Corporate Income Tax Act
International Tax Coordination Act
Individual Income Tax Act
According to the amended Corporate Income Tax Act, where a holding company (as defined by the Anti-Monopoly and Fair Trade Act) receives dividends from any of its subsidiaries, the dividends may be deducted from the taxable income of the holding company (Article 18(2)).
The maximum amount of the dividends that may be deducted under Article 18(2) varies depending on the holding company's shareholding in the relevant subsidiary company and the status of the latter. The following table sets out the maximum amount of dividends that a holding company may deduct under the amended act, by reference to the status of the subsidiary and the holding company's shareholding in the subsidiary.
|Status of subsidiary||Percentage of holding company's shareholding in subsidiary||Maximum amount of deductible dividends|
|More than 80% and less than 100%||90%|
50% to 80%
Listed on Korea Stock Exchange / KOSDAQ
|More than 40%||90%|
|30% to 40%||60%|
Prior to the amendment of the act domestic corporations other than holding companies were not permitted to deduct the dividends received from their subsidiaries for the purpose of calculating their taxable income. The amended act extends the application of deductions to general domestic corporations. The following table sets out the maximum amount of dividends that a general domestic corporation (other than holding companies) may deduct under the amended act, by reference to the status of the subsidiary and the corporation's shareholding in the subsidiary.
|Status of subsidiary||Percentage of general domestic corporation's shareholding in subsidiary||Maximum amount of deductible dividends|
|Unlisted||More than 50%||50%|
|50% or less||30%|
|Listed on Korea Stock Exchange / KOSDAQ||More than 30%||50%|
|30% or less||30%|
However, the following dividends are not deductible:
- dividends distributed between the affiliates of a large corporate group;
- dividends on shares held for less than three months; and
- dividends distributed by a so-called 'paper company', including a mutual fund.
According to the amended act, passive income of the Korean branch of a foreign corporation (eg, interest income) is classified as Korean source income, even if the income is gained overseas, and thus subject to Korean corporate income tax. The amended act permits the credit (or deduction, at the election of the taxpayer) of withholding tax paid overseas on the passive income of the Korean branch of a foreign corporation.
Corporate restructuring vehicles
Under Article 51-2 of the amended act, where a corporate restructuring vehicle distributes 90% or more of its distributable net income as dividends, the amount of the distributed dividends may be deducted for the purposes of calculating the corporate restructuring vehicle's taxable income. A corporate restructuring vehicle is a 'paper company' created to support the financial aspects of the normalization of the companies, subject to workout.
International Tax Coordination Act
Advance pricing agreement
The amended International Tax Coordination Act extended the due date for the application for an advance pricing agreement to the last date of the initial fiscal year to which the reported arm's-length price applies. In addition, the maximum period that may be covered by an advance pricing agreement has been changed from three years to a period designated by the applicant. The arm's-length price under an advance pricing agreement can now be applied retroactively.
Details of international transactions
Details of an international transaction between a Korean corporation and any of its foreign related parties should be submitted to the competent tax authority when filing the annual corporate income tax return. The due date for the submission of such details may be extended by one year subject to the prior approval of the competent tax authority.
Reduction of tax credit
'Class B income' is defined as a salary or wage accrued or received from a foreign employer abroad for employment services in Korea. Prior to amendment of the act, a Class B income earner who declared his or her income and paid individual income through a Class B taxpayers' association was entitled to claim a 30% tax credit. The amended act lowers the rate of this tax credit to 10% and entitles the member of a Class B income taxpayers' association to the same tax credit as that applicable to Class A income earners. 'Class A income' is defined as a salary or wage accrued or received from a Korean employer. The maximum tax credit permissible for Class A income is currently W600,000.
Capital gains deduction
Prior to amendment of the act, the maximum amount of capital gains that a taxpayer was permitted to deduct for the purposes of calculating his or her taxable capital gains was W2.5 million in total. Under the amended act a taxpayer may deduct up to W2.5 million from the capital gains achieved from the disposition of each type of his or her assets.
For further information on this topic please contact Man Soo Han or Andrew H Kim at Woo, Yun, Kang, Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5200) or by e-mail ([email protected] or [email protected]).
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