Individual Income Tax Law
Foreign Investment
Recently the Ministry of Finance and Economy proposed certain changes to Korea's taxation laws. If approved by the National Assembly, most of the changes will take effect in 2002.
Special capital gains tax
Currently, the capital gains that a corporation earns from the sale of real estate are subject to a 16.5% special tax (including a 10% resident tax), as well as corporate income tax. The Ministry of Finance and Economy proposes the abolition of the special tax so that it will not apply to sales of real estate effected on or after January 1 2002. However, even if the tax is abolished, an additional 10% corporate income tax will be imposed on the capital gains that a corporation earns by selling real estate in designated areas, in order to prevent speculative investment.
Domestic place of business
Under the current Corporate Income Tax Law, the Korean branch from which a foreign corporation provides services is not deemed to be its 'domestic place of business' unless it provides its services there for more than six months of the year. According to the ministry's proposal, the Korean branch may constitute the foreign corporation's domestic place of business if it has continuously and repeatedly provided similar types of service there for at least two years, even if it now provides services there for six months or less. The foreign corporation will be required to file a tax return with the Korean tax authorities for the income attributable to the domestic place of business, and pay corporate income tax accordingly.
Taxation of excessive retained earnings
Under the current Corporate Income Tax Law, where a large unlisted corporation accumulates an excessive amount of retained earnings without paying dividends, the earnings are subject to 15% corporate income tax. The ministry proposes the abolition of this taxation since it tends to deter corporations from accumulating such earnings.
Dividend deduction of CR REITs
A corporate restructuring real-estate investment trust (CR REIT) is a REIT in which at least 90% of the assets are invested in those companies which are subject to corporate restructuring. Under Article 51(2) of the Corporate Income Tax Law, where a CR REIT is used to pay 90% or more of its distributable net income to its shareholders as dividends, the dividends may be deducted as expenses when computing the CR REIT's taxable income. 'Distributable net income' is the amount calculated by adding the retained earnings carried over from previous fiscal years to (or deducting the net operating loss carried forward from) the net income for the current fiscal year, excluding the loss or gain arising from the valuation of securities.
The dividend deduction available to CR REITs applies to dividends payable from January 1 2002.
In an effort to ease the burdens of individual taxpayers, the ministry proposes a reduction of tax rates on comprehensive income tax and capital gains tax on the sale of real estate for individual taxpayers as follows:
| Type of Tax | Current Rates | Proposed Rates |
| Comprehensive income tax | Between 11% and 44% | Between 9.9% and 39.6% |
| Capital gains tax on sale of real estate | Between 22% and 44 % | Between 9.9% and 39.6% |
Currently, when a shareholder of a large corporation transfers his or her shares for less than one year, the current Individual Income Tax Law imposes capital gains tax at progressive rates of between 22% and 44%. Under the proposed amendment a flat rate of 33% will apply.
In current Korean law, foreign investment enjoys various tax benefits and exemptions. However, since foreign investment through the acquisition of existing businesses in Korea usually results in the creation of fewer jobs and less new investment than other forms of foreign investment, the ministry proposes a reduction of these benefits and exemptions as follows:
| Type of Tax | Current Exemptions | Proposed Exemptions |
| Corporate income tax | Exempt for seven years from (and including) the taxable year in which the company first generated income, or from (and including) the fifth taxable year after commencement of business (if the company does not generate income for five years from commencement), and then a 50% reduction for three years upon expiration of the seven-year period. | Fifty percent reduction for three years from (and including) the taxable year in which the company first generated income, or from (and including) the fifth taxable year from commencement of business (if the company does not generate income for five years from commencement), and then a 30% reduction for two years upon expiration of the three-year period. |
| Withholding tax on dividend income | As above | As above |
| Acquisition, registration, property and composite land taxes | Exempt for five years from (and including) the date of acquisition or commencement of business, and then a 50% reduction for three years upon expiration of the five-year period. | Fifty percent reduction for three years from (and including) the date of acquisition or commencement of business, and then a 30% reduction for two years upon expiration of the three-year period. |
For further information on this topic please contact Catherine Eun-gyoung Shin at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5200) or by email ([email protected]).