2016韩国投资指南（英文版）_24页_511kb

Summary of Taxation and Investment in Korea 2016

Core Content

Korea is a constitutional democracy with a strong emphasis on exports and a complex economic structure dominated by large chaebol conglomerates. The country is a member of the OECD and has made progress in liberalizing its foreign exchange regime, while maintaining certain controls. The business environment is governed by a range of laws and regulations, including the Foreign Investment Promotion Act (FIPA), which provides incentives for foreign investment. The legal framework for taxation and investment in Korea is extensive, with detailed provisions on corporate taxation, tax incentives, and international tax cooperation.

Main Points

1.0 Investment Climate

• Korea has a large SME sector, but chaebol conglomerates dominate major industries.
• Korea is a major trading nation, with a heavy reliance on exports and imported raw materials.
• The country is a member of the OECD and has a number of enhanced engagement and accession candidate countries.
• Foreign investment is generally permitted, with some exceptions in protected industries.

1.1 Price Controls

• Price controls exist in a few areas, such as farm products and telecommunications.
• The president can impose emergency price controls.
• Administrative guidelines and informal rules may restrict price fluctuations.

1.2 Currency

• The official currency is the Korean won (KRW).
• The Bank of Korea is the central bank, and Seoul is the financial center.

1.3 Banking and Financing

• The financial sector has improved through international regulatory alignment.
• The Financial Services Commission (FSC) oversees financial institutions.
• The Korea Exchange is a world-class securities market.

1.4 Foreign Investment

• Foreign companies may invest in Korea through subsidiaries, joint ventures, or branches.
• The FIPA is the main legislation governing foreign investment.
• Foreign investment companies must invest at least KRW 100 million and own at least 10% of a Korean company's shares.
• Investment incentives include tax exemptions, land leases, and support from Invest Korea.

1.5 Tax Incentives

• Tax incentives are available for high-tech industries and companies in special zones.
• Under the Tax Incentive Limitation Law (TILL), foreign investment companies may receive:
  • Full corporate income tax exemption for the first 3 or 5 years.
  • 50% exemption for the next 2 years.
  • Exemption from acquisition tax, registration tax, and property tax.
• Land can be leased for up to 50 years, with conditions for termination and exemption from lease payments.

1.6 Exchange Controls

• The Ministry of Strategy and Finance (MOSF) and the Bank of Korea manage the foreign exchange system.
• Most forex transactions are liberalized, except those involving offshore KRW.
• Free repatriation of capital and dividends is guaranteed under Korean law.
• Forex banks must verify the legitimacy of transactions.

Business Entities and Legal Requirements

2.1 Principal Forms of Business Entity

• Foreign investment may take the form of incorporated subsidiaries, joint ventures, or branches.
• The most common form is the Joint Stock Company (JSC), which offers flexibility and is widely accepted.
• Other forms include Limited Liability Companies (LLC), with different requirements for directors and shares.

2.2 Regulation of Business

• Mergers and acquisitions are regulated under the FIPA and require prior notification.

• A 5% rule applies to share acquisitions, requiring reporting to the FSC and Korea stock exchange.

• Tax-free mergers are possible under certain conditions, including a minimum stock ratio and continuation of business.

• Tax Implications of Mergers:

  • Merged company may recognize capital gains or losses.
  • Qualified tax-free mergers avoid capital gains by using book value.
  • Surviving company may recognize goodwill or negative goodwill, which is amortized over 5 years.

• Monopolies and Restraint of Trade:

  • Chaebol dominate key industries and are subject to the Monopoly Regulation and Fair Trade Act (MRFTA).
  • The MRFTA restricts anti-competitive behavior and imposes penalties.

2.3 Accounting, Filing, and Auditing

• Financial statements and business reports must be filed annually.
• Listed companies and those with assets over KRW 12 billion must be audited by external accountants.
• K-IFRS is required for listed companies and unlisted financial institutions, while unlisted companies may use K-GAAP.
• Tax laws have been updated to reflect K-IFRS adoption.

Business Taxation

3.0 Business Taxation Overview

• Korea levies both national and local taxes.
• Taxes include corporate income tax, surtax, minimum tax, VAT, excise tax, and others.
• Foreign branches may be subject to branch tax under tax treaties.
• Taxation of foreign investment is governed by multiple laws and treaties.

3.1 Taxable Income and Rates

• Resident companies are taxed on worldwide income.
• Nonresident companies are taxed only on Korea-source income.
• Corporate Income Tax Rates:
  • 10% on the first KRW 200 million.
  • 20% on KRW 200 million to 20 billion.
  • 22% on amounts over KRW 20 billion.
• Local Income Surtax:
  • 1% on the first KRW 200 million.
  • 2% on KRW 200 million to 20 billion.
  • 2.2% on amounts over KRW 20 billion.
• Minimum Tax:
  • 10% on taxable income up to KRW 10 billion.
  • 12% on KRW 10 billion to 100 billion.
  • 17% on income over KRW 100 billion.
  • SMEs are subject to a lower rate of 7% for four years, then 8% and 9% for subsequent years.

3.2 Residence

• A company is considered resident in Korea if its headquarters or place of effective management is located in Korea.

3.3 Taxable Income and Deductions

• Taxable income is calculated as gross income minus non-taxable items.
• Standard operating expenses are deductible.
• Payments to foreign affiliates (e.g., interest, royalties) are deductible, but subject to review.
• Certain taxes, such as property and car taxes, may be deducted.
• Tax loss carryforwards are limited to 80% of taxable income for non-SMEs, and 1-year carryback is available for SMEs.

3.4 Capital Gains Taxation

• Capital gains are included in taxable income.
• Nonresidents are taxed at the lesser of 11% (including surtax) of the sales price or 22% (including surtax) of the gain.
• Tax-free mergers avoid capital gains taxation.
• Foreign companies holding less than 25% of shares in a listed company for five years are exempt from capital gains tax.

3.5 Double Taxation Relief

• Korea provides unilateral tax credits for foreign taxes paid.
• The Law for the Coordination of International Tax Affairs (LCITA) facilitates international tax cooperation.
• Tax treaties help avoid double taxation.

Intellectual Property Protection

• Korea protects patents, trademarks, copyrights, and trade secrets.
• Patents: 20 years from filing, extendable up to 5 years for regulatory approval.
• Trademarks: 10 years from registration, renewable every 10 years.
• Copyrights: 70 years after the author's death, with registration required for asserting rights.
• Trade Secrets: Protected under the Unfair Competition Prevention and Trade Secrets Protection Act.
• Korea is a signatory to key international IP treaties, including the Madrid Protocol and the WIPO Copyright Treaty.

Conclusion

Korea offers a structured and evolving investment environment, with a focus on promoting foreign investment through legal and tax incentives. The country's tax system is comprehensive, with a clear distinction between resident and nonresident corporations, and includes mechanisms to prevent double taxation. The legal and regulatory framework is aligned with international standards, making it attractive for foreign investors, although the dominance of chaebol and complex monopolies regulations may pose challenges.