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Korea, Rep of

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South Korea Plans to Increase Taxes on Large Companies and High-Income Individuals and Introduce Hybrid Mismatch and Interest Restrictions Measures

On 2 August 2017, South Korea's Ministry of Strategy and Finance published the government's proposed tax reforms, which include several initiatives meant to support employment and lower-income individuals, as well as SMEs. These include credits for increased employment, increased deduction for social insurance premiums, a new retained employee condition for M&A tax relief, increased tax relief for wage growth, and additional start-up relief in relation to employment, among others.

The initiatives are to be funded by increased tax revenue from large companies and high-income individuals, including through:

  • A new corporate tax rate bracket of 25% for companies with taxable income exceeding KRW 200 billion (rates for income below that amount unchanged); and
  • An increase in the top individual income tax brackets, including:
    • The addition of a 40% rate bracket for income over KRW 300 million up to 500 million; and
    • An increase in the rate for income over KRW 500 million from 40% to 42%.

Further to the rate increases, the government is also planning to reduce certain tax credits for large companies, including the R&D expense credit and the capital investment credit with respect to facilities for improved productivity, environmental protection, and safety equipment.

In addition to the employment and tax rate measures, the government is also planning to introduce certain BEPS measures, including:

  • Cost deduction restrictions in relation to hybrid mismatch instruments where amounts are not taxed in the other country within one year (BEPS Action 2); and
  • Related party interest deduction restrictions (30% of EBITDA) in relation to both domestic and foreign related party interest expense (BEPS Action 4).

The legislation for the proposals is to be finalized and submitted to parliament on 1 September and, subject to approval, would generally apply from 2018. Additional details will be published once available.

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