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TAX & CUSTOMS

2016 Revision Focuses on Boosting Investment and Promoting Employment

  • DateJuly 28, 2016
  • Tel044-215-4111

Tax Revision Bill, 2016

 

2016 Revision Focuses on Boosting Investment

and Promoting Employment

 

 

Background

 

Despite production and consumption steadily improving, investment has yet to pick up due to sluggish exports, and the job market will likely be negatively affected by the industrial restructuring and external uncertainties, such as China’s economic slowdown and Brexit.  There is still increased demand for social welfare although recovering consumption has led to an increase in tax revenues[1]. 

 

Against this backdrop, the government drew up the 2016 tax revision bill which focuses on stimulating the economy and improving people’s livelihoods, while pursuing fair and rational taxation.

 

1. Stimulate the Economy

 

Support Future Growth Engines

 

- Restructure the new growth engine R&D tax credit to help develop the 11 new technologies[2]:  an up to 30 percent income or corporate tax credit, the higher the ratio of R&D investment to sales revenue, the higher the credit rates are

- Introduce an up to 10 percent tax credit for facility investment if it is to commercialize new growth engine technologies

- Restructure the tax support given to companies with foreign investment[3] in order to promote the development of new growth industries:  an up to 100 percent foreign investment tax deduction

- Introduce tax incentives to promote the content industry

- Increase tax support for eco-friendly cars:  an up to 4 million won individual consumption tax reduction when buying hydrogen fuel cell vehicles

 

Promote Employment

 

- Adopt a negative list approach in providing tax support for job creation and investment: applying to most of the businesses

- Promote small- and medium-sized enterprises (SMEs) creating jobs:  Increase the tax deduction ceiling for creating new jobs by 5 million won per new employee

 

Boost investment and consumption

 

- Promote investment in ventures:

·       Introduce a 5 percent corporate tax credit for investment in ventures,

·       raise the ceiling of the stock option tax break[4] from 100 million won a year to 500 million won for three years to help attract talented human resources,

·       introduce tax breaks for individual investors who invest in PEFs which finance ventures

- Promote tourism: Expand the VAT refund amount for foreign visitors to get at the tax refunding counters in the city from up to 2 million won per store to up to 5 million won per store

 

Support Industrial Restructuring

 

- Provide the shipping industry with tax support:  Shipping companies will be allowed not to apply the tonnage tax for the 2016 and 2017 business years

- Expand tax support for corporate restructuring:

·       Requirements for tax deferrals due to spinoff or in-kind investment will be eased that parent companies need to meet the more than 50 percent holding requirement for only 3 years. 

·       Asset losses associated with M&As will be counted as expenses if they are not built-in losses.

·       Taxes to be deferred on capital gains from a merger between overseas subsidiaries if the taxes have been deferred in the foreign country

- Extent the special tax advantage given to high-risk and high-yield trust funds until the end of 2017, which is aimed at helping SMEs issue corporate bonds

 

2. Support the Working Class and SMEs

 

Support the Working Class

 

- Extend the income tax deduction for credit card payments until the end of 2019, while adjusting the deduction ceiling from 3 million won to 2 million won for those earning 120 million won or more a year

- Increase EITC by around 10 percent[5]

- Raise the childbirth tax credit for having more than one child from 300,000 to 500,000 won for a second child and 300,000 to 700,000 won from a third child onwards

- Increase the rate of the tax credit for housing rent payments by 2 percentage points to 12 percent

- Introduce tax incentives to encourage corporate investment in long-term, large-scale rental housing supply:  dividend income from rental housing funds or real estate investment trusts (REITs) to be made tax-exempt, while giving a capital gains tax deduction for stock transactions

 

Support SMEs and the Self-employed

 

- Extend the VAT preferential deemed input tax deduction ceiling applied to the purchases of agricultural products and seafood until the end of 2018

- Introduce a 3 percent tax credit to large corporations for their investment in facilities when the facilities are rented free of charge to SMEs through foundations set up to promote cooperation between conglomerates and SMEs

- Increase the tax credit for SMEs’ investment in welfare facilities from 7 percent to 10 percent

- The forest industry to be made eligible for the Special SME Tax Reduction[6]

 

3. Fair Taxation

 

Broaden the Tax Base

 

- Improve effectiveness of taxes on capital gains from the sales of shares:  Those holding equities worth 1.5 billion won or more per company are subject to the capital gains tax, an increase from 2.5 billion won for a KOSPI-listed company and 2.0 billion won for a KOSDAQ-listed company

- Extend the special low income tax rate for foreign workforce until the end of 2019, while adjusting the tax rate from 17 percent to 19 percent

- Allow foreign corporate branches in Korea to use a loss carryforward, which can be deducted from this year’s revenues for the amount of up to 80 percent of the revenues, the same rate applied to domestic companies

- Give a 10 percent income tax deduction for credit card payments made to purchase used cars

- Expand businesses that are obliged to issue cash receipts to 55 businesses, including used car dealers and art dealers

 

Reduce International Tax Evasion

 

- Multinational enterprises to be required to submit the country-by-country report in accordance with the OECD BEPS[7] project for the 2016 business year by the end of 2017

- Impose a 20 percent capital gains tax on shares owned by large shareholders regardless of the sales of the shares on the date when they become nonresidents due to such as emigration, which will be effective from January 2018

- Impose gift taxes on givers instead of recipients if the givers are residents and recipients are nonresidents, and the gifts are foreign assets

- Impose taxes on technical services that are provided overseas by a foreign company if the payments are made in Korea according to tax treaties

- Multinational companies will still be subject to taxes after they withdraw their advance pricing agreement applications, for as long as a year.

 

Taxation to Increase Household Income

 

- Revise the corporate tax system to promote increases in employee wages and investments rather than dividend payments

 

- Allow businesses to change their tax methods from the one which does not include investment as tax-deductible to the one which includes investment as tax-deductible[8]

 

4. A Taxpayer Friendly System of Taxation

 

Strengthen Taxpayer Rights

 

- Reduce penalty tax by 50 percent for minor offenses, such as not submitting less relevant documents

- Allow to apply price adjustments when traders file the imported goods with the arm’s length price approved by domestic tax law.

 

Relieve Administrative Burden on Taxpayers

 

- Ease the preliminary return duties of the capital gains tax on share transactions from 4 times a year to twice a year

- Continue to work on rewriting the tax code, which is aimed at increasing taxpayers’ understanding of the rules

 

Promote Stock Transactions

 

- Lower the securities transaction tax rate imposed on the K-OTC[9] trading of unlisted stocks from 0.5 percent to 0.3 percent

 

 

Please refer to the attached pdf for the full press release

 

 



[1] Tax revenues increased by 19 trillion won for January-May this year to 112.7 trillion won compared with the same period last year

 

[2] Future cars, AI technology, next generation SW and security, contents, next generation electronic devices and information security, next generation broadcasting and communications, bio- and health industries, energy and environment industries, material science and engineering, robots, aerospace engineering

 

[3] More than 10 percent for the largest foreign share holder

[4] Pay either income taxes (6-38%) or capital gains taxes (10%, 20%) for the income generated by exercising stock options

 

[5] Maximum benefits (million won, 2016→2017): single households (0.7→7.7), single income households (1.70→1.85), dual income household (2.10→2.30)

 

[6] 5-30%

[7] Base Erosion and Profit Shifting

 

[8] Businesses must spend a certain amount on investments, wage increases and dividend payments, and choose between either A or B methods and must adhere to it for 3 years.

-      A: [income x 80% base rate ? (investment + employment wage increase + dividends, and etc.)] x 10% tax rate

-      B: [income x 30% base rate ? (employee wage increase + dividends, and etc.)] x 10% tax rate

[9] KOFIA (Korea Financial Investment Association) Over the Counter Market

Ministry of Economy and Finance
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