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Update - South Korea Tax Reform Measures for 2018

South Korea's 2018 budget bill was enacted on 19 December 2017 and includes a number of tax reform measures (previous coverage). The following is an update on some of the key measures not previously covered. The measures generally apply for fiscal years beginning on or after 1 January 2018, unless indicated otherwise below:

  • The disallowance of interest deductions for payments in relation to hybrid mismatch instruments to foreign related parties applies when such payments are not taxed in the foreign jurisdiction in the recipient's fiscal year beginning within 12 months following the close of the Korean payer's fiscal year in which the deduction is claimed (if partially taxed, the deduction of the non-taxed portion is disallowed);
  • A 30% of EBITDA interest restriction rule applies from 1 January 2019 in addition to the current 2:1 debt-equity ratio thin cap rules, with the deduction of interest payments to foreign related parties limited to the lower amount resulting from the application of the 30% of EBITDA or the 2:1 debt-equity ratio rules;
  • The 80% of taxable income limit for the offset of carried forward losses per year is reduced to 70% for fiscal years beginning on or after 1 January 2018 and to 60% for years beginning on or after 1 January 2019;
  • The transfer pricing documentation penalty is increased from KRW 10 million to KRW 30 million for failing to submit, or submitting incorrect information, for any one of the required documents: the Master file, the Local file, and the CbC report;
  • The accumulated earnings tax for certain large companies is extended to 31 December 2020 with amendments from 1 January 2018, including an increase in the rate from 10% to 20% (22% with 10% local tax), as well as an adjustment in the calculation of the tax that excludes the deduction of dividends in determining the accumulated earnings (deduction for payroll, investment, etc. still apply);
  • The ownership condition for the capital gains tax exemption on the alienation of listed Korean shares by non-resident is reduced from less than 25% ownership to less than 5% ownership, with a transition period for shares owned prior to 1 January 2018 if alienated by 31 December 2018; and
  • A continuity of employment condition is added in addition to prior conditions with respect to tax-free mergers/divisions, including that at least 80% of the employees of the transferred business must continue their employment with the surviving/spun-off entity.

Click the following link for an English-language release from South Korea's Ministry of Strategy and Finance on the enforcement decrees for various measures of the budget. Additional enforcement decrees are expected to clarify the application of other measures.

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