On December 10, 2024, the 2024 tax law amendment bill passed the National Assembly plenary session. The National Assembly approved the 2-year deferral of crypto gains tax and the abolishment of financial investment income tax, but rejected the proposed repeal of the 20% Uplift Rule. The approved amendments will go through deliberation by the Cabinet Meeting before being promulgated, and will mostly become effective from January 1, 2025.
We have summarized below the key changes that relate to international tax or may have an impact on multinational enterprises (“MNEs”) with investments or operations in Korea
I. What has changed from theGovernment’s original proposal - The 20% Uplift Rule will remain in place
When valuing shares or equity interests under the Inheritance Tax and Gift Tax Act, shares held by the largest shareholder and its related parties must be valued by adding a 20% premium (“Largest Shareholder Premium Valuation”, also often referred to as the “20% Uplift Rule”). The 20% Uplift Rule has drawn substantial criticism because (i) it is difficult to measure the premium for management control at the time of receiving an inheritance / gift, (ii) it is problematic to apply a 20% premium uniformly without considering the characteristics of individual transactions, and (iii) globally, it is very rare to apply such premium for purposes of valuing management control.
The original Tax Law Amendment Proposal sought to abolish the 20% Uplift Rule in response to such criticism. However, the 20% Uplift Rule will remain in place as the National Assembly voted against the proposed amendment. Accordingly, foreign companies planning to transfer Korean company shares should continue to assess the applicability of the 20% Uplift Rule before executing the transaction
II.. Approved tax law amendments
1. Improving the tax credit system
(1) Higher integrated investment tax credit for incremental investment (Act on Restriction of Special Taxation (often referred to as the Tax Preferential Control Act (“TPCA”)) §24(1))
The Korean Government previously announced through the 2024 Economic Policy Direction that it will extend the application of the temporary integrated investment tax credits (additional 2-6% base tax credit and additional 10% tax credit for incremental investment) available for the tax year including December 31, 2023 for one year until December 31, 2024.
However, (i) the application of the temporary additional base tax credit will not be extended, and instead, (ii) the additional tax credit for incremental investment will be permanently increased to 10%.
This amendment aims to improve the competitiveness of the strategic industry and to promote corporate investment. The amendment will be effective for investment made in tax years beginning on or after January 1, 2025.
(2) Adjusting the scope of mid-sized companies (TPCA Presidential Decree (“PD”) §6-4, §9)
The tax benefits (e.g. tax credits and tax exemptions) provided to companies under the TPCA differ based on the size of the company. Under the TPCA, a company is classified as (i) a ‘small or medium-sized company’ if its sales revenue is less than the industry standard (KRW 40B-150B), and (ii) a ‘mid-sized company’ if its average sales revenue for the past 3 years is less than KRW 300B, regardless of its industry (KRW 500B for R&D tax credit).
In order to improve taxation equity among mid-sized companies across different industries and to improve the tax system, the 2024 Tax Law Amendment modifies the sales revenue threshold of mid-sized companies to “3 times the sales revenue threshold of small or medium-sized companies in the same industry (5 times for R&D tax credit)”. In addition, the 2024 Tax Law Amendment excludes real estate leasing business from the list of eligible industries for mid-sized companies.
(3) Streamlining when members of a consolidated group can apply the regulations for small or medium-sized companies / mid-sized companies (Corporate Income Tax Act (“CITA”) § 76-22)
Under the CITA, if a Korean company owns 90% or more of the total issued and outstanding shares or total equity of another Korean company (“consolidated control”), they can elect to form a tax consolidated group based on the economic substance and file consolidated corporate tax returns.
A tax consolidated group is viewed as one Korean company, and for purposes of applying the TPCA, etc., each member of a tax consolidated group is viewed as a small or medium-sized company only if the tax consolidated group as a whole also qualifies as a small or medium-sized company. In other words, even if each member of a tax consolidated group qualifies as a small or mediumsized company, the members cannot apply the tax regulations applicable to small or medium-sized companies (i.e. provisions relating to tax credit or exemption) unless the tax consolidated group as a whole also satisfies the small or medium-sized company threshold.
However, the current tax law does not have a similar requirement for the tax regulations applicable to mid-sized companies which has caused ambiguity in practice. The 2024 Tax Law Amendment resolves this uncertainty and makes it clear that the members of a tax consolidated group can apply the tax regulations applicable to mid-sized companies if (i) the tax consolidated group as a whole qualifies as a mid-sized company, and (ii) each member of the tax consolidated group qualifies as a small or medium-sized company or mid-sized company.
The amendment applies to the calculation of corporate tax for income generated in consolidated tax years beginning on or after January 1, 2025.
Going forward, if a tax consolidated group as a whole does not satisfy the requirements of a small or medium-sized company / mid-sized company and is classified as a general company, all members of the tax consolidated group will be treated as a general company (not a small or medium-sized company / mid-sized company) for purposes of applying the TPCA, etc
(4) Expanding the scope of costs eligible for R&D tax credit (TPCA PD §9, Annex 6)
Compared to general technology, higher R&D tax credits are available for national strategic technology and new growth / original technology (collectively, “national strategic technology”). However, under the current law, if a R&D staff performs R&D activities in relation to both general technology and national strategic technology, the general R&D credit rate applies to the entire employment costs relating to that staff.
Going forward, if a R&D staff primarily performs R&D activities in relation to national strategic technology, the employer can apply the higher R&D credit rates available for national strategic technology in respect of the relevant portion of the staff’s employment costs (prorated based on the time spent on national strategic technology-related activities). It is expected that this increased tax benefit will promote R&D activities in advanced technology industries.
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