The 2018 Tax Reform introduces a limitation on deductible expenses relating to hybrid mismatch arrangements as a commitment to implement the hybrid mismatch rules recommended by the Organisation for Economic Co-operation and Development’s.
The proposed rule will apply to cross-border hybrid financial instrument transactions between a domestic corporation (including the Korean branch of a foreign corporation) and its foreign related party. If a payment associated with a hybrid financial instrument remains wholly or partially nontaxable in the counterparty jurisdiction until the close of the recipient’s fiscal year beginning within 12 months following the close of the payor’s fiscal year in which the deduction is claimed, the nontaxable portion of the payment would not be deductible for the fiscal year in which the payment is made. A claw-back provision applies when the payor deducts the nontaxable portion of the payment for the fiscal year in which the payment is made. The amended law is effective for fiscal years beginning on or after 1 January 2018.
