growth of designated strategic technologies and emerging industries to shape the future of growth, and to reduce the economic bipolarisation that has deepened during the COVID-19 pandemic.
Integrated investment tax incentive system
Under the previous investment tax incentive schemes, 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 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.
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 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, such as bulldozers and excavators in construction and engineering industry, vessels in fishing industry, vehicle and transportation equipment in transportation, etc.
This tax credit scheme allows basic credits 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 rates are 1% (3% for medium-scale companies and 10% for SMEs), while the higher rates of 3% (5% for medium-scale companies and 12% for SMEs) shall apply to investment in new growth commercialisation facilities. For qualified investment to commercialise national strategic technologies, such as semiconductor, secondary battery, and vaccine, the basic tax credit of 6% (8% for medium-scale companies and 16% for SMEs) plus the additional tax credit rate of 4% shall be applied to such investment made on or after 1 July 2021.
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') until the end of December 2022. On qualifying production costs of video contents, the applicable credit rates are 3% for large companies, 7% for medium-scale companies, and 10% for SMEs.
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 (5 million in non-metropolitan area) for medium-scale companies, and up to KRW 4 million (9 million in non-metropolitan area) 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 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 (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 ten 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 ten years.
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. In 2019, R&D tax incentives accounted for 43% of total government support for corporate R&D expenditure in Korea. Also, Korea was placed in 2019 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, 2021').
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, and vaccine sectors, which are fundamental to the national economy and other industries.
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 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 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 2023. 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 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 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 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, at least 80% of the paid 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 (‘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, the tax deferral shall be immediately terminated and deferred taxes shall be recaptured since the merger is recharacterised as a non-qualified transaction of taxable transfer of asset and liabilities, while marginal profits or losses from the merger will be equally included in gross income or deductible expenses over five years.
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.