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APAC Tax Matters - March 2012 - Korea - EY - China

APAC Tax Matters: March 2012Korea


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Revisions to Korean Tax Laws

This year’s revisions to the Korean tax laws were enacted at a regular session of the National Assembly on 31 December 2011. The revisions are designed mainly to support job creation, lay the foundation for sustainable growth, improve fiscal conditions and rationalize the taxation system. In particular, in the context of improving fiscal conditions and rationalizing the taxation system, a new corporate and individual income tax brackets were created.

We summarize below the major revisions to the Korean tax laws and subsequent revisions to the related Enforcement Decrees which were finalized on 2 February 2012.

  • Creation of a middle corporate income tax bracket
    Under the previous Corporate Income Tax Law (“CITL”), the applicable corporate income tax rate for the fiscal year commencing 1 January 2012 is 11% (including 10% local income surtax) on a tax base of KRW200 million or less, and 22% on the tax base exceeding KRW200 million.

    However, under the revised CITL, a top tax rate of 24.2% will be applied to large corporations reporting a tax base exceeding KRW20 billion and a middle income tax bracket will be introduced for those corporations with a tax base between KRW200 million (exclusive) and KRW20 billion (inclusive). The rate of tax applicable to corporations falling within this middle income tax bracket will be 22%.
Corporate income tax base
(in Korean Won)
Applicable tax rate (including resident surtax)
Old New
200 million or less 11% 11%
200 million - 20 billion 22% 22%
Over 20 billion 22% 24.2%

The revised CITL will be applicable from the fiscal year commencing on or after 1 January 2012.

  • Introduction of new highest individual income tax rate
    Under the previous Individual Income Tax Law (“IITL”), the highest individual income tax rate applicable to individual income for year 2012 is 36.3% (including 10% local income surtax) on a tax base more than KRW88 million.

    However, under the revised IITL, a new top tax rate of 41.8% will be applied to a tax base exceeding KRW300 million and an increased tax rate of 38.5% will now be applied to a tax base of KRW88 million (exclusive) to KRW300 million (inclusive), as shown in the below table.
Individual income tax base
(in Korean Won)
Applicable tax rate (including resident surtax)
Old New
12 million or less 6.6% 11%
12 million - 46 million 16.5% 16.5%
46 million - 88 million 26.4% 26.4%
88 million - 300 million 36.3% 38.5%
Over 300 million 36.3% 41.8%

The revised IITL will be applicable from 1 January 2012.

  • Introduction of new documentation requirement for the application of tax treaties
    Under the new CITL and IITL, foreign investors who apply for reduced rates under a tax treaty will be subject to new documentation requirements, the requirements varying depending on their legal status:
    • Foreign investors who are not investing through an “Offshore Investment Vehicle (“OIV”)”, e.g. non-resident individuals or foreign corporations, will be required to submit an “Application for Reduced Tax Rate” to the tax withholding agent.
    • OIVs, on the other hand, will be required to collect “Applications for Reduced Tax Rate” from their underlying investors (the beneficial owners) and to submit a list of these investors, along with a “Report of Offshore Investment Vehicle” ("OIV Report") to the tax withholding agent.
    Failure to submit the required documentation to the withholding agent will cause the domestic tax rate to be applied at source. In such a situation, the investor will have a 3-year period in which to request a refund of the excess tax by sending the required documentation to the local tax office. The local tax office will then be required to make a decision on the request within 6 months from receiving the same.

    This revised provision will be applicable from 1 July 2012.
  • Cancellation of exempt status for interest income accrued on foreign currency denominated bonds issued in Korea
    Under the previous Tax Incentive Limitation Law (“TILL”), interest income on foreign currency denominated bonds issued by a government or a domestic corporation, earned by a foreign corporation, is exempt from withholding tax in Korea.

    According to the revised TILL, interest income on foreign currency denominated bonds issued in a foreign country will remain exempt from withholding tax, whereas the interest income on foreign currency denominated bonds issued in Korea will be subject to withholding tax in Korea.

    This revised provision will apply to any such interest income received on foreign currency denominated bonds issued on or after 1 January 2012.
  • Creation of legal framework for correlative adjustment of national tax and customs duty for import transactions
    Under the previous International Tax Coordination Law (“ITCL”), multinational companies operating in Korea (including foreign-invested companies which import products from foreign affiliates) often suffer difficulties due to there being discrepancies in the tax bases adopted by the Korea Customs Service (“KCS”) and the National Tax Service (“NTS”).

    According to the revised ITCL, if either the KCS or the NTS makes an assessment on the taxpayer’s import transactions with overseas related parties and the taxpayer files a refund request to the other authority, the other authority must make correlative adjustments if the adjusted price is deemed appropriate under the Customs Law or Income Tax Law.

    This revised provision will be applicable to assessments made on or after 1 January 2012.

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