The Ministry of Economy and Finance of South Korea (ROK) introduced its proposed 2024 Tax Law Amendment Bill on 25 July 2024, aiming to encourage economic activity and enhance the overall health of the public economy.

“This year’s tax revision aims to enhance economic vitality by unlocking new growth potential while supporting livelihood stability and creating a more efficient and rational tax system,” said Choi Sang-mok, Finance Minister and Deputy Prime Minister during a press briefing.

The bill seeks to modernise the tax system and create a more taxpayer-friendly environment. It will be presented to the National Assembly for discussion, with expectations for finalisation and enactment by the end of the year.

Key revisions in the bill include:

Corporate, personal income and other taxes

Removal of premium valuation on largest shareholder’s shares
The bill aims to eliminate the 20% premium valuation on shares held by the largest shareholder and related entities, effective 1 January 2025. This change is intended to simplify corporate succession.

Tax incentives for shareholder returns
A proposed tax system will boost shareholder returns for KOSPI- and KOSDAQ-listed firms, excluding certain investment entities. Corporations that increase returns by over 5% compared to the past three years can receive a 5% tax credit on returns exceeding this threshold, effective through 31 December 2027.

Reduced dividend tax for shareholders
A new tax regime will lower the withholding tax on dividends from 14% to 9% for individual shareholders of listed companies that increase returns by over 5% annually. This regime will be in effect from 1 January 2026 to 31 December 2028.

Inheritance and gift tax adjustments
The bill proposes expanding the 10% tax rate bracket to amounts up to KRW 200 million and eliminating the highest 50% rate. New tax rates will range from 10% to 40%, effective for inheritances and gifts received after 1 January 2025.

Increased child deduction for inheritance tax
The child deduction for inheritance tax will increase from KRW 50 million to KRW 500 million per child. The change will apply to inheritances starting after 1 January 2025.

Postponement of virtual asset income tax
The virtual asset income tax implementation is delayed to 1 January 2027. This tax, applied to income from virtual asset transfers or lending, will be levied at 20% with a KRW 2.5 million deduction.

New standards for employee discounts
The bill introduces standards for non-taxation of employee discounts, capping non-taxable amounts at 20% of the market price or KRW 2.4 million annually. Discounts must be for personal use and meet specific payment criteria, effective for income generated after 1 January 2025.

International tax

New application requirement for tax exemption on Korean-sourced personal services income
The proposed bill introduces a requirement for applying for tax exemptions on Korean-sourced personal services income under tax treaties. Taxpayers must now apply for the exemption, and payers are required to submit a payment statement to tax authorities for non-resident service payments. This requirement will apply to payments made after 1 January 2025.

Direct tax amendment procedure for non-residents and foreign corporations
The new bill will allow non-residents and foreign corporations to directly amend their taxes without involving withholding agents. Eligible entities, including non-residents, foreign corporations, qualified foreign financial institutions, and income payers, can file amended returns within five years from the 11th day of the month following withholding tax payment. The amendment process requires a revised tax return, a tax exemption application, and a residency certificate. This change, effective after 1 January 2025, aims to simplify tax refunds and enhance compliance.

Revised reporting obligations for overseas financial accounts
The bill proposes changes to reporting obligations for overseas financial accounts, including reducing the stay threshold for foreign residents in Korea from 183 days to 182 days. It introduces additional exemptions for residents classified as non-residents under tax treaties due to legal proceedings or mutual agreements. Residents and domestic corporations with overseas accounts identified via foreign trust details submitted to tax authorities will also be exempt from reporting. These changes aim to protect taxpayer rights and streamline compliance, effective from 1 January 2025.

Reduced penalties for overseas financial account reporting non-compliance
Penalties for failing to report overseas financial accounts will be standardised to 10% of the unreported amount, with a cap of KRW 1 billion, down from 20% and KRW 2 billion. The penalty for false or misleading reports will also be reduced to 10%. These revisions will apply to non-compliance issues arising from 1 January 2025 onwards.

Extended timeline for foreign investment reporting compliance
The bill removes the two-year statute of limitations for requests for supplementary information on foreign investments and real estate, extending the timeline for tax authorities to request additional details. Taxpayers must submit foreign investment and real estate information within six months of the fiscal year-end. This change will apply to submissions and requests made after 1 January 2025.

Tax incentives and credits

Extension of R&D and investment tax credits for strategic technologies
The bill proposes extending the period for R&D and comprehensive investment tax credits related to national strategic and original technologies from 31 December 2024 to 31 December 2027. This extension aims to bolster the competitiveness of key industries.

Increase in additional investment tax credit rates
The additional investment tax credit rates for facilities related to national strategic technologies and other investments would increase from 4% and 3% to 10% each, effective after 1 January 2025.

Revised qualifications for medium-sized enterprises
The bill adjusts the criteria for defining medium-sized enterprises, excluding real estate leasing businesses from eligibility. Revenue thresholds for medium-sized enterprises will be updated to a maximum of three times the standard amounts, or five times if eligible for R&D tax credits. These changes will take effect for taxable years starting after the law’s effective date.

Extended grace period for SME status
The bill extends the grace period for maintaining SME status from three to five years after a business no longer meets the qualifications. For KOSPI and KOSDAQ-listed companies, the grace period is extended to seven years. The extension also applies to consolidated tax returns, effective for returns beginning after 1 January 2025.

Diminishing tax credit rates for transitioning medium-sized enterprises
For medium-sized enterprises transitioning from SME status, the R&D tax credit rates will increase progressively over three years to 20%, 25%, and 35%, depending on the investment category. Investment tax credit rates will also rise, with updated rates effective for transitions occurring after 1 January 2025.

Expanded scope of R&D tax credits
The bill broadens the scope of eligible expenses for R&D tax credits to include software costs, R&D facility lease costs, consulting fees, and patent analysis. It also refines the calculation of labour costs for R&D tax credits and includes contractor expenses for human resource development.

Reduction in depreciation period for R&D machinery
The useful life of machinery used for R&D will be reduced from five to three years, allowing for accelerated deductions on R&D-related expenses. This change will apply to investments made after the law takes effect.

Revised employment tax credit framework
The bill introduces a revised framework for employment tax credits, increasing credit amounts for full-time and flexible employment. It also eliminates claw back rules and introduces additional deductions for maintaining or increasing full-time employment, with new minimum employee number requirements for medium-sized and large enterprises. These changes will be effective for tax years starting on or after 1 January 2025.

General

Amendment of tax credit reporting
The bill proposes that taxpayers can amend returns not only for overreported taxable income, excess tax payments, or underreported tax losses but also for underreported tax credits. This provision will be effective for amended returns filed after 1 January 2025, allowing taxpayers to adjust their tax credits through 31 December 2025 for periods starting on or after 1 January 2025.

Special statute of limitations for carry forward tax credits
The bill establishes a special statute of limitations for carrying forward tax credits, extending the carryforward period to 10 years. If a tax credit is used after the standard limitations period has expired, the special statute of limitations will be one year from the tax year in which the credit was utilised. Taxpayers must retain documentation to validate the credit until the special statute of limitations expires. This measure applies to tax credits generated from 1 January 2025 onwards.