TAX LAW CHANGES FOR YEAR 2009

Transcription

1 Tax & Finance February 10, 2009 TAX LAW CHANGES FOR YEAR 2009 (Reflecting Presidential Decree) On December 26, 2008, amendments to certain tax laws (including the Corporation Tax Law, the Personal Income Tax Law and the Special Tax Treatment Control Law) were promulgated by the government and most of the changes took effect on January 1, 2009 (with the exception of those provisions for which different effective dates are specified). Also, amendments to the Presidential Decrees under most of these tax laws were promulgated on February 4, 2009, most of which retroactively take effect as of January 1, 2009 (with the exception of those provisions for which different effective dates are specified). Please note that this letter contains finalized changes to tax laws and Presidential Decrees and thus, updates our previous newsletters which contained proposed changes. Among the amendments, we would like to provide you with an outline of major items that may affect your business or may be of interest to you as set forth below. Please note that the following is a very brief outline of select items of the changes in tax law and Presidential Decrees. If you wish to discuss any item in more detail or are concerned that other amendments not addressed here may have a bearing on your business, please feel free to contact us. National Tax Basic Law ( NTBL ) 1. Request for refund of withholding tax (Article 45-2(4) of the NTBL): Prior to the amendment, foreign recipients of interest, dividends, and other income could not make a direct request to the government for refund of national taxes withheld with respect to these income subsequent to the payment of the withholding tax amount while a direct refund request has been allowed with respect to rental income for ships, aircraft or facilities, business income, personal service income, wage & salary income, severance payment income, royalties and capital gains from the alienation of stocks by virtue of the amendment of Article 45-2 on December 30, From January 1, 2009 and thereafter, however, foreign individuals and foreign corporations can directly make a request to the government (without going through the withholding agent) for a refund of national taxes withheld with respect to Korean sourced interest, dividends, and other income as well if certain conditions are met. 2. Reduction of penalties (Article 48 of the NTBL): Prior to the amendment, if and only when a taxpayer files voluntarily an amended tax return within six months from the original due date, the penalty for underreporting of tax base was reduced by 50%. In addition, for amended tax returns filed on or after January 1, 2009, the reduction in penalty is granted for voluntarily amended tax returns filed after six months but within one year (20% reduction) and after one year but within two years (10% reduction) from the original due date.

2 Corporation Tax Law ( CTL ) and Presidential Decree of the CTL ( CTL-PD ) 1. Corporate income tax rate (Article 55 of the CTL): Under the revision, the first taxable income bracket increases from KRW 100 million to KRW 200 million, effective from fiscal years which includes December 26, In addition, the corporate income tax rate (including resident surtax) has been reduced as follows: (Unit: KRW million) Income bracket Current 2008/ and after 200 million or less 14.3% 12.1% (from 2008) 11.0% Over 200 million 27.5% 24.2% (from 2009) 22.0% 2. Withholding tax rate (Article 98 of the CTL): Withholding tax rate on interest, dividends, etc., paid to a foreign corporation, which are not effectively connected to a permanent establishment ( PE ) in Korea (including income paid to a foreign corporation with no PE in Korea), has been reduced from 27.5% to 22.0% (inclusive of 10% resident surtax). This revision applies for interest, dividends, etc., paid on or after January 1, Consolidated tax return (Articles 76-8 through of the CTL): A consolidated tax return regime has been newly introduced and will take effect from fiscal year beginning on or after January 1, A domestic corporation which has a fully controlled subsidiary (defined in Article 76-8 of the CTL) is allowed to apply the consolidated tax return with approval of the Commissioner of the National Tax Service. A domestic corporation which elects the consolidated tax return regime is not allowed to abandon the election for 5 years. 4. Carry-forward of net operating losses ( NOL ) (Article 13 of the CTL): Under the revision, NOL can be carried forward for 10 years (prior to the revision, 5 years). In case when the NOL carried forward is offset against future taxable income after the expiry of the previous statute of limitations (5 or 7 years) but within 10 years, the statute of limitations are also extended until the end of the one-year period after the due date for filing of the corporate income tax return for the fiscal year in which the NOL was offset against income. Also, the obligation to maintain accounting books is extended. This revision applies to NOL arising from fiscal year beginning on or after January 1, Utilization of NOL of surviving company (Article 45 of the CTL): Prior to the revision, existing NOL of the surviving company was allowed to be offset against future taxable income following a merger, whether the income is generated from the surviving company s business or the disappearing company s business, subject to certain exceptions. However, the amended provision does not allow such NOL of the surviving company to be offset against future taxable income arising from the business of the disappearing company. This revision applies to mergers taking place on or after January 1, Dividend Paid Deduction ( DPD ) for indirect investment vehicles (Article 51-2 of the CTL): Prior to the revision, DPD was allowed for Private Equity Fund ( PEF ), PEF Special Purpose Company ( PEF-SPC ), etc., in accordance with the Indirect Investment Asset Management Business Act. Under the revision, DPD is also allowed for corporate type indirect investment vehicles (such as Investment Yuhan-Hoesa and Investment Hapja-Hoesa) newly added in accordance with the Financial Investment Business & Capital Markets Act. This revision took effect on February 4, However, PEFs registered with the Financial Services Commission on or after January 1, 2009 will not qualify for the DPD (such PEFs may elect the partnership taxation). 7. Interest rate applied to related party transactions (Article 89 of the CTL-PD): Prior to the revision, in case of money lending transactions between related parties, the arm s length interest rate was the weighted average interest rate, in principle. If the weighted average interest rate is not applicable, the arm s length interest rate is the interest rate determined and

3 announced by the Commissioner of the National Tax Service (at present, 9% per annum). Under the amended CTL-PD, a corporate taxpayer is allowed to choose (i) the weighted average interest rate or (ii) the interest rate determined and announced by the Commissioner of the National Tax Service (at present, 9% per annum). This revision applies to fiscal years for which tax return is filed on or after the promulgation date of the CTL-PD. 8. Deductibility of stock option chargeback (Article 19 of the CTL-PD): Prior to the revision, in case where a parent company grants stock options for officers and/or employees of its subsidiary and related expense is charged to the subsidiary, the charge-back of such expense for stock option was not deductible. Under the amended CTL-PD, if either of the following conditions is satisfied, the charge-back is allowed deduction: (i) stock options are granted to officers and/or employees of affiliates in accordance with the Securities Exchange Law or (ii) stock options are granted by a foreign listed parent company for officers and/or employees of domestic unlisted subsidiary. This revision applies to stock options for which expense is charged back after the promulgation date of the CTL-PD. Personal Income Tax Law ( PITL ) 1. Personal income tax rate (Article 55 of the PITL): Under the revision, individual income tax rate (including 10% resident surtax) has been reduced as follows: (Unit: KRW million) Income bracket Current and after - 12 million 8.8% 6.6% 6.6% 12 million 46 million 18.7% 17.6% 16.5% 46 million 88 million 28.6% 27.5% 26.4% 88 million % 38.5% 36.3% 2. Taxable income for foreigners on short-term stay (Article 3 of the PITL): Prior to the revision, resident individuals (i.e., those who have address or place of abode in Korea for one year or more, etc.) in Korea were taxed on their world wide income, i.e., both Korean source and non- Korean source income. Under the revised tax law, foreign resident individuals that resided in Korea for 5 years or less during the past 10 years are taxed on all Korean source income plus only such non-korean source income as being paid in Korea or being remitted to Korea. This revision applies to income earned on or after January 1, Withholding tax rate (Article 119 of the PITL): Same as in the case of Item 2 of the CTL section above. 4. Carry-forward of net operating losses ( NOL ) (Article 13 of the PITL): Same as in the case of Item 4 of the CTL section above. 5. Taxation of investors with income from indirect investment vehicles (Article 17 of the PITL): Prior to the revision, income distributed to investors by indirect investment vehicles such as investment trust, investment corporations, PEFs were taxed as dividends. Under the revised tax law, income distributed to investors by indirect investment vehicles (such as Investment Yuhan-Hoesa, Investment Hapja-Hoesa, Investment Chohap and Investment IK-Myung Chohap) newly added in accordance with the Financial Investment Business & Capital Markets Act would be taxed as dividends as well. This revision applies to income earned on or after February 4, In addition, PEFs will qualify for partnership taxation regime starting with income earned on or after January 1, 2009.

4 Special Tax Treatment Control Law ( STTCL ) and Presidential Decree of the STTCL ( STTCL- PD ) 1. Reserves for technology and human resources development (Article 9 of the STTCL): The reserve for technology and human resources development expired due to a sunset clause as of December 31, The government decided again to allow taxpayers to deduct amounts reserved for technology and human resources development within the limit of 3% of revenue. This incentive takes effect for the taxable year which begins on or after January 1, 2009 and is due to expire on December 31, Reduction of preferential flat rate on personal income tax applied to foreign workers (Article 18-2 of the STTCL): Under the revision, flat rate on personal income tax preferentially applied to foreign individuals working in Korea is reduced from 18.7% to 16.5% (inclusive of the 10% resident surtax). This revision applies to income earned on or after January 1, Temporary Investment Tax Credit (Articles 26 and 130 of the STTCL and Article 23 of the STTCL-PD): Prior to the revision, 7% credit was allowed for business-purpose facilities acquired for use at a business place located outside of any metropolitan area. Based on the revision, the tax credit has increased to 10% for investments outside of metropolitan area and the scope was extended to investments within metropolitan areas but at a lower rate of 3%. This revision applies to any qualified investment made on or after January 1, Value-Added Tax Law ( VATL ) The below two amendments for the VATL shall be effective on or after January 1, 2010, not January 1, Expansion of the application of VAT taxation on taxpayer basis (Articles 4 and 5 of the VATL): Under the system of VAT Taxation on Taxpayer Basis which took effect from January 1, 2008, a taxpayer is permitted to register only one place of business where all VAT obligations for the taxpayer may be carried out on the condition that the taxpayer is required, among others, to implement the Enterprise Resource Planning (ERP) system which integrates all of the data and processes of the organization under a unified system. The government, by abolishing the condition of ERP, will expand the application of the VAT taxation on taxpayer basis. A taxpayer who wants to apply the system from the tax period in which January 1, 2010 falls should register with the district tax office by December 11, Mandatory issuance of electronic VAT invoices (Article 16 of the VATL): Under the revision, a corporate taxpayer is required to issue VAT invoices electronically when it supplies goods or services from January 1, Inheritance and Gift Tax Law ( IGTL ) Inheritance and gift tax rate (Article 26 of the IGTL): The proposed reduction of the inheritance and gift tax rates has yet to have been approved and it is reported that it will be discussed further by the National Assembly. Therefore, the current taxable income brackets and the tax rates shall continue to be effective for the time being. Currently, the top marginal rate of 50% applies to taxable gift of more than KRW 3 billion. Education Tax Law ( ETL ) Education tax (Article 3 of the ETL): Under the current ETL, education tax is levied at 0.5% of the gross receipts (adjusted for certain items as detailed in the ETL) of banks, insurance companies, etc., except for certain financial institutions. Under the revision, financial investment companies (including securities companies) in dealing and brokerage business under the Financial Investment Business & Capital Markets Act, specialized credit financial business companies (Card, Lease, etc.) and Export-Import Bank of Korea would also be subject to education tax. This revision will take effect on or after July 1, 2009, delayed from the proposed effective date of January 1, 2009.

5 If you have any questions regarding this issue, please contact Jong Yul LEE at Yong-Ho JO at or any of your regular contact at Kim & Chang. Seyang Building, 223 Naeja-dong, Jongno-gu, Seoul , Korea Tel: Fax: ~3 This service is provided for general informational purposes only and should not be considered a legal opinion of the firm nor relied upon in lieu of specific advice. If you would prefer not to continue to receive copies of this service, or if they should be directed to one or more of your colleagues instead of or in addition to you, please let us know by return .