On 30 July 2018, the Ministry of Strategy and Finance (MOSF) announced its proposed tax law amendments proposal for 2019. This rule will be effective as from tax years beginning on or after 1 January 2020.
The summary of the tax amendments proposal for 2019 are as follows:
(1) Expansion of the scope of domestic place of business of non-resident/foreign corporation
According to the 2019 tax amendments, even if activities conducted in places where certain activities are conducted are preparatory and auxiliary in nature, such places fall under a PE if any of the following conditions are met:
- a PE of the relevant non-resident/foreign corporation or its related party exists at the same place as the places where certain activities are conducted or at another place in Korea; and
- activities conducted at the places where certain activities are conducted are complementary to business activities conducted at the PE of the relevant non-resident/foreign corporation or its related party; and
- The overall activity resulting from the combination of the activities carried on by the relevant non-resident/foreign corporation or its related party at the places where certain activities are conducted is complementary, and is not of a preparatory and auxiliary character.
(2) Expansion of the scope of dependent agent and clarification of types of contracts applicable to determination of dependent agent.
Under the current law, any person having the authority to conclude contracts in Korea on behalf of a non-resident or a foreign corporation and repeatedly exercises such authority is considered a dependent agent and thus falls under a PE of such non-resident or foreign corporation.
As a result of this new amendment, even if the agent does not have the authority to conclude contracts, where the agent repeatedly plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the principal (non-resident/foreign corporation), such agent is considered a dependent agent PE.
Under the current Presidential Decree on the CITL, a foreign corporation means any of the following organizations:
- an entity endowed with legal personality pursuant to the law of the state in which it was incorporated; an entity formed only with limited partners;
- a domestic entity whose type of business is the same as, or similar to, the type of business of a foreign entity that is a corporation under domestic law; or
- an entity that owns an asset, becomes a party to a lawsuit, or directly holds a right or owes an obligation, independent of its members.
The proposed tax amendments for 2019, will delete the above-mentioned fourth criterion (the subject of rights and obligations).
Moreover, the new tax amendments may allow withholding agents to regard an Overseas Investment Vehicle (OIV) as the substantive owner of domestic source income, if certain conditions are met.
