South Korea in its press release will reportedly implement the tax reform to boost the economic growth by implementing the Base Erosion and Profit Shifting (BEPS) measures and incentivizing certain business sector.
The Favorable Incentives
To boost the economy, the Korean government reiterates to increase Small Medium-Sized Enterprise (SME) tax incentives for investment. The SMEs located in the areas affected by restructuring to receive the increased tax incentives, and reshoring companies to receive increased income tax reduction. In addition, the government will also provide the following incentives:
- Provide tax breaks, such as a tax break for accommodation businesses as a compensation;
- Give income tax reductions for renting hydrogen fuel cell cars, as well as electric cars Lower taxes on interest earned from P2P lending;
- Promote further developing the sharing economy: increase tax support for investment in R&Ds and human resources development.
Besides providing favorable incentives, the government also hardened the anti-avoidance measures aligned with the OECD recommendations specifically on BEPS Action 7 (Preventing the artificial avoidance of Permanent Establishment Status), among others, to prevent the abusive business structure that might drain Korean income. The measures include:
- The permanent establishment (PE) rules are expanded to bring them in line with the latest OECD guidelines. With respect to dependent agent PEs, a person that plays a principal role leading to the conclusion of contracts may constitute a PE, even if the person does have the authority to conclude contracts. Moreover, rules are introduced to counter artificial avoidance of a PE through fragmenting business activities in order to take advantage of PE exemptions for activities of a preparatory and auxiliary nature;
- The repeal of the foreign investment tax incentive providing tax exemptions for foreign-invested companies in new growth sector businesses, which was identified has harmful and resulted in South Korea's inclusion in the EU's list of non-cooperatives jurisdictions (subsequently removed);
- The loss carry forward offset limit for branches of foreign corporations in South Korea is reduced 80% to 60% from 1 January 2019 (already scheduled for domestic corporations);
- The introduction of new rules to treat an overseas investment as the beneficial owner of Korean-source income if at least one of the following conditions are met: (1) The investment vehicle is subject to tax in its jurisdiction of residence and the investment vehicle was not established with the purpose of evading Korean tax; (2) The investment vehicle is unable to disclose its investors or only partially discloses, in which case the investment vehicle may be considered the beneficial owner in respect of income attributed to the investors not disclosed (treaty benefits denied when this condition applies); or (3) The investment vehicle is considered the beneficial owner under the provisions of an applicable tax treaty;
- The transfer pricing rules are expanded to provide that in determining whether a transaction is at arm's length, the tax authority must accurately delineate the transaction in consideration of the commercial and financial conditions between a resident and its foreign related party, and where a transaction lacks commercial reason, the tax authority must disregard or recharacterize the transaction.
The changes generally applied from 1 January 2019.
Source: Korean Government