January 14, 2022 Korea enacts 2022 tax reform bill Executive summary On 8 December 2021, 21 December 2021 and 28 December 2021,1 Korea enacted various measures in the 2022 Tax Reform Bill (the 2022 Tax Reform) after it was passed by Korea's National Assembly on 2 December 2021. Unless otherwise specified, the 2022 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2022. The Enforcement Decrees, which provide more specific guidance on the laws, are expected to be enacted in February 2022. This Alert summarizes the key features of the new and amended tax laws. Detailed discussion Clarification of the deemed beneficial owner rules for overseas investment vehicles (OIV) The current Korean tax law views an OIV as a deemed beneficial owner of Korean-source income if any of the following conditions are met:
The 2022 Tax Reform has clarified the conditions of (i) and (ii) as follows:
This rule will be effective for Korean-sourced income paid on or after 1 January 2022. Deferral of taxation on virtual assets3 Under the current Korean tax law, gains derived from the disposal of virtual assets by a foreign individual or a foreign corporation are categorized as "other income" subject to withholding tax at the lower of 11% of the transfer price or 22% of the net capital gains. The 2022 Tax Reform deferred by one year the effective date of the previously enacted legislation requiring the taxation of gains from the sale of virtual assets. Those gains will now be taxed beginning 1 January 2023. Option to conduct a partial investigation on tax treaty-based exemptions The 2022 Tax Reform added a provision in which Korean tax authorities would be allowed to conduct a partial investigation on taxpayers.4 The new provision applies to cases where they find it necessary to assess or confirm the appropriateness of a tax exemption which is claimed/availed based on the application of a tax treaty, in respect of income attributable to nonresidents. The above rule would apply to cases of tax treaty-based exemption applications filed with the tax offices on or after the date of enactment of the Enforcement Decree. Revision of the 30% EBITDA5 interest limitation rule The current 30% EBITDA interest limitation rule provides an ordering rule for the calculation of non-deductible interest. If interest is calculated with different interest rates, the interest deduction denial is applied starting with the highest interest rate. The 2022 Tax Reform introduced additional ordering rules for the non-deductible portion of interest:
In addition, the 2022 Tax Reform introduced a new rule whereby if the amount of EBITDA is negative, the deductible amount of interest is deemed to be nil. The above rules will be effective for fiscal years beginning on or after 1 January 2022. Introduction of new rules for international transactions The 2022 Tax Reform introduced the following new rules to mitigate potential tax evasion through international transactions.
Amendment to transfer pricing under special economic conditions To rationalize TP taxation under special circumstances such as COVID-19, the 2022 Tax Reform revised the TP rules under the current Law for the Coordination of International Tax Affairs (LCITA).
Extension of the deadline for submitting documents related to international transactions The current Enforcement Decree of the Korean Corporate Income Tax Law (CITL) requires a permanent establishment (PE) of a foreign corporation to submit documents such as a statement of internal transactions, expense allocation, among others for the transactions between a PE of a foreign corporation and its overseas headquarters and other branches within the statutory deadline for the corporate income tax (CIT) return.6 The 2022 Tax Reform extended the above submission deadline from the statutory deadline of the CIT return to within six months from the last day of the month containing the fiscal year-end date. This rule applies to submissions made on or after 1 January 2022. Extension of the application period for special taxation for foreign workers Under the current Restriction of Special Taxation Act, a foreign executive or employee (excluding workers hired daily) initially working in Korea before 31 December 2021 may elect to apply for a flat tax rate of 19% (excluding local income tax) on wage income without deductions,7 for five years from the first day of work in Korea. The 2022 Tax Reform extended the application period from 31 December 2021 to 31 December 2023. _________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young Han Young, Seoul
Ernst & Young LLP (United States), Korean Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
_________________________________________ ENDNOTES 1 Individual Income Tax Law and Value Added Tax revisions were enacted on 8 December 2021 and 28 December 2021, respectively. All other measures discussed in this Global Tax Alert were enacted on 21 December 2021. 2 If the OIV can substantiate only a portion of its investors, then the OIV would be treated as the beneficial owner of the Korean source income to the extent of the Korean source income attributable to those investors that the OIV is unable to substantiate under the Korean domestic tax law. 3 Virtual assets are electronic certificates (including relevant rights) of economic value that can be traded electronically (e.g., digital currency such as bitcoin). 4 Prior to the 2022 Tax Reform, a partial investigation was allowed when the confirmation is necessary to process the refund claim of income payers or to investigate the beneficial owners who are not eligible for tax exemption/non-taxation application. 5 Earnings before interest, taxes, depreciation, and amortization (EBITDA) equals taxable income plus depreciation expense for fixed assets and net interest expense. 6 A corporate income tax return must be filed within three months from the end of the fiscal year. 7 Non-taxation, tax deductions, tax reductions/exemptions, and tax credits are forfeited. | |||||||||||||||||||||||