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January 9, 2024
2024-0156

South Korea enacts 2024 tax reform bill includes a 12-month delay on Undertaxed Profits Rule

  • South Korea's 2024 tax reforms were enacted on 31 December 2023, including additional global minimum tax rules to reflect the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) 2.0 Pillar Two.
  • These rules, outlined in this Alert, will be effective for fiscal years beginning on or after 1 January 2024, unless otherwise specified.
  • The effective date of the Undertaxed Profits Rule would be delayed by 12 months, until 1 January 2025.
  • Taxpayers should review the rules to determine their impact on Korean operations.
 

Executive summary

On 31 December 2023, Korea enacted the 2024 Tax Reform Bill (the 2024 Tax Reform) after it was passed by Korea's National Assembly on 21 December 2023. Unless otherwise specified, the 2024 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2024. Significantly, the supplementary rules for income inclusion (known as Undertaxed Profits Rule (UTPR)) will be postponed by one year, extending the effective date to 1 January 2025.

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

Detailed discussion

Revision of the global minimum tax rule

The 2024 Tax Reform include new and additional Global Anti-Base Erosion(GloBE) rules that apply on top of Korean GloBE regulations under the current Adjustment of International Taxes Act (AITA) to reflect the OECD's Pillar Two GloBE rules, including the relevant administrative guidance, as well as other member countries' Pillar Two legislation movements. In addition, the new Enforcement Decrees (EDs) to the AITA are enacted on 29 December 2023 and are effective 1 January 2024.

Details regarding the GloBE rules in the 2024 Tax Reform are outlined below.

The 2024 Tax Reform

Effective date

The UTPR will have a 12-month delay.

Effective starting from the fiscal year beginning on or after 1 January 2025

In addition to current AITA rules, the statutes of limitations are extended to one year from the date the tax authority becomes aware of the change in the case where the effective tax rate (ETR) of the GloBE is changed.

Effective starting from the fiscal year beginning on or after 1 January 2024

The national and local governments are excluded from the definition of Entities.

A company with only a stateless permanent establishment is excluded from the definition of a Group.

The definition of a permanent establishment in accordance with the OECD Model Rules is clarified.

The head office of the Group is added to the definition of Ultimate Parent Entity (UPE), while the sovereign wealth fund held by an ultimate parent company is excluded.

An applicable foreign exchange rate is introduced for conversion into local KRW currency for the euro-based consolidated revenue test amount (i.e., €750m) in accordance with the OECD/G20 Administrative Guidance.

Only arbitrarily excluded entities can be selected as constituent entities.

In addition to current AITA rules, if the head office's domestic taxation includes the loss of the permanent establishment, the head office's GloBE income or loss calculation includes the loss of the permanent establishment.

Adjustment methods have been added for GloBE income or loss due to increase or decrease of adjusted covered tax.

A top-up tax calculation method has been added under new scenarios in which the top-up tax percentage exceeds 15%.

New requirements have been introduced for recognition of the qualified domestic minimum top-up tax (i.e., QDMTT) where the top-up tax of the GloBE is exempted for a parent entity in accordance with the OECD/G20 Administrative Guidance

Supplemental rules have been introduced on the allocation method between entities in the same jurisdiction for the top-up tax according to the UTPR for each constituent entity.

Effective starting from the fiscal year beginning on or after 1 January 2025

A new provision requires allocation to other jurisdictions if certain constituent entities do not bear additional top-up tax under the UTPR.

Additional provisions provide special rules for restructuring if the constituent entity's jurisdiction allows fair market value adjustment rather than tax book value.

Effective starting from the fiscal year beginning on or after 1 January 2024

Tax-transparent entities are excluded from applying special rules for investment constituent entities.

A supplemental rule is introduced on the scope of the allocation amount if the amount includes both actual and deemed allocations.

For a group in the early stages of overseas expansion, the special application period is five years from the time the UTPR is first applied (i.e., 1 January 2025).

Effective starting from the fiscal year beginning on or after 1 January 2025

Penalty tax exemption and reduction provisions have been introduced related to failures to meet the GloBE top-up tax filing and payment obligation during the transitional period:

  • Penalty exemptions on non-filing or filing returns that understate tax or overclaim tax refunds
  • 50% reduction of interest for the delayed/underpaid tax payment

Penalty exemption provisions have been introduced for errors in submitting the GloBE information report during the transitional period, subject to conditions.

Effective starting from the fiscal year beginning on or after 1 January 2024

In addition, the new EDs, which provide more specific guidance on the AITA, include detailed requirements on definitions and the scope of the GloBE rules as well as details on calculating GloBE income or loss and covered tax, among others. The new EDs also contain the transitional country-by-country reporting safe harbor and GloBE information return requirements that were addressed in the OECD/Inclusive Framework (IF) Administrative Guideline (AG) issued in February 2023. However, other features of the GloBe rules that were introduced in the latest OECD/IF AG issued in July 2023, such as a UTPR safe harbor and QDMTT safe harbor, have not yet been introduced.

New filing obligation for overseas stock-based compensation

The 2024 Tax Reform introduces a filing obligation requiring domestic corporations (including the permanent establishment of foreign corporations) to report on transactions in which executives or employees receive the share-based compensation upon exercise (or payment) from foreign controlling shareholders.

Domestic corporations must submit the transaction details (e.g., details of grant, exercise and payment of share-based compensation) by 10 March of the year following the taxable period when the exercise or payment of stock-based compensation occurred. This rule will be applied to stock-based compensation exercised (or paid) on or after 1 January 2024.

Changes to when limitations period starts for treaty rectification

Under the current Korean Corporate Income Tax Law, if a beneficial owner (foreign individual or foreign corporation) wants to apply a tax treaty exemption in respect of its Korean-sourced income, either the beneficial owner or income payer may request the refund claim. The claim must be submitted to the district tax office that has jurisdiction over tax payment of the income payer and must be made within five years from the last day of the month in which the tax is withheld.

Effective 1 January 2024, the limitations period for the treaty rectification is the five years that follow the 10th day of the month following the month to which the withholding date belongs under the 2024 Tax Reform.

Special tax rules for omnibus accounts for foreigner

Under the 2024 Tax Reform, when foreign individuals or corporations invest through the omnibus account, the income payer must withhold tax from the payment. A reduced or exempted withholding tax rate under the treaties does not apply. However, either beneficial owners or income payers who wish to receive an exemption or reduced tax rates under tax treaties may apply for its rectification after withholding taxes are deducted. The new rule will be effective for the income paid on or after 1 January 2024.

Change of document submission requirement for international transactions

The current AITA provides an exemption from the requirement to submit the transfer pricing (TP) documents (i.e., statement of international transactions, summary income statement of foreign related parties and the report on arm's-length pricing method) for taxpayers who are required to file master/local files.

Due to the 2024 Tax Reform, taxpayers required to file master/local files should also be given the relevant TP documents within six months from the last day of the month containing the fiscal year-end date, unless certain waiver conditions are met.

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Contact Information

For additional information concerning this Alert, please contact:

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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
 
 

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