Invest KOREA

When a foreign-invested company is eligible for tax reduction or exemption for both foreign investment and startup small and medium-sized enterprises, the company may choose only one advantageous reduction or exemption. ◎ However, if the company keeps the book for its business eligible for foreign investment tax reduction or exemption completely independent from the other operations and their income sources can be separated, tax reduction or exemption for foreign investment and tax credit and tax reduction or exemption for other businesses can both apply

Such a foreign-invested company should keep the accounting records for the business eligible for tax reduction separately from the business that is not. The tax reduction amount is calculated by multiplying the assessed corporate tax amount by a ratio of the tax base from the eligible business to the total corporate tax base and then by the reduction rate. ◎ The calculation formula is as follows: – Tax reduction amount = Assessed corporate tax amount × (Tax base from the business eligible for tax reduction ÷ Total corporate tax base) × Reduction rate – Reduction rate = Ratio of foreign investment × reduction rate (100%, 50%)

Even if an FIZ is designated and publicly announced as an individual-type FIZ, companies in the FIZ shall make a separate application for tax reduction and exemption to the Minister of Economy and Finance. Tax reduction will not be granted without such an application. ◎ Required documents when applying for tax reduction and exemption (for submission to the International Economic Affairs Division of the Ministry of Economy and Finance) – The tax reduction and exemption application form – Notification of foreign investment by acquisition of stocks or contribution – Documents that prove the FIZ has been designated as an individualtype FIZ (e.g., an official announcement of the local government) – Documents demonstrating the business sector (e.g., project plan) – Documents proving the installation of new production facilities

The company is exempt from customs duty on capital goods whose import declaration is completed within five years from the date of foreign investment notification. It should be noted that the starting date of the five years is not the date of the decision to grant tax reduction or exemption nor the first day of commencing business operation, but the date of the foreign investment notification. Therefore, it is safe for foreign-invested companies such as general resort complex businesses which require a long time to obtain licenses to put off the foreign investment notification as long as possible.

The general reasons for the additional collection are listed below. More details can be found in Article 121-5 of the Restriction of Special Taxation Act. Corporate tax exemption for foreign investment was repealed on January 1, 2019. However, additional collection is still applicable to the corporate tax that had been exempted before the abovementioned date. – In case of cancellation of registration or business closure – Where the company fails to meet the requirements for tax reduction or/and exemption for foreign-invested companies prescribed in the Restriction of Special Taxation Act – Where a person, who has received a corrective order due to nonfulfillment of notification, fails to comply with it – Where a foreign investor transfers the stocks which he/she owns to a Korean national or a Korean corporation – Where the foreign-invested company fails to meet the requirements within five years (or three years for requirements for tax reduction or/and exemption relating to employment) from the date it notified foreign investment, in terms of payment of the object of investment, acquisition of loans, or the number of workers it has employed – The object of investment is disposed of or used for purposes other than those notified – The foreign investor's ratio of stocks, etc. falls short of the ratio of stocks, etc., at the time of reduction or/and exemption

Foreigners can opt for a flat rate when they pay wage and salary income tax. However, among foreign employees, foreign engineers who contribute to technology transfer and meet certain criteria are granted more significant tax benefits. ◎ Foreign engineer: A person who is not a Korean national and meets one of the following criteria: – A person who provides technologies for Korea in the area of engineering technologies defined by subparagraph 5 of Article 2 of the Engineering Industry Promotion Act under an engineering technology transfer agreement whose contract amount is USD 300,000 or higher – A person who works as a researcher at an R&D facility of a foreigninvested company that satisfies all the following requirements: ○ Employs at least five full-time researchers with a bachelor’s degree in the field of science and technology and at least three years’ research experience, or with a master’s or degree or higher in the field of science and technology (regardless of nationality) ○Has an independent research facility ○Invested KRW 100 million or more in the R&D facilities ○ Foreigners own at least 30/100 of the invested capital or voting shares issued by the R&D facility or the foreign-invested company that established the R&D facility – Foreign engineer in the materials, parts, and equipment sector: A person who is not a Korean national and works at an enterprise specializing in materials and components defined in Article 16 of the Act on Special Measures for Strengthening the Competitiveness of Materials, Parts and Equipment Sectors (Newly inserted on December 31, 2019) < Eligibility and scope of tax reduction and exemption >

Foreigners are liable to pay tax on their wage and salary income for providing service in Korea in the same way as Korean workers. However, unlike Korean workers, foreign workers can choose to pay the flat tax rate (19 percent) instead of the progressive tax rate (6-45 percent) according to income amount. ◎ Those who are eligible for tax reduction or exemption are foreign workers (executives or employees), and the income eligible is the wage and salary income paid for working in Korea. Therefore, foreigners working for purely domestic corporations and local branches of foreign corporations as well as foreign-invested companies are eligible. ◎ Notwithstanding Article 55(1) of the Income Tax Act, an amount equivalent to 19/100 (flat tax rate) of the wage and salary income can be the wage and salary income tax for the first day of providing service in Korea to the taxable period which ends within five years from such day. ◎ In principle, such benefit is valid until December 31, 2021. However, as an exception, no time limit is applied to foreign workers working at the regional headquarters (Article 20-2(5)1 of the Enforcement Decree of the Foreign Investment Promotion Act).

Under the thin capitalization rule, the interest expense on loans from foreign controlling stockholders exceeding a certain amount is not recognized as deductible expense. ◎ To save tax, companies tend to increase loans and pay interest expense to increase expenses instead of raising paid-in capital. The thin capitalization rule is a system to prevent this by not recognizing as deductible expenses the interests on loans from foreign controlling stockholders exceeding a certain amount. ◎ The thin capitalization rule – Where a domestic corporation borrows funds from a foreign controlling stockholder or a third party under a payment guarantee by a foreign controlling stockholder, and such borrowings exceed twice (six times for a financial business) the amount invested by the foreign controlling stockholder, the interest and discount fees paid in relation to the excess amount shall be excluded from deductible expenses of the domestic corporation and shall be deemed to have been disposed of as a dividend of or an outflow from the domestic corporation.10) – The term “foreign controlling stockholder” means any of the following persons who substantially controls either a domestic corporation or a domestic place of business of a foreign corporation: (1) In the case of a domestic corporation, a foreign stockholder or investor (hereinafter “foreign stockholder”) or a foreign corporation financed by such foreign stockholder (2) In the case of a domestic place of business of a foreign corporation, the head office or a branch of the foreign corporation (located overseas), a foreign stockholder of the foreign corporation, or a foreign corporation financed by the foreign corporation or the foreign stockholder

Customs duty, liquor tax, education tax, and VAT are imposed on imported alcoholic beverages. ◎ Procedures according to relevant laws 1) The Liquor Tax Act: The business should have a trader’s identification number under the Foreign Trade Act and a license for alcoholic beverage sales. – Enforcing authority: National Tax Service (www.nts.go.kr) 2) The Food Sanitation Act: The import declaration for food should be approved by the Minister of Food and Drug Safety or the head of the National Quarantine Office. Customs clearance is possible only after passing the quarantine inspection. – Enforcing authority: The Ministry of Food and Drug Safety (www. kfda.go.kr), National Quarantine Office (nqs.cdc.go.kr) 3) The Act on the Promotion of Saving and Recycling of Resources: The Korea Environment Corporation needs to check whether the bottles of imported alcoholic beverage are subject to a contribution charge. – Enforcing authority: Korea Environment Corporation (www.keco.or.kr) ◎ Customs clearance procedure – Upon the arrival of goods that meet the requirements above, import declaration, goods inspection, and customs duty payment should follow. ◎ Types and calculation method of taxes on importation – For the example of vodka (HSK2208.60-0000), tariff rate (refer to the rate set by FTA), liquor tax (72%), and VAT (10%) are imposed. The tax is calculated as follows:9) ○ Customs duty = Dutiable value (Value of goods + Transportation cost + Insurance premium) x Tariff rate (refer to the rate set by FTA) ○ Liquor tax = (Dutiable value + Customs duty) × Liquor tax rate (72%) ○ Education tax = 30% of Liquor tax ○ VAT = (Dutiable value + Customs duty + Liquor tax + Education tax) × VAT rate (10%)

The tax base for VAT on the importation of goods shall be the total sum of customs value, customs duties, individual consumption tax, liquor tax, education tax, special rural development tax, and traffic, energy and environment tax on such goods. ◎ VAT is imposed on the supply of goods or services by entrepreneurs and importation of goods.7) For the supply of goods or services, entrepreneurs are liable to pay VAT, and in principle, only for the goods or services supplied in Korea. For importation of goods, however, the importer of goods is liable for VAT regardless of the purpose or whether the importer is an entrepreneur. ◎ VAT is imposed on imported goods as an indirect tax for the goods consumed or used in Korea. This is to apply the same tax treatment applied to goods produced in Korea to imported goods as well, assuming the imported goods will be used or consumed in Korea. ◎ The tax base for VAT on the importation of goods shall be the total sum of the taxable value for customs duties, individual consumption tax, liquor tax, education tax, special rural development tax, and traffic, energy and environment tax on such goods.8)