Providing Excellence In Client Services
March 2012
Newsletter
Bi-monthly Newsletter of Horwath Choongjung LLC
Contents
This newsletter is prepared and issued by Horwath Choongjung LLC
(Choongjung Accounting Corp.) on a bi-monthly basis and intended to
provide foreign investors with an update on tax law changes in Korea
NTS Taxation Trend
and other related subjects of special interests to foreign investors.
The information provided herein should not form a basis of any
Scrutinization of fee for
payment guarantee
provided to a foreign (nonKorean) subsidiary
decision as to a particular course of action, nor should it be relied upon
as a substitute for a detailed advice in individual cases.
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2012 Tax Law Changes
Extension of 50% income
tax exemption period for
the qualified foreign
engineers
Please contact any of the following individuals with any inquiries or
comments.
Contacts: G.S. Sim or H.S. Kim at Tax&BPO Services of Horwath
Choongjung [Tel: (82)(2) 316-6600, Fax: (82)(2) 775-5885, E-mail:
post@crowehorwath.co.kr]
(You may find this newsletter and other items of interest at
http://www.crowehorwath.co.kr)
New Tax Ruling
Application of “denial of
unfair transactions” to an
in-kind contribution
transaction by a Korean
branch
Tax Filing Information
Global individual income
tax return filing by May 31,
2012
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March 2012
NTS Taxation
Trend
Scrutinization
of fee for
payment
guarantee
provided to a
foreign (nonKorean)
susidiary
1. Scrutinization of fee for payment guarantee provided to a foreign (nonKorean) subsidiary
When a foreign subsidiary of a Korean company uses a loan from the financial institutions in
the foreign country, the Korean company usually provides the foreign subsidiary with payment
guarantee and the foreign subsidiary pays a fee for the payment guarantee. Based on the
announcement of National Tax Service (“NTS”), the amount of payment guarantees for the
foreign subsidiaries provided by the Korean parent companies steeply increased to USD 12
billion, 23 billion and 42 billion in 2007, 2008 and 2009, respectively.
Under the Korean tax law, the fee for payment guarantee received from the foreign subsidiary
is treated as taxable income and subject to the Korean transfer pricing rules. However, as it
is not clear how to determine the arm’s length price of the fee for payment guarantee, certain
Korean parent companies were deemed to have received the fees for payment guarantee at a
lower level and as a result, there have been disputes on the appropriateness of the fees for
payment guarantee between NTS and the taxpayers over the years.
NTS has collected the information on the payment guarantees from the Korean parent
companies and the relevant financial institutions, and recently developed a calculation model
of arm’s length price of the fee for payment guarantee. It is known that NTS plans to, based
on the calculation model, recommend certain taxpayers to file amended corporate tax returns
or impose underpaid corporate taxes on the Korean companies which have received the lower
fees for payment guarantees than the arm’s length prices.
Considering the size of payment guarantees, the number of relevant Korean companies and
the number of years concerned, NTS is likely to levy a significant amount of taxes in relation to
the payment guarantee. In this connection, it is likely that tax appeals or litigations by the
relevant Korean companies against the tax assessments by NTS will increase.
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March 2012
2012 Tax Law
Changes
2. Extension of 50% income tax exemption period for the qualified foreign
engineers
Foreign engineers prescribed in Article 16 of Presidential Decree of Tax Incentive Limitation
Law are eligible for the tax exemption of the amount equivalent to 50% of the income tax on
the earned income for two years from the initial service date which should be before
December 31, 2011.
However, the initial service date has been extended to December 31, 2014 and as a result, the
qualified foreign engineers starting their initial services in Korea on or after January 1, 2012
and before December 31, 2014 will be able to enjoy the above income tax exemption.
New Tax
Ruling
3. Application of “denial of unfair transactions” to an in-kind contribution
transaction by a Korean branch (Gukjesewon-582, 2011.12.23)
When a Korean branch of a foreign company invests assets and liabilities in a newly
established Korean company (“New Company”) in the form of in-kind contribution, if the
Korean branch does not receive the fair market price for the transferred net assets including
goodwill from the New Company, Article 52 (Denial of Unfair Transactions) of Corporate Tax
Law will apply and additional taxes may be assessed as a result of tax adjustments made by
the Korean tax authorities.
Tax Filing
Information
4. Global individual income tax return filing by May 31, 2012
Korean citizens and foreigners who are considered to be residents for tax purposes are
subject to taxation on worldwide income derived from sources both inside and outside of
Korea. The income includes global income [employment (earned) income, business profits,
pension, dividend, interest and other income], severance pay, and capital gains. Regarding
the scope of income subject to the tax return filing, an exception exists for the foreigners who
lived in Korea less than 5 years. A foreigner deemed to be a non-resident is taxed only on
income derived from sources within Korea, including wages and salaries earned in Korea,
unless a tax treaty to which the individual is subject indicates otherwise.
The foreign expatriate officers and employees are eligible to apply a flat income tax rate of
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March 2012
15% (plus local income tax) instead of the progressive income tax rates ranging from 6% to
38% plus local income tax (an application must be filed separately).
However, when
choosing the flat income tax rate, the expatriate officer or employee concerned must give up
all the existing available benefits including nontaxable income treatment, tax reduction and tax
exemption relating to income taxes.
Taxpayers making monthly tax payments and having only one source of worldwide income
(i.e., either Class A or Class B) are generally not required to file a global income tax return
since the employer (for Class A income earners) or the Class B taxpayers' association (for
Class B income earners) finalizes the individual's tax liability at the end of the year.
Taxpayers having more than one source of income, however, are required to file a global
income tax return for the year and pay taxes due on such income on or before May 31 of the
following year, or prior to permanently leaving Korea. In case an employee has both Class A
and Class B income declared to the Class B taxpayers’ association, the employer who pays
Class A income may finalize the employee’s tax liability by including Class B income in the
exact payroll withholding tax settlement at the end of the year instead of the employee filing a
global income tax return.
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Horwath Choongjung LLC
Member Crowe Horwath International
PMAA Jaram Building, 16th Floor, 566 Dohwa-dong,
Mapo-gu, Seoul 121-815, Korea
TEL: (82)(2) 316-6600 FAX: (82)(2) 775-5885 E-mail: post@crowehorwath.co.kr
Website: http://www.crowehorwath.co.kr
Horwath Choongjung LLC is a member of Crowe Horwath International, a Swiss association. Each member firm of Crowe Horwath International is a
separate and independent legal entity. Horwath Choongjung LLC and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath
International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of
Crowe Horwath International or any other Crowe Horwath International member.
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