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January 14, 2022

Korea enacts 2022 tax reform bill

Executive summary

On 8 December 2021, 21 December 2021 and 28 December 2021,1 Korea enacted various measures in the 2022 Tax Reform Bill (the 2022 Tax Reform) after it was passed by Korea’s National Assembly on 2 December 2021. Unless otherwise specified, the 2022 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2022. The Enforcement Decrees, which provide more specific guidance on the laws, are expected to be enacted in February 2022.

This Alert summarizes the key features of the new and amended tax laws.

Detailed discussion

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 liable to tax 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 meets qualifications for being regarded as the beneficial owner under the applicable tax treaty.

(iii) The OIV is unable to substantiate its investors.2

The 2022 Tax Reform has clarified the conditions of (i) and (ii) as follows:

(i) The OIV is liable to tax in the jurisdiction where it is established and meets qualifications for being eligible for tax treaty benefits for the Korea-sourced income in accordance with the tax treaty.

(ii) The OIV (in the case where it does not meet the requirements provided in the clarified condition (i) above) meets the qualifications for being regarded as the beneficial owner under a tax treaty and meets other qualifications for being eligible for tax treaty benefits for the Korea-sourced income under the tax treaty.

This rule will be effective for Korean-sourced income paid on or after 1 January 2022.

Deferral of taxation on virtual assets3

Under the current Korean tax law, gains derived from the disposal of virtual assets by a foreign individual or a foreign corporation are categorized as “other income” subject to withholding tax at the lower of 11% of the transfer price or 22% of the net capital gains.

The 2022 Tax Reform deferred by one year the effective date of the previously enacted legislation requiring the taxation of gains from the sale of virtual assets. Those gains will now be taxed beginning 1 January 2023.

Option to conduct a partial investigation on tax treaty-based exemptions

The 2022 Tax Reform added a provision in which Korean tax authorities would be allowed to conduct a partial investigation on taxpayers.4 The new provision applies to cases where they find it necessary to assess or confirm the appropriateness of a tax exemption which is claimed/availed based on the application of a tax treaty, in respect of income attributable to nonresidents.

The above rule would apply to cases of tax treaty-based exemption applications filed with the tax offices on or after the date of enactment of the Enforcement Decree.

Revision of the 30% EBITDA5 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 2022 Tax Reform introduced additional ordering rules for the non-deductible portion of interest:

  • For interest where the same interest rate is applied, the most recent borrowing date takes precedence.

  • If the interest rate and borrowing date are the same, the non-deductible portion is bifurcated based on the ratio of the borrowed amounts.

In addition, the 2022 Tax Reform introduced a new rule whereby if the amount of EBITDA is negative, the deductible amount of interest is deemed to be nil.

The above rules will be effective for fiscal years beginning on or after 1 January 2022.

Introduction of new rules for international transactions

The 2022 Tax Reform introduced the following new rules to mitigate potential tax evasion through international transactions.

The 2022 Tax Reform

Details/ submission due date

Effective date

New obligation to submit information regarding the status of a liaison office of a foreign company (e.g., basic information of the liaison office, status of foreign headquarters and other domestic branches, among others)

10 February of the following year

Effective for submission of the status information relevant to taxable years beginning on or after 1 January 2022

New obligation to submit transaction details by foreign companies supplying electronic services

·       Simplified Value Added Tax (VAT) registrant maintains electronic service transaction details for five years after the due date of the final VAT return

·       Simplified VAT registrant is required to submit a transaction statement within 60 days of receiving a request from the Commissioner of the National Tax Service (NTS)

Effective for the supply of electronic services on or after 1 July 2022

Establishment of grounds for ex officio cancellation of simplified VAT registration

The NTS Commissioner may cancel a simplified VAT registration if the registrant closes its business

Effective on or after 1 January 2022

The current Enforcement Decree of Adjustment of International Taxes Act applies a penalty for late or false filing of transfer pricing (TP) documentation (e.g., Master/ Local files, Country-by-Country Report) of up to KRW100 million (US$87,000)

The 2022 Tax Reform introduces new rules reducing the penalties for negligence for submitting revised or late TP documentation

30% to 90% reduction in penalties for the submission of revised or late TP documentation before the penalty is imposed

Effective for submissions of TP documentation on or after the date of enactment of the Enforcement Decree

Amendment to transfer pricing under special economic conditions

To rationalize TP taxation under special circumstances such as COVID-19, the 2022 Tax Reform revised the TP rules under the current Law for the Coordination of International Tax Affairs (LCITA).


The 2022 Tax Reform

Effective date

Considerations when applying the arm's-length pricing method

  • Analysis of taxpayer's business environment and related transactions, selection of arm's-length price calculation method, selection of comparable transactions, among others

  • Data from multiple business years can be used if economic conditions or business strategies are affected over multiple years

Additional considerations when applying the arm's-length price calculation method in which companies that have suffered losses due to economic conditions such as economic downturn can also be selected for comparable transactions

Effective for decisions and corrections made on or after 1 January 2022

Determination and correction by tax authorities based on normal cost-sharing

  • If a resident and a foreign-related party enters into an agreement on cost/ expense/ risk sharing in advance and jointly develop and secure intangible assets accordingly, and if that share of cost differs from the normal cost-sharing, it can be determined and corrected based on the normal cost-sharing

Exceptions to decision and correction are accepted, if the cost is not shared as agreed upon due to force majeure, such as a disaster

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, among others for the transactions between a PE of a foreign corporation and its overseas headquarters and other branches within the statutory deadline for the corporate income tax (CIT) return.6

The 2022 Tax Reform extended the above submission deadline from the statutory deadline of the 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 daily) 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,for five years from the first day of work in Korea.

The 2022 Tax Reform extended 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 States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago



  1. Individual Income Tax Law and Value Added Tax revisions were enacted on 8 December 2021 and 28 December 2021, respectively. All other measures discussed in this Global Tax Alert were enacted on 21 December 2021.

  2. If the OIV can substantiate only a portion of its investors, then the OIV would be treated as the beneficial owner of the Korean source income to the extent of the Korean source income attributable to those investors that the OIV is unable to substantiate under the Korean domestic tax law.

  3. Virtual assets are electronic certificates (including relevant rights) of economic value that can be traded electronically (e.g., digital currency such as bitcoin).

  4. Prior to the 2022 Tax Reform, a partial investigation was allowed when the confirmation is necessary to process the refund claim of income payers or to investigate the beneficial owners who are not eligible for tax exemption/non-taxation application.

  5. Earnings before interest, taxes, depreciation, and amortization (EBITDA) equals taxable income plus depreciation expense for fixed assets and net interest expense.

  6. A corporate income tax return must be filed within three months from the end of the fiscal year.

  7. Non-taxation, tax deductions, tax reductions/exemptions, and tax credits are forfeited.


The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.


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