On 19 December 2017, Korea passed the 2018 Tax Reform Act (the 2018 tax reform) after it was passed by the Korean National Assembly on 5 December 2017. The tax reform 2018 contains provisions in line with the BEPS Action 2 and Action 4 of the OECD. The tax reform came into effect for financial years beginning on or after 1 January 2018.
The most important changes in the tax reforms are as follows:
- The 2018 Tax Reform adds a new 25% corporate income tax bracket for taxable income in excess of KRW300 billion (US$270 million) . In addition, a local income tax surcharge of 10% will be levied on the current and amended corporation tax rates.
- Reducing the limitation to 70% and 60% for fiscal years beginning on or after 1 January 2018 and 2019, respectively. For fiscal years beginning on or after 1 January 2016, it was 80%
- Under the 2018 Tax Reform, the maximum ownership threshold for the capital gains tax exemption qualification would be reduced from less than 25% to less than 5%. This exemption will continue under the current law until the end of 2018 for the transfer of listed Korean company shares acquired before 1 January 2018.
- Pursuant to the 2018 Tax Reform, the penalties for non-compliance transfer pricing documentation would be increased to KRW30 million (US$27,000) from KRW10 million (US$9,000) per documentation.
- The 2018 Tax Reform introduces limitation on expense deductions relating to hybrid financial instruments. Under this, If a payment associated with a hybrid financial instrument remains wholly or partially nontaxable in the counterparty jurisdiction until the end of the recipient’s financial year starting within 12 months following the end of the payor’s fiscal year in which the deduction is made, the nontaxable portion of the payment would not be deductible for the fiscal year in which the payment is made.
- Committing to implement the interest expense deduction limitation rules recommended by BEPS Action 4, the deductibility of interest payments made to foreign related parties will be limited. A domestic corporation would be able to deduct net interest expense up to 30% of the domestic corporation’s adjusted taxable income. In applying the existing thin capitalization rule and the new interest deduction rule, a domestic company should apply the rule which would result in more denial of interest expense.
