Korean Tax Law Changes in 2021

Proposed tax law changes announced by the Korean government in July 2020 were approved by the National Assembly in December 2020 with several amendments and additions. We summarized below some of the major tax law changes for 2021 to keep you updated. Most of the tax law changes we discussed below came into force from the fiscal year starting, or income earned, on or after January 1, 2021 unless indicated otherwise.

I. Corporate Income Tax Law (CITL)

l Extension of foreign tax credit carryforward and deduction for unused foreign tax credit

Currently, a company can claim a foreign tax credit for foreign taxes paid or to be paid in relation to its foreign source income for five years if the claimed foreign tax credit is in excess of tax limit.

Under the tax law changes, to strengthen a relief for double taxation of foreign source income, the five (5)-year carryforward period would be extended to ten (10) years.

In addition, for foreign tax credits which are not used during the carryforward period, taxpayers will be allowed to deduct the unused tax credit amount from taxable income for the year immediately following the year in which the carryforward period ends. This change will apply to the unused foreign tax credit whose existing carryforward period (i.e., five years) would not lapse upon income tax return filing on or after January 1, 2021.

l Increased threshold for deductible small entertainment expenses without qualified supporting documents

Currently, all entertainment expenses over KRW 10,000 threshold should be substantiated by valid supporting documents to be tax deductible for corporate income tax reporting purposes within tax limit allowed (an exception applies for cash gifts for congratulation/condolence to business partners/customers, which do not need to be supported by valid supporting receipts if the amount is KRW 200,000 or less).

Under the tax law changes, the threshold of KRW 10,000 shall be increased to KRW 30,000, which will apply for payments from January 1, 2021.

II. Individual Income Tax Law (IITL)

l Housing fund deductions allowed to qualified foreign resident employees

Currently, application of income deductions and tax credit for housing funds for qualified individuals is allowed to a resident employee who is a Korean national only. Under the tax law changes, the application of income deductions and tax credit shall be allowed to a qualified foreign resident employee as well.

l Increased individual income tax rate

Under the tax law changes, the top marginal individual income tax rate bracket shall be established and the top marginal tax rate shall be 49.5% (including 10% local (provincial) income tax assessed on top of individual income tax liability) as given below. The revised provision will be effective for income earned from January 1, 2021.

III. Others

l Expansion of the scope of Overseas Specially Related Party (“OSRP”)

Under the tax law changes, when determining whether a third party is in an overseas special relationship by directly or indirectly owning at least 50% of the voting shares of both transaction parties, the calculation of the shareholding ratio of the third party also includes shares directly or indirectly owned by a relative under the International Tax Coordination Law of Korea (“ITCL”).

As the shares directly or indirectly owned by the relatives shall be considered in determining the overseas special relationship, the transactions subject to the transfer pricing taxation may also be expanded, so care must be taken to ensure that the transactions are not omitted from the list of the OSRP transactions when preparing the Master File and Local File to meet the BEPS requirements. The revised provision is effective from the tax year beginning on or after January 1, 2021.

l Extension of retrospective application period of Advance Pricing Agreement (“APA”)

Currently, it shall not be possible to apply APA for some of the tax years within the statute of limitations for tax assessment even if an application for APA is intended to be applied retrospectively.

Under the tax law changes, the period of retrospective application of bilateral APA through a mutual agreement shall be extended from five (5) years to seven (7) years in accordance with the statute of limitations for tax assessment on offshore transactions, and the period of retrospective application of unilateral APA shall be extended from three (3) years to five (5) years in accordance with the period of claim.

The revised provision is applied to the APA applied for the first time on or after January 1, 2021. This amendment is expected to increase the protection of the rights of taxpayers applying for retrospective APA application.

l Extension of deadline for submitting the Schedule of International Transactions (“SIT”)

Under the tax law changes, the deadline for submitting the SIT and the Summarized Profit and Loss Statement of OSRP (“SPLS”) is extended from the reporting due date of the tax base under the Corporate Income Tax Law (i.e., three (3) months after the end of the tax year) to six (6) months after the end of the tax year.

The revised provision is applied to the SIT and SPLS to be submitted on or after January 1, 2021.