Global Tax Alert | 30 January 2014

Korea passes tax reform proposals including several changes to R&D incentives regime

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On 1 January 2014, Korea’s National Assembly passed the tax reform proposal originally made on 1 August 2013, which includes several modifications to the previous research and development (R&D) incentives regime. These changes, included in the Limited Tax Incentives Law, are outlined below and are all effective as of 1 January 2014.

Deductibility of R&D reserve1

Under the previous tax law, 3% of a company’s reserves used as future R&D was permitted to be deducted for corporate income tax purposes. Under the new law, these reserves are no longer deductible. Amounts that were accrued until 31 December 2013 may be deducted.

Changes in R&D investment tax credit2

Under the new law, the previous credit of 10% on the cost of developing a new R&D facility for SMEs (small and medium enterprises) and large companies has been decreased to 5% for medium companies and 3% for large companies. The 10% credit remains for small-sized companies. The changes are designed to mitigate the tax burdens of small- and medium-sized companies resulting from the decreasing investment tax credit ratio. Under Korean law, the determination whether or not a company is considered as a large company depends on various facts and circumstances such as the industry the company is mainly involved in, number of full time employees, the equity balance amounts, and others. In general, if a company’s recent three years’ average revenue is KRW 500 billion or more, then the company is often considered as a large company.

Changes in R&D tax credit3

To limit large companies from making excessive utilization of R&D tax credits, under the new law the available R&D tax credit for large taxpayers equals the greater of: (i) 40% of current year R&D expenditures exceeding the average of the three prior years (two prior years for 2014 and prior year for 2015) R&D expenditures, or (ii) the R&D expenditures for the current year multiplied by 3% plus an additional rate defined as 50% of the R&D expense ratio, capped at 4%. Under the previous law, this limitation was limited to 6%, as illustrated below:

Previous (2013 and prior)

Finalized (effective 1 January 2014)

Tax credit rate

Taxpayer

Rate

Small sized

25%

Medium sized

1-3 years

15%

Medium sized 4-5 years

10%

Medium sized

8%

Large sized

3-6%*

*3% (basic rate) plus ratio of R&D cost from current year’s revenue multiplied by 1/2

*Limitation: 6%

Decrease in the limitation amount for a large company’s tax credit amount

Taxpayer

Rate

Small sized

25%

Medium sized

1-3 years

15%

Medium sized 4-5 years

10%

Medium sized

8%

Large sized

3-4%*

*3% (basic rate) plus ratio of R&D cost from current year’s revenue multiplied by 1/2

*Limitation: 4%

Endnotes

1. Article 9 of the Limited Tax Incentives Laws.

2. Articles 11, 25-2, 25-4 of the Limited Tax Incentives Laws.

3. Article 10 of the Limited Tax Incentives Laws.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Han Young, Seoul
  • Chanyeon Hwang
    +82 2 3770 0971
    chanyeon.hwang@kr.ey.com
Ernst & Young LLP, Asia Pacific Business Group, New York
  • Chris Finnerty
    +1 212 773 7479
    chris.finnerty@ey.com
  • Kaz Parsch
    +1 212 773 7201
    kazuyo.parsch@ey.com
  • Jeff Hongo
    +1 212 773 6143
    jeff.hongo@ey.com
  • Bee Khun Yap
    +1 212 773 1816
    bee-khun.yap@ey.com

EYG no. CM4141