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South Korea 2019 Tax Reform Laws Published

On 31 December 2018, South Korea reportedly published the laws for the implementation of the tax reform measure for 2019 in the Official Gazette. Changes include:

  • The repeal of the foreign investment tax incentive providing tax exemptions for foreign-invested companies in new growth sector businesses, which was identified has harmful and resulted in South Korea's inclusion in the EU's list of non-cooperatives jurisdictions (subsequently removed);
  • The permanent establishment (PE) rules are expanded to bring them in line with the latest OECD guidelines, including:
    • With respect to dependent agent PEs, a person that plays a principal role leading to the conclusion of contracts may constitute a PE, even if the person does have the authority to conclude contracts; and
    • Rules are introduced to counter artificial avoidance of a PE through fragmenting business activities in order to take advantage of PE exemptions for activities of a preparatory and auxiliary nature;
  • The loss carryforward offset limit for branches of foreign corporations in South Korea is reduced 80% to 60% from 1 January 2019 (already scheduled for domestic corporations);
  • The scope of foreign e-commerce supplies subject to VAT is expanded to include advertising services, cloud computing services, and intermediary online-to-offline services (like Airbnb);
  • Changes are made for the prevention of abuse in relation to the taxation of overseas investments vehicles and Korea-sourced income, including:
    • The removal of a condition for the treatment of an entity as a foreign corporation for Korean tax purposes so that the members or interest holders of an entity may be subject to tax unless at least one of the remaining three conditions for treatment as a foreign corporation are met:
      • The foreign entity is incorporated under the law of the jurisdiction of establishment;
      • The foreign entity's members are all partners with limited liability; or
      • The foreign entity is the same or similar to a Korean entity treated as a corporation under Korean law;
    • The introduction of new rules to treat an overseas investment as the beneficial owner of Korean-source income if at least one of the following conditions are met:
      • The investment vehicle is subject to tax in its jurisdiction of residence and the investment vehicle was not established with the purpose of evading Korean tax;
      • The investment vehicle is unable to disclose its investors or only partially discloses, in which case the investment vehicle may be considered the beneficial owner in respect of income attributed to the investors not disclosed (treaty benefits denied when this condition applies); or
      • The investment vehicle is considered the beneficial owner under the provisions of an applicable tax treaty;
  • The rules for the secondary tax liability of a buyer in a business transfer transaction are amended to provide that secondary tax liability will apply only where the buyer is related to the seller or the buyer acquired the business to aid the seller in tax evasion;
  • The transfer pricing rules are expanded to provide that in determining whether a transaction is at arm's length, the tax authority must accurately delineate the transaction in consideration of the commercial and financial conditions between a resident and its foreign related party, and where a transaction lacks commercial reason, the tax authority must disregard or recharacterize the transaction; and
  • The provision under domestic law that the provisions of a tax treaty will be preferentially applied in respect of the classification of domestic (Korea) source income of a nonresident is repealed.

The changes generally apply from 1 January 2019, although the expanded scope of VAT is to apply from 1 July 2019 and the new rules for overseas investment vehicles apply from 1 January 2020. Additional details will be published once available.

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