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August 10, 2021
Korea announces 2021 tax reform proposals
Korea’s Ministry of Economy and Finance announced the 2021 tax reform proposals (the 2021 Proposals) on 26 July 2021. Unless otherwise specified, the 2021 Proposals will generally become effective for fiscal years beginning on or after 1 January 2022.
This Alert summarizes the key proposals.
Clarification of the deemed beneficial owner rules for overseas investment vehicles (OIV)
The current Korean tax law views an OIV as a deemed beneficial owner of Korean-source income if any of the following conditions are met:
(i) The OIV is subject to taxation in the jurisdiction in which it resides and there is no intention to wrongfully evade Korean tax on the Korean-source income by establishing the OIV in such jurisdiction.
(ii) The OIV is unable to substantiate its investors.1
(iii) The OIV is deemed as the beneficial owner under a tax treaty.
The 2021 Proposals clarifies the conditions of (i) and (iii) as follows:
(i) The OIV should be obligated to pay tax in their country of residence and be eligible for tax treaty benefits for the applicable Korean-sourced income in accordance with the tax treaty.
(iii) the OIV is recognized as the beneficial owner of Korean-sourced income by a separate provision in the tax treaty and is subject to the benefits of the tax treaty for the applicable Korean-sourced income in accordance with the tax treaty. The rule will be effective for Korean-sourced income paid on or after 1 January 2022.
Revision of the 30% EBITDA2 interest limitation rule
The current 30% EBITDA interest limitation rule provides an ordering rule for the calculation of non-deductible interest. If interest is calculated with different interest rates, the interest deduction denial is applied starting with the highest interest rate.
The 2021 Proposals introduce additional ordering rules for the non-deductible portion of interest:
In addition, the 2021 Proposals introduce a new rule that if the amount of EBITDA is negative, the deductible amount of interest is deemed to be nil.
This rule will be effective for fiscal years beginning on or after 1 January 2022.
Introduction of new rules for international transactions
The 2021 Proposals introduce the following new rules to mitigate potential tax evasion through international transactions.
Amendment to transfer pricing under special economic conditions
To rationalize TP taxation under special circumstances such as COVID-19, the 2021 Proposals revise the TP rules under the current Law for the Coordination of International Tax Affairs (LCITA).
Extension of the deadline for submitting documents related to international transactions
The current Enforcement Decree of the Korean Corporate Income Tax Law (CITL) requires a permanent establishment (PE) of a foreign corporation to submit documents such as a statement of internal transactions, expense allocation, etc. for the transactions between a PE of a foreign corporation and its overseas headquarters and other branches within the statutory deadline for the CIT return.3
The 2021 Proposals allows an extension of the above submission deadline from the statutory deadline of CIT return to within six months from the last day of the month containing the fiscal year end date.
This rule applies to submissions made on or after 1 January 2022.
Extension of the application period for special taxation for foreign workers
Under the current Restriction of Special Taxation Act, a foreign executive or employee (excluding workers hired on a daily basis) initially working in Korea before 31 December 2021 may elect to apply for a flat tax rate of 19% (excluding local income tax) on wage income without deductions,4 for five years from the first day of work in Korea.
The 2021 Proposals extend the application period from 31 December 2021 to 31 December 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Han Young, Seoul
Ernst & Young LLP (United States), Korean Tax Desk, New York
Ernst & Young LLP (United Kingdom), Asia Pacific Transfer Pricing Desk, London
Ernst & Young LLP (United States), Asia Pacific Business Group, New York