TITLE : FAQ on FDI in Korea 2023 (Q96~Q100)
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작성일
2023
2023-12-12
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■ FAQ on FDI in Korea 2023 (Q96~Q100)
Taxation and Accounting
Q96 | What is the thin capitalization rule? |
A96 | 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 interestexpense to increase expenses instead of raising paid-in capital. Thethin capitalization rule is a system to prevent this by not recognizingas deductible expenses the interests on loans from foreign controllingstockholders exceeding a certain amount.
- The thin capitalization rule
- Where a domestic corporation borrows funds from a foreigncontrolling stockholder or a third party under a payment guarantee bya foreign controlling stockholder, and such borrowings exceed twice(six times for a financial business) the amount invested by the foreigncontrolling stockholder, the interest and discount fees paid in relationto the excess amount shall be excluded from deductible expenses ofthe domestic corporation and shall be deemed to have been disposedof as a dividend of or an outflow from the domestic corporation.*
- The term “foreign controlling stockholder” means any of the followingpersons who substantially controls either a domestic corporation or adomestic place of business of a foreign corporation:
- In the case of a domestic corporation, a foreign stockholder or investor(hereinafter “foreign stockholder”) or a foreign corporation financed bysuch foreign stockholder
- In the case of a domestic place of business of a foreign corporation,the head office or a branch of the foreign corporation (locatedoverseas), a foreign stockholder of the foreign corporation, or aforeign corporation financed by the foreign corporation or the foreignstockholder
* Article 22 of the Adjustment of International Taxes Act
Q97 | What is the preferential treatment of earned income tax for foreigners working at foreign- invested companies? |
A97 | 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%) instead of the progressive tax rate (6-45%) according to income amount. |
- Those who are eligible for tax reduction or exemption are foreignworkers (executives or employees), and the income eligible is the wageand salary income paid for working in Korea. Therefore, foreignersworking for purely domestic corporations and local branches of foreigncorporations as well as foreign-invested companies are eligible.
- Notwithstanding Article 55 (1) of the Income Tax Act, income tax forwage & salary income received from the first day of providing service inKorea until the taxable year in which the date on which 20 years elapsesfrom such date falls, the tax amount can be the amount calculated bymultiplying 19/100 (flat tax rate) with the wage & salary income.
Q98 | What is the preferential treatment of wage and salary income tax for foreign engineers working at foreign-invested companies? |
A98 | Wage & salary income paid to a foreign engineer for providinglabor to a domestic person in Korea which was generated for 10years starting from the date on which labor was first providedin Korea (on or before Dec. 31, 2023) shall be reduced by 50%. |
- Foreign engineer: A person who is not a Korean national and meets oneof the following criteria:
- Persons providing technology in Korea under an engineering technologyintroduction contract (contract amount of USD 300,000 or more) in Korea
- Foreign engineers meeting all of the following conditions:
- The person holds a bachelor’s degree or higher in the field of naturalscience, engineering and medicine
- The person has experience in R&D and technology in an overseasuniversity or research institution
- The person does not have family relations or has managementrelations with the company receiving service as of the last day of therelevant taxable year.
- The person is working as a researcher (not including persons onlymanaging administrative affairs) at a company-affiliated researchcenter or government-funded research institution.
Q99 | What are the reasons for the additional collection of tax that had been exempted on the grounds of foreign investment (e.g., exempted corporate tax)? |
A99 | 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 thathad 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 reductionor/and exemption for foreign-invested companies prescribed in theRestriction of Special Taxation Act
- Where a person, who has received a corrective order due to nonfulfillmentof notification, fails to comply with it
- Where a foreign investor transfers the stocks which he/she owns to aKorean national or a Korean corporation
- Where the foreign-invested company fails to meet the requirementswithin five years (or three years for requirements for tax reduction or/and exemption relating to employment) from the date it notified foreigninvestment, in terms of payment of the object of investment, acquisitionof loans, or the number of workers it has employed
- The object of investment is disposed of or used for purposes other thanthose 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
Q100 | Once tax reduction or exemption is granted, how long is the foreign-invested company eligible for exemption of customs duty on imported capital goods? |
A100 | The company is exempt from customs duty on capital goodswhose import declaration is completed within five yearsfrom the date of foreign investment notification. It should benoted that the starting date of the five years is not the dateof the decision to grant tax reduction or exemption nor thefirst day of commencing business operation, but the date ofthe foreign investment notification. Therefore, it is safe forforeign-invested companies such as general resort complexbusinesses which require a long time to obtain licenses to putoff the foreign investment notification as long as possible. |