On 24 December 2018, Korea enacted the 2019 tax reform bill after it was passed by Korea’s National Assembly on 8 December 2018. The 2019 Tax Reform also includes provisions in line with the OECD BEPS Action Plan 7 among others. The 2019 Tax Reform will generally become effective for fiscal years beginning on or after 1 January 2019.

Repeal of certain foreign investment tax incentives

On 5 December 2017, the European Union (EU) included Korea on the list of non-cooperative tax jurisdictions, noting a harmful preferential tax regime related to Korea’s foreign investment tax incentives that are only granted to nonresidents. On 23 January 2018, the EU removed Korea from the list after Korea pledged to revise its foreign investment tax incentive rules in line with global standards.

The current law grants a corporate income tax exemption for up to 7 years and certain local tax exemptions for up to 15 years to foreign-investment companies engaging in the new growth sector businesses and in specially designated areas. The 2019 Tax Reform repeals the corporate income tax exemption and will be effective for tax incentive applications filed on or after 1 January 2019. The repeal has no effect on local taxes; accordingly, the tax incentives on local taxes will continue to apply.

PE in Korea

As a commitment to implement the PE rules recommended by BEPS Action 7, the 2019 Tax Reform reflects contents of the updates to Article 5 (PE) of the OECD Model Tax Convention approved by the OECD Council on 21 November 2017.

Non-PE definition

Under the current law, the term PE does not include a fixed place solely for: (i) the purposes of purchasing goods or merchandise for the foreign company; (ii) the purposes of storing goods or merchandise belonging to the foreign company; and (iii) the purposes of maintaining a stock of goods or merchandise belonging to the foreign company for processing by another company. The 2019 Tax Reform adds that the above exemption applies only if the activity of the fixed place is of a preparatory or auxiliary character.

Preventing misuse of PE rules

The 2019 Tax Reform introduces a new rule to prevent misuse of specific exceptions to the PE rules. Under the 2019 Tax Reform, even if the activity of a fixed place is of a preparatory or auxiliary character, such fixed place would constitute a PE if any of the following conditions are met: (i) if such fixed place or other place constitutes a PE of the foreign company or its related party, and the activity of such fixed place is complementary to the business activity carried on by the PE of the foreign company or its related party; or (ii) the overall activity resulting from the combination of the activity of the fixed place carried on by the foreign company or its related party constitutes a complementary function and is not of a preparatory or auxiliary character.

Expanded scope of agency PE

A foreign company may be deemed to have an agency PE in Korea if it has a person in Korea, who is authorized to conclude contracts on its behalf and repeatedly exercises such authority, or who is regarded to have such authority. Under the 2019 Tax Reform, a foreign company may be deemed to have a PE in Korea if a person continuously plays the principal role leading to the conclusion of contracts by the foreign company without material modification even if the person has no legal authority to conclude contracts on its behalf.

The 2019 Tax Reform clarifies that the types of contracts that may be deemed to create an agency PE in Korea are contracts executed in the name of the foreign company: (i) for the transfer of the ownership of, or for the granting of the right to use, property owned by the foreign company; or (ii) for the provision of services by the foreign company.

Limitation on net operating losses (NOLs) utilization for Korean branches of foreign companies

Effective for fiscal years beginning on or after 1 January 2017, Korean branches of foreign companies are subject to an 80% of taxable income limitation on utilization of NOLs. The 2019 Tax Reform further reduces the 80% to 60%.