The Korean government began providing tax incentives in order to attract foreign investment with its introduction of Foreign Capital Inducement Act in 1960. Through the Special Tax Treatment Control Law (the “STTCL”), the incentives were granted for investments in high technology and industrial support services, large-scale foreign investments, and investments in specified regions such as free economic zones.
With significant changes in the Korean economic conditions over the last 55 years, the Korean government is now considering extensive revision of its tax incentive regime. This movement for large-scale amendment arises from the following factors: (i) the current tax incentives are granted to only a small number of foreign- invested companies, (ii) Korean companies competing with foreign-invested companies have been placed at a competitive disadvantage and subject to reverse discrimination due to the tax incentive regime, and (iii) the effectiveness of the tax incentive regime in attracting foreign investment has been reduced, considering the current economic conditions in Korea.
II. Proposed Reform
According to materials from a public hearing recently held by the Korea Institute of Public Finance (a government agency under the Prime Minister’s Office; the “KIPF”), the Ministry of Strategy and Finance (the “MOSF”) is considering three major reforms to the tax incentive regime. First, the 7-year tax incentive, which was granted (a) for an investment in high technology business and industrial support services business and (b) where a special committee of the free economic zone had reviewed and approved an investment in the free economic zone, may be reduced to a 5-year tax incentive. Second, the amount of tax incentives may increase for a foreign-invested company in the service sector with a significant employment effect, with the upper limit of incentives linked to the number of employees. Third, no tax incentives may be granted for part of the investment effectively made by a Korean person, where the Korean person holds more than 10% of the ownership interest in the foreign company investing in the Korean company.
III. Assessment and Counter-Strategy
Although no clear announcements have been made on how the reforms proposed by the KIPF will be reflected in the STTCL when MOSF and the National Assembly publish their proposed amendments to tax law (including the STTCL) this fall, it appears highly possible for the reduction of 7-year tax incentive to a 5-year tax incentive to be adopted in the proposed amendments. If the National Assembly passes the proposed amendments including the reduction mentioned above by the end of this year, the amendments will likely become effective on January 1, 2016.
On a related note, a decision for grant of incentives is effective for 3 years from the date of notice of such decision (Article 121-2(13) of the STTCL). Thus, it is recommended for a foreign-invested company planning an investment in Korea within the next three years to quickly make an application for exemption and receive a decision for grant of incentives regarding its investment from the MOSF prior to effective date (i.e., January 1st, 2016) of the new law in order to enjoy the 7-year tax incentive. Moreover, considering that the Ministry of Trade, Industry, and Energy must review and approve the application for exemption in order for MOSF to issue the decision for grant of incentives, a foreign-invested company would be well advised to file the application for exemption as soon as possible.