MAJOR DEVELOPMENTS
In late 1995, a new law, entitled law for Coordination of International Tax Affairs,?was enacted. Significant provisions of the new law include:
q Transfer pricing rules for cross-border transactions based on the OECD Transfer Pricing Guideline;
q Advance Pricing Approval (APA);
q Anti-thin capitalization rule;
q Anti-tax haven legislation.
Also, significant provisions of the 1995 Tax Reform include:
q Indirect foreign tax credit;
q Branch profits tax;
q Reduction of corporation income tax rates;
q Reduction of individual income tax rates.
INCOME TAXES ON CORPORATIONS
1. Rates
Tax Base Tax Rate
W100,000,000 or less 16%
Over W100,000,000 W16,000,000 + 28% of the tax
base in excess of W100,000,000
2. Local Income Taxes
A 10% resident surtax is levied by local governments on the corporation tax.
3. Capital Gains Taxes
Capital gains and losses are treated in the same manner as ordinary income and loss, except that gains from the sale of land, buildings, or real estate rights are subject to an additional special surtax (see item 26):
Surtax Rate
(before resident taxes)
If the acquisition of the property was registered with the Court 20%
If the acquisition of the property was not registered with the
Court 40%
4. Branch Profits Taxes
A branch of a foreign corporation is subject to corporation taxes on its income generated from Korean sources at the same rates as Korean corporations. Allocation of expenses from the head office may or may not be allowed as deductible expenses of the branch, depending on the reasonableness of the charges and the provisions of tax treaties.
A foreign corporation carrying on its business through a branch in Korea is not required to pay taxes on the repatriation of after-tax income. However, where the relevant tax treaty allows, branch profits tax will be imposed at 27.5% (this rate includes resident surtax) or at the reduced treaty rate of taxable income after certain adjustments.
5. Foreign Tax Reliefs
A tax credit is allowed to the extent of foreign taxes paid on the foreign-source income. The credit, however, cannot exceed the amount of Korean taxes attributable to the foreign-source income.
If a resident or a domestic corporation receives foreign-source income, the taxpayer can elect either of the following methods. A different method can be elected each tax year.
q Method of deducting total amount of foreign taxes paid from gross income when calculating the income amount for the respective tax year;
q Method of crediting foreign taxes paid; if foreign taxes paid exceed Korean taxes attributable to the foreign-source income, the excess amount may be carried for five years.
If the income from foreign sources of a resident or a domestic corporation is exempted from income tax by the provision of
laws in a foreign country with which Korea has concluded a tax treaty, the exempted tax amount shall be deemed to have been actually paid to the foreign country and, thus, shall be eligible for the above election, subject to the provision of the tax treaty.
An indirect foreign tax credit is allowed to a domestic parent corporation for foreign income taxes paid by its qualifying overseas first-tier subsidiaries if the dividends from such subsidiaries are included in the taxable income of the domestic parent corporation. The
credit is allowed within certain limitations and subject to the
provision of the relevant tax treaty.
6. Classification of Corporations
Corporations are classified for Korean tax purposes primarily as domestic or foreign. A domestic corporation is one whose head office or main office is in Korea. Domestic corporations are taxed on their worldwide income, whereas foreign corporations are subject to tax only on Korean-source income.
A foreign corporation that has a permanent establishment in Korea is subject to tax on its Korean-source income attributable to the permanent establishment, applying the
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