[Korean Foreign-Invested Company] Changes in local tax rates and International tax revisions by OECD BEPS project for foreign-invested companies in Korea

Changes in local tax rates and International tax revisions by OECD BEPS project for foreign-invested companies in Korea

☞ The following tax information is translated from Korean for foreign-invested companies in Korea, and is not legally binding.

※ Major revisions in tax laws in 2018 – Part 1 (to be continued next month)

□ Corporate tax rate and Income tax rate raised

○ Corporate tax rate bracket added for tax base exceeding 300B won: 22% → 25%

Tax base	Current tax rate	Revised tax rate
Not over 200M won	10%	(No change)
Over 200M won-Not over 20B won	20%	(No change)
Over 20B won-Not over 300B won	22%	(No change)
Over 300B won		25%

* For comparison, the average corporate tax rate of G20 member states is 25.7%.

○ Adjustment of maximum tax rate for Income tax (40% for tax base exceeding 500M won

→ 40% for tax base exceeding 300M won, 42% for tax base exceeding 500M won)

Tax base	Current tax rate	Revised tax rate
Not over 12M won	6%	(No change)
Over 12M won-Not over 46M won	15%
Over 46M won-Not over 88M won	24%
Over 88M won-Not over 150M won	35%
Over 150M won-Not over 300M won	38%	(No change)
Over 300M won-Not over 500M won		40%
Over 500M won	40%	42%

* Excluding countries adopting a flat tax rate system (five eastern European countries) and countries with a low portion of national tax such as federal states (five countries including Swiss), the average Income tax rate of the remaining 25 OECD state members is 41.9% (47.1% including local tax).

Reason for revision: To enhance fair taxation and promote redistribution of profit

Applicable period: Effective from the business year commencing on or after Jan. 1, 2018

□ Non-inclusion of expenses related to “Hybrid Financial Products" in deductible expense

1. Transactions to which the restrictions apply

1-(1) Restricted transactions : International transactions between a domestic company (including the domestic place of business of a foreign company) and its overseas special related party using hybrid financial products

1-(2) Hybrid Financial Product : A product that can be considered both debt and capital at the same time (e.g., participating bond). Such product is treated as debt in one country and deemed capital in another country.

* Excluding products issued by a financial institute for capital increase purposes

1-(3) The restrictions apply if all or part of the payments for which expenses are deducted is not taxed at the transaction counterpart country within a certain period*.

* Until the last day of the recipient’s business year commenced within 12 months of the last day of the payer’s business year

2. Non-inclusion in deductible expense

The amount that is not taxed in the transaction counterpart country is not recognized as deductible expense.

3. Procedure for tax filing

3-(1) Corporate tax is filed by excluding the payment from the business year’s deductible expense:

- However, if the payment excluded from deductible expense is included in the transaction counterpart’s taxable income* within a certain period, the payment can be included in deductible expense when filing a corporate tax return for the business year to which the last day of such period falls.

* The taxpayer is responsible for submitting documentary evidence.

3-(2) Where corporate tax is filed by including the payment in the business year’s deductible expense but the payment is not taxed within a certain period in the country in which the recipient resides:

- The payment is included in profit when filing corporate tax for the business year to which the last day of the period belongs (the amount equivalent to interest shall be included as well).

Reason for revision : To prevent tax evasion using the difference between tax laws in two countries.

* OECD BEPS project recommendation (Action 2)

Applicable period : From the business year commencing on or after Jan. 1, 2018.

☞ Source: Korean National Tax Service