Proposed Korean Tax Law Revision for 2025
The Ministry of Economy and Finance (MOEF) announced the government’s Korean tax reform bill on July 25, 2024.
This tax reform bill aims to enhance support for 1) promoting investment, employment, regional development, and capital market activation to ensure economic dynamism, 2) alleviating the burden of marriage, childbirth, and childcare, and providing support for ordinary people and small business owners to ensure public welfare, 3) pursuing appropriate tax burdens and efficient tax systems to establish a rational taxation framework, and 4) strengthening taxpayer convenience and rights to create a taxpayer-friendly environment.
The proposed revisions will undergo additional discussion and require approval from the National Assembly before finalized.
We summarized the major proposed tax law revisions which could be applicable to foreign-invested companies to keep you updated as below. Most of the tax law revisions we discussed below will come into force from the fiscal year starting, or income earned, on or after January 1, 2025, unless indicated otherwise.
l Promotion of corporate investment and employment
a. Extension of grace period for SMEs
Currently, the grace period of three years is applied for companies that exceed the criteria of Small and Medium-sized Enterprises (SMEs) in scale.
Under the tax reform proposal, the grace period for SMEs will be extended to five years (seven years for those listed on the Korea Exchange or KOSDAQ). This proposed revision will apply to companies that exceed SME criteria for the first time in the fiscal year when this revision takes effect.
b. Changes in criteria for Middle-scale companies
Regarding the criteria of middle-scale companies under the Special Tax Treatment Control Law in Korea,
• Real estate rental businesses will be added to the list of sectors disqualified from meeting middle-scale company criteria. This list already includes consumption-oriented services, banking, insurance, pension services, and other related financial services.
• The scale-based threshold will be adjusted considering business types.
|
Criteria |
Current |
Proposed |
||||||||||||
|
Annual gross sales over the previous three years |
Less
than |
Less than three times (or five times if receiving R&D tax credits) the specified amount by business type
|
c. Gradual reduction in R&D and investment tax credits after the grace period
This tax reform bill proposes a gradual reduction in the R&D tax credit and the integrated investment tax credit for middle-scale companies over additional three (or five) years, following the grace period for SMEs transitioning to middle-scale companies.
• The R&D tax credit for qualifying R&D expenditures
|
Category |
Basic credit rate (%) |
Additional |
|||
|
Large |
Middle-scale company |
SMEs |
|||
|
Current |
Proposed |
||||
|
General |
2 |
8~15 1 |
8~20 2 |
25 |
- |
|
New growth and source technologies |
20 |
20 |
20,25 3 |
30 |
Up to 10 |
|
National strategic technologies |
30 |
30 |
30~35 4 |
40 |
Up to 10 |
*1. Currently, 15% for the first three years after the grace period, 10% for the next years, and 8% from the sixth year onwards
*2. 20% for the first three years after the grace period, 15% for the next two years, and 8% from the sixth year onwards
*3. 25% for the first three years after the grace period and 20% from the fourth year onwards
*4. 35% for the first three years after the grace period and 30% from the fourth year onwards
• The integrated investment tax credit for investing business-purpose tangible assets
|
Category |
Basic credit rate (%) |
Additional 1 |
||||
|
Large |
Middle-scale company |
SMEs |
||||
|
Current |
Proposed |
Current |
Proposed |
|||
|
General |
1 |
5 |
5, 7.5 2 |
10 |
3 |
10 |
|
New growth and source technologies |
3 |
6 |
6, 9 3 |
12 |
||
|
National strategic technologies |
15 |
15 |
15, 20 4 |
25 |
4 |
|
*1. For investment amounts exceeding the previous three-year average, the additional tax credit would increase from 3 or 4% to 10%, regardless of corporate scale or type of facility.
*2. 7.5% for the first three years after the grace period, 5% from the fourth year onwards
*3. 9% for the first three years after the grace period and 6% from the fourth year onwards
*4. 20% for the first three years after the grace period and 15% from the fourth year onwards
d. Reform of the integrated employment tax credit schemes
• The scope of eligible employees for the tax credit will expand to include fixed-term employees with contracts lasting at least one month but less than one year, as well as short-term workers who work less than 15 hours per week.
• As shown in the table below, the tax credit for continuous employment will be increased, and a new tax credit for flexible employment for SMEs and middle-scale companies will be introduced to promote flexible employment practices.
|
Category |
Proposed tax credit (in KRW thousands, %) |
||||
|
SMEs |
Middle-scale company |
Large |
|||
|
Metropolitan area |
Non-metropolitan area |
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|
Continuous employment |
Youth, disabled, aged over 60, rehired after parental leave, etc. |
22,000 (←14,500) |
24,000 (←15,500) |
12,000 (←8,000) |
400 |
|
Others |
13,000 (←8,500) |
15,000 (←9,500) |
7,000 (←4,500) |
n/a |
|
|
Flexible employment |
Payroll increase from 3% to 20% |
20% of the increase in payroll |
10% of the increase in payroll |
|
|
|
Payroll increase over 20% |
40% of incremental increase exceeding the 20% increase |
20% of incremental increase exceeding the 20% increase |
|
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• The additional tax credits for transitioning non-regular workers to regular employment and for returning employees after parental leave in SMEs and middle-scale companies will be integrated into the basic tax credits, offering up to KRW 48 million over two years for continuous employment increases.
• Additionally, a new requirement that increases the number of employees needed to qualify for employment-related tax credits will be introduced. Specifically, middle-scale companies shall hire at least 10 new employees in the relevant fiscal year, while large companies shall hire at least 20 new employees.
• Under the tax reform bill, the current requirement for continuous employment retention to avoid recapturing the credited amount will be abolished. It suggests providing tax credits for an additional year if continuous employment requirements are met.
l Robustness of capital market
a. Abolition of the regulation on premium in valuation of shares owned by the largest shareholder
Under the current Inheritance and Gift Tax Law (IGTL), 20% premium is added to the value of company shares held by the largest shareholders and their related parties except for specific cases such as SMEs or middle-scale companies with less than KRW 500 billion in annual sales, etc.
Under the tax reform bill, by abolishing this regulation, no premium applies to the value of shares held by the largest shareholders.
b. Withdrawal of the financial investment income tax regime and deferral of taxation on income from virtual assets
The tax reform bill proposes withdrawing the financial investment income tax regime 1, scheduled to start on January 1st, 2025. Instead, the existing capital gains taxation regime under the Individual Income Tax Law will be maintained.
*1. The comprehensive taxation of income arising from shares, bonds, funds, investments in contract securities, derivative-linked securities, derivatives, etc.
Additionally, under the tax reform bill, the taxation of individual income from the transfer or lending of virtual assets will be deferred from January 1, 2025 to January 1, 2027, considering the status of implementing the virtual asset user protection system, etc.
l International taxation
a. Requirement for submission of application for entitlement to tax exemption and payment statement for Korean-source personal service income
Under current Korean income tax laws, non-residents or foreign corporations seeking tax exemption for Korean-source income (excluding business income and personal service income) under applicable tax treaties shall submit an “Application for Entitlement to Tax Exemption on Korean-source Income” and evidential documents proving to be an actual beneficiary of the Korean-source income.
Additionally, when Korean residents or corporations pay Korean-source income to non-residents or foreign corporations, they shall submit payment statements to the Korean tax authorities. Exclusions to this requirement include Korean-source income attributable to permanent establishments of non-residents or foreign corporations, income for which applications for entitlement to tax treaty exemption are submitted, Korean-source business income, and Korean-source personal service income.
The proposal will remove this exclusion for Korean-source personal service income, making it mandatory to submit an application for entitlement to tax exemption and payment statements for such income.
This change will be effective for payments made on or after January 1, 2026.
b. Changes in amended tax return for tax refund request based on arm’s length price adjustments
For transfer pricing transactions where the transaction price deviates from an arm’s length price, taxpayers are allowed to file amended tax return for tax refund request by seeking an adjustment of the transaction price to the arm’s length price within the statutory deadline, which is generally five years from the statutory due date for the tax return. In this case, the taxpayer shall submit a statement on the adjustment of transaction prices to the Korean tax authority.
Under the tax reform bill, a document evidencing the arm's length price shall be submitted additionally for amended tax return for tax refund request. This document shall demonstrate the appropriateness of the transfer pricing method and will be prescribed by the relevant enforcement regulation.
Additionally, the deadline for the Korean tax authority to determine whether to accept or reject an amended tax return for a refund request will be extended from two months to six months from the filing date of the amended tax return.
Furthermore, the Korean tax authorities may request supplementary documents from the taxpayer within 30 days, if necessary. The period for providing supplementary documents will not count towards the six-month deadline.
c. Expansion of application of non-deductible net interest expenses exceeding the 30% threshold to non-financial holding companies
Under the Korean International Tax Coordination law (ITCL), the net interest deduction claimed by a Korean company for overseas intercompany loans shall be limited to 30% of the adjusted taxable income of the Korean company. Currently, this regulation shall not be applied to holding companies.
Under the tax reform bill, this regulation shall be applied to non-financial holding companies.
l Enhancing revenue source transparency
a. Modifications to the residency test
Consideration of the immediately preceding taxable period when calculating the residency period (183 days)
• An individual is considered a tax resident of Korea if they have a domicile or abode in Korea for at least 183 days during one taxable period. Under the tax reform bill, an individual will also be considered a tax resident of Korea if he/she consecutively resides in Korea for at least 183 days during any two taxable periods.
Specification of criteria for residence period recognition
• The residence period shall be calculated as the period from the day after the arrival date to the departure date, with the temporary departure period shall be included in the 183-day residence threshold. The tax reform bill specifies qualified reasons for temporary departure, including 1) personal reasons such as tourism, medical treatment, or visiting relatives; 2) business-related reasons such as business trips or professional training; and 3) other similar reasons.
The revised residency test will apply to taxable periods starting on or after January 1, 2026.
l Protection of taxpayers’ rights
a. Relaxation of penalties for non-compliance with foreign financial accounts reporting requirements
Under the tax reform bill, the penalties will be relaxed as follows:
• The progressive penalty rate, which currently ranges from 10% to 20%, will be unified into a single penalty rate of 10% on the non-reported or under-reported amount.
• The penalty cap, currently set at KRW 2 billion, will be reduced to KRW 1 billion.
• Failure to provide an explanation or providing a fraudulent explanation will incur a penalty of 10% of the non-reported or violated amount, compared to the current rate of 20%.
b. Expansion of amended tax returns for tax refund requests on tax credits
Under current Basic Law for National Taxes, amended tax returns for tax refund are available if the tax base and tax payable were overreported, or if tax losses or refundable taxes were underreported.
The tax reform bill will allow taxpayers to also submit an amended tax return for a tax refund request if tax credit amounts are underreported even if there is no change in the tax payable or refundable.
c. Extension of prior notice period for general tax audit
Currently, tax auditors shall deliver a written notice of a general tax audit to taxpayers 15 days before the audit begins.
Under the tax reform bill, this notification period will be extended to 20 days. Additionally, in case of re-examination following decisions on tax appeals, the prior written notice period will be set at 7 days.
l Others
a. Extension of applicable period of tax credit and reduction of credit rate regarding Class B taxpayers’ association
Currently, taxpayers who join a Class B taxpayers' association and meet the monthly tax payment obligations shall be entitled to receive a 5% tax credit (with an annual maximum cap of KRW 1,000,000) on income tax payable.
Under the tax reform bill, the sunset date of this tax credit will be extended from December 31, 2024 to December 31, 2027. However, the credit rate will be reduced from 5% to 3%, with an annual maximum cap of KRW 1,000,000 unchanged.