Korea: New Tax Revisions for 2015
The 3 Tax Packages are as follows:
1) Tax package to boost earned income
Law: Businesses that increase employee wages will receive a 10 percent tax credit (5% for large corporations) on the portion that was increased, on the condition that wage growth exceeds average growth for the past 3 years and the number of permanent employees does not decrease from the previous year.
The permanent employee condition does not include board of executive members, employees earning more than 120 million won a year or relatives of the largest shareholders.
2) Tax package to boost dividend income
Law: Lower the withholding tax rate on dividend income earned on stocks held in listed corporations (14% -> 9%) and allow financial income, which had been taxed at the general rate, to be taxed separately (at a 25% rate).
Tax credit applies to listed stocks whose dividend payout ratios or dividend yields are more than 120 percent of the market average and total dividend payouts increase more than 10 percent from the previous year, as well as listed stocks whose dividend payout ratios or dividend yields are more than 50 percent of the market average and total dividend payouts increase more than 30 percent compared with the previous year. Newly listed stocks and stocks with no previous dividend payouts are required to issue dividends in excess of 130 percent of the market average.
3) Tax package to strengthen the link between corporate earnings and household income
Law: Businesses which do not spend a certain amount of earnings for the current fiscal year on investment, employee raises and dividend payments will be subject to a tax (10%).
- Applicable to businesses with an excess of 50 billion in equity capital (excluding SMEs) and large conglomerates where mutual shareholding between affiliates is banned.
- Businesses choose between either A or B methods
A. [income x base rate α(60-80%) – (investment + employee wage increase + dividends)] x 10% tax rate
B. [income x base rate β(20-40%) – (employee wage increase + dividends)] x 10% tax rate
In the A method, which includes investment, α will be set at 80%, and in the B method, which excludes investment, β will be set at 30%. Taxable income includes dividends earned from subsidiaries, depreciation on assets purchased in the current fiscal year (to avoid double deduction as it is already deducted from corporate income), interest earned from national tax refunds. Taxable income will exclude taxes to be paid (excluding this tax package), corporate contributions required by law, losses transferred from the previous fiscal year, donations exceeding the amount that can be treated as costs.
Investment will include both fixed asset and non-tangible fixed asset investment. Fixed asset investment includes investment in machinery, transportation equipment, tools, construction of new buildings and extension of old buildings, land used for business construction and expansions. Non-tangible fixed asset investment includes development costs, patent rights, trademarks and mining rights (excluding business rights).
Investment will exclude foreign investment in order to promote domestic investment, and will exclude share purchases for M&As. In the case of M&As, corporations can choose to be taxed with the B method, instead of the A method. Investments that will be sold or rented within 2 years will be taxed, unless they are freely rented or sold to SMEs. Employee raises do not include raises for executive members, employees earning more than 120 million won per year and the largest shareholder relatives.
While the above two measures are carrots for companies, the third is a stick that will tax them if they refrain from investing, raising wages or paying out more dividends. Specifically, the tax authorities will impose a tax of 10 percent on companies reluctant to use internal reserves. The government estimates that about 4,000 companies with 50 billion won or more in capital will be subject to this new taxation.
