Doing Business in Korea 2009 - Enterprise Ireland€¦ · Samil PricewaterhouseCoopers LS Yongsan...

Doing Business in Korea 2009

SeoulSamil PricewaterhouseCoopers LS Yongsan Tower, 21st Floor191 Hangangro 2gaYongsangu, Seoul 140-702Telephone: (82) (2) 709-0800Fax: (82) (2) 709-0850

GwangjuSamil PricewaterhouseCoopers Korea Investment & Securities Building, 8th Floor 183 Geumnamro 5ga, Donggu Gwangju 501-025Telephone: (82) (62) 223-3131Fax: (82) (62) 224-1335

BusanSamil PricewaterhouseCoopersHanil Officetel, Suite 401815 MoonhyundongNamgu, Busan 608-040Telephone: (82) (51) 640-0400Fax: (82) (51) 631 5505

DaeguSamil PricewaterhouseCoopersGwangjang Building, 3rd Floor495-45 Duryu 3dongDalseogu, Daegu 704-063Telephone: (82) (53) 655-3331Fax: (82) (53) 655-3339

The PricewaterhouseCoopers offices and contact information in Korea are as followings:

Market & Strategy LeaderJae-Bong Yoon02 709 [email protected]

Assurance Managing PartnerHong-Kee Kim02 709 [email protected]

Assurance LoS LeaderYeong-Kyun Ahn02 709 [email protected]

Tax Managing PartnerYoung-Sik Kim02 709 [email protected]

Tax LoS LeaderSoo-Hwan Park02 709 [email protected]

PIC Managing PartnerKyung-Joon Jang02 709 [email protected]

PIC LoS LeaderEui-Hyung Kim02 709 [email protected]

TS-FAS Managing PartnerSang-Tai Choi02 709 [email protected]

TS-FAS LoS LeaderSeung-Woo Ryu02 709 [email protected]

The Digested Version

This Guide has been prepared to provide information about doing business in the Republic of Korea (Korea). While the Guide covers a broad range of topics, it is not intended to provide comprehensive coverage. For specific accounting or legal questions, please refer to the laws, regulations and decisions or seek appropriate advice from a professional adviser. Samil PwC does not assume any responsibility for inaccurate information contained in this publication.

The material contained in this Guide was assembled in May 2009 and, unless otherwiseindicated, is based on information that was current at that time.

Doing Business in Korea 2009

PricewaterhouseCoopers in the Republic of Korea

As we advance into the midpoint of the Global Financial Crisis, we should stop and reflect on how the Korean economy has always demonstrated resiliency. Korea, in the past, has experienced significant economic upturns and downturns and yet never failed to maintain a strong economy. The Asian financial crisis of 1997 acted as a catalyst for Korea’s structural reform with an increased emphasis on conglomerates and financial institutions.

In addition, the Korean government executed a series of regulatory reforms in an effort to create a more business-friendly environment. Foreign investment liberalization and consequent corporate tax incentives have been pursued and implemented in order to attract additional foreign investment and stimulate further economic growth.

Through these efforts, the Korean economy achieved sustainable growth with a 5.7% average GDP growth rate from the years 1999 through 2007. Although the global economy has been recently suffering from a credit crunch, Korea continues to display its economic resilience as major companies remain strong with profits while overall economic activities including consumption, investments in construction and facilities, and production from manufacturing and services are quickly making improvements.

This guide prepared by Samil PwC is filled with essential information to help the international business society gain a better understanding of the Korean economy. Covering a variety of topics including governmental policies, foreign investment incentives and regulations, banking and financing, labor relations, audit requirements, tax systems and living environment, this informative guide will provide value for those who are interested in or already doing business in Korea.

Kyung-Tae AhnChairman

Business Environment in Korea

Investment Opportunities and Incentives

Restrictions on Foreign Investment and Investors

Labor Relations

Exporting to Korea

Accounting Requirements and Practices

Tax System and Administration

Taxation of Foreign Corporation

Partnerships and Joint Ventures

Individual Income Tax for Foreigners

Transfer Pricing Regulations

How Samil PricewaterhouseCoopers can assist you

01.

02.

03.

04.

05.

06.

07.

08.

09.

10.

11.

12.

What’s inside

The PricewaterhouseCoopers offices in Korea

04

12

18

22

26

30

34

42

48

52

58

62


Chapter 01

5

Industrial climate

Korea has achieved stable and consistent economic growth; the GDP growth rate over the last decade stood roughly at 5%. The Korean economy has demonstrated its resilience through a quick recovery after the Asian financial crisis in 1997 The Korean economy, which has been highly dependent on exports, was negatively affected due to the sudden decrease in demand from major trade partners in developed countries. The government focused on retaining an equal balance in components of GDP and anticipated a quick revitalization of exports and gradual improvement in consumption. The percentage of exports in the Korean GDP was 38% in 2001; this rate been rising continually, representing over 63% in 2008.

Amid concerns that increasing labor costs and imports of low-priced articles from underdeveloped countries in Asia are causing Korea to be less competitive in lower-quality and labor-intensive products, there is a trend to concentrate on higher-quality, value-added products and the high technology sector. High-technology products such as semiconductors, computers, wireless communication devices and automobiles accounted for 38 percent of the nation's total exports during the first three months of 2009. Government policies also encourage development of the service sectors including education, IT, medical care, contents, etc. Recently, ‘green growth’ has arisen as a significant issue across the industries as the Government promotes tax incentives and funding for green technology.

Table I reflects the growth of both gross domestic product (GDP) and gross national income (GNI) for the five year period through 2008.


01 Chapter

In billions of Won at 2008 constant prices*

2004 2005 2006 2007 2008

Agriculture, forestry and fishing 27,681 25,853 25,751 25,209 23,441

Manufacturing 205,826 213,646 220,940 238,611 258,638

Mining and quarrying 1,759 1,992 1,925 2,001 2,185

Electricity, gas, water 17,497 17,612 18,547 19,155 16,399

Construction 57,833 59,284 61,359 64,979 64,616

Wholesale, retail trade, restaurants and hotel 79,351 82,470 87,321 93,406 101,054

Logistics and storage 34,632 35,292 36,424 40,071 40,283

Communications 33,821 36,256 37,970 39,198 39,979

Finance and insurance 49,868 53,395 55,235 61,114 60,724

Real estate 73,132 77,411 75,956 80,075 73,012

Business services 35,336 37,893 41,292 45,056 49,912

Public administration and National Defense 44,435 48,201 52,263 55,516 59,656

Education 43,281 46,502 51,037 55,554 59,963

Health and welfare 25,618 28,558 31,618 35,452 38,653

Culture and entertainment 9,437 10,111 10,859 12,209 12,987

Other services 14,701 15,610 16,610 17,816 18,827

Total value added 741,832 775,890 814,686 874,782 920,331

Net tax on production 85,061 89,351 94,058 100,231 103,606

I. Expenditure on GDP, 2004~2008

6 Samil PricewaterhouseCoopers

2002 2003 2004 2005 2006 2007 2008 2009(Q1)

Male 3.7% 3.8% 3.9% 4.0% 3.8% 3.7% 3.6% 4.3%

Female 2.7% 3.3% 3.4% 3.4% 3.0% 2.6% 2.6% 3.1%

Average 3.2% 3.5% 3.7% 3.7% 3.4% 3.2% 2.0% 3.7%

Source: National Statistical Office

Beginning in 1987, legal minimum wage standards were established for selected industries. In January 1990, the Ministry of Labor expanded the minimum wage system to cover all businesses with five or more employees.

Per capita GNP dramatically increased from US$1,600 in 1989 to approximately US$ 8,581 in 1999 and has shown consistent growth until 2007, reaching US$10,493. Per capita GDP decreased slightly in 2008 to US$9,287.

Population and employment

■ Population

With a population of over 47 million people (including foreigners), Korea is one of the most densely populated countries in the world. Seoul, the capital of the nation and the largest city in terms of population and business infrastructure, is occupied by more than 9.8 million residents. Since 1960, the population of Seoul has increased from ten to almost 21 percent of the total population.

As the economy advances the economic focus has shifted away from labor-intensive industries, and the annual population growth rate is currently less than one (1) percent. Due to the low birth rate, the annual population growth rate is expected to fall slightly under zero percent by 2020. The Korean labor force is estimated to be approximately 24 million in 2009.

■ Employment and standard of living

Approximately 52 percent of the population 15 years old or older participates in full-time economic activities. Because of the wide availability of education in Korea, the majority of new entrants in the manufacturing sector have at least a high school level of education. The number of people in the workforce is approximately 23 million and the unemployment rate is at 3.7 percent. The unemployment rate has remained steady at around 3% during the last decade. The unemployment rate trends for the years from 2002 to 2009 are shown in Table II.

II. Unemployment Rates, 2002~2009

Chapter 01

GDP 826,893 865,241 908,744 975,013 1,023,938

Gains from changes in terms of trade 12,710 0 -13,196 -16,828 -49,756

Gross domestic income 845,015 865,241 896,853 939,687 928,031

Net factor income from abroad 2,503 -814 1,342 1,623 5,901

GNI 847,525 864,427 898,194 941,317 933,942

*US$1 = W1102.6 (2008 average exchange rate)Source: Economic Statistics System, Bank of Korea, 2009

7

Framework of industry

Most companies are small and closely held by the controlling family. Conglomerates known as Chaebol are an indispensable part of the Korean economy and have played a pivotal role in the nation's industrialization over the last five decades. After the Asian financial crisis in 1997, a number of Korean firms including the Chaebols were put under intense pressure to implement real operational restructuring with improvements in corporate governance, management transparency and capital structure. Since then, subsidiary business swaps and capital structure improvement plans are now assessed to be well-implemented. Chaebols are now more focused on their core businesses, have a much sounder balance sheet and have a much more transparent management and improved governance structure.

Approximately 750 companies are listed on the Korea Stock Exchange and over 1000 companies are listed on the KOSDAQ (as of May 20, 2009). The government controls or dominates certain major industries including tobacco, ginseng, oil, mining, utilities, public services and industries that require heavy capital investment.

■ Manufacturing

Korea’s economy depends highly on foreign trade. Accordingly, most major industries are either export-oriented or suppliers for export industries. During the 1980s and 1990s, Korea shifted away from low-skilled manufacturing sectors such as garments, textiles, shoes, toys, and sundry goods due to competition from developing nations. Korea has increased its focus on higher-value quality products and on higher-technology industries such as semiconductors, specialized ships, telecommunications devices, automobile parts, etc.

The production of major manufacturers is shown in Table III.


01 Chapter

2004 2005 2006 2007 2008

CDMA wireless phone - 53,369 55,709 51,017 57,211

LCD TV - 852 1,304 1,794 2,285

Refrigerator 2,229 2,739 2,929 2,565 2,641

Passenger car 3,123 3,357 3,489 3,723 -

Cargo ship (in CGT) - 4,470 5,162 7,355 8,538

Source: National Statistical Office.

III. Production of Major Manufacturers, 2004~2008


Chapter 01

■ High-tech industry

In recent years, high-technology industries have experienced rapid growth. The major factors contributing to this growth include the plentiful supply of qualified engineering graduates and the granting of a variety of tax and other investment incentives. Foreign participation in high-technology industries is strongly encouraged.

■ Service industry

The service sector has represented approximately 50 percent of gross domestic product in recent years and is expected to continue to experience solid growth in the future.

The government has recognized that foreign expertise is valuable in contributing to the development of business services, and recently announced the development plans for ten major service areas including education, contents, IT, design, consulting, medical care, media, etc. The plan includes strategies to attract prominent foreign educational and medical institutions to establish branches in Korea.

About 42 foreign banks have branches in Korea. Foreign banks and local banks operate under similar conditions. The insurance industry has been open to foreign companies. At present, eight foreign life insurance companies and three Korean-foreign joint life insurance companies are operating in Korea.

■ Energy

As Korea's economy has grown rapidly, its total energy consumption has also risen sharply. Because of the lack of natural resources, dependence on overseas energy imports has been steadily rising. Korea is currently dependent on overseas imports for more than 97 percent of its total primary energy consumption.

Korea possess very limited natural resources and the country depends heavily on imported petroleum for its basic energy supply. In order to enhance energy independence, Korea has been promoting an energy diversification program since the 1970s which placed significant emphasis on nuclear energy. Korea’s nuclear power technology is very similar to that of more developed nations and nuclear energy has been one of the major sources of power, generating roughly 36% of the total electricity produced. However, global interest in green energy is dramatically increasing and Korea is not an exception. The government has set an agenda to foster development of alternative energy and plans to provide financial and political support to businesses involved in this activity.

Table IV reflects the growth of electric power generated over the last three years.

2004 2005 2006 2007 2008

Hydro 5,861 5,189 5,219 5,042 5,563

Thermal Coal* 133,777 133,658 139,206 154,674 173,508

Oil** 22,065 20,491 19,195 21,215 15,425

Gas 55,999 58,118 68,392 78,427 75,809

Nuclear 130,715 146,779 148,749 142,937 150,958

Alternative 350 404 511 829 1,092

Total 342,148 364,638 381,181 403,124 422,355

In millions of Kilowatt-hours

IV. Electric Power Generated, 2004~2008

9

01 Chapter

Foreign trade and balance of payments

Korea consistently had an unfavorable trade balance until 1985. Domestic and international concern about Korea's large foreign debt and balance of payments position caused the government to implement programs to improve the trade imbalance by promoting energy conservation measures. This included encouraging selective import substitution of semi-finished and capital goods, controlling the level of foreign debt, encouraging domestic savings, and supporting efforts to achieve domestic self-sufficiency in rice and other grains. As a result, Korea achieved its first significant overall favorable international trade balance in 1986 and continued to record increasing surpluses over the following decades.

The country experienced a trade deficit in the 1990s. During the latter part of 1989, a rapid appreciation of the Korean currency and frequent labor disputes in many workplaces caused sluggishness in exports relative to the increase in imports. Since 1998, the current account has registered a large surplus, mainly caused by the sharp decline of imports in response to dull domestic demand. The recent global economic downturn caused a significant decrease in demand from Korea’s trading partners in developed nations resulting in a subsequent fall in the trade balance.

Since the admission of Uruguay and Korea to the OECD, the government has accelerated import liberalization by removing some of the institutional hurdles and regulations that restrict imports. Furthermore, Korea signed Free Trade Agreements (FTA) with Chile, Singapore, EFTA, ASEAN and the U.S. (has not been ratified). Active negotiations are currently under progress between Korea and the European Union, Canada, Mexico, India, etc. as of 2009.

Korea's balance of payments position is shown in Table V.

The United States and Japan accounted for 20.5 percent and 16.8 percent, respectively, of Korea’s exports in 1999. A significant amount of Korea’s trade has shifted to China over the last decade. Exports to currently China represent 22% of Korea’s total exports. Korea is growing trade with the Middle East, Europe and Southeast Asia. Korean products are also exported to Hong Kong, Singapore, Germany, Mexico, Australia, Canada, France, the Netherlands, Saudi Arabia and the United Kingdom. The ratio of total trade to Gross National Income (GNI) exceeded 100% in 2008 which demonstrates the Korean economy’s large dependence on exporting and importing activities.

Source: The Bank of Korea.

2004 2005 2006 2007 2008

Exports 253.8 284.4 325.5 371.5 422.0

Imports 224.5 261.2 309.4 356.8 435.2

Trade balance 29.3 23.2 16.1 14.7 (13.2)

Current account balance 28.2 15.0 5.4 0.6 (0.6)

V. Balance of Payments, 2004-2008



Aims of government policy

■ Value-added strategy in core industries

High competency in core industries such as shipbuilding, automobile and steel is obtained through high technological development supported by the government (domestic industry leaders globally ranked #1 in shipbuilding, #4 in steel and #10 in automobiles in 2008). Though such industries have shown significant growth, there is a clear limit to price competition in the global market. Therefore, companies are focusing on the development of high value-added products and services. Such value-added products include human-friendly vehicles that are hybrid or fuel-cell powered, specialized ships that require core advanced technology and advanced materials.

■ Efficient SME (Small & Medium Enterprise) supporting system SME departments in the central government will be integrated and reorganized into

function-departments such as financing and international marketing for SMEs to easily access the system and its policies. The complicated SME system will be reformed by removing similar and overlapping areas so that it is more efficient for practicality purposes.

■ Fostering foreign direct investment

The Korean government encourages fostering foreign investment that creates a ripple effect in employment, technology and the economy. The government is aware of the value of building a foundation that can generate stable investment fund inflow and providing a suitable business environment. Korea supports searching for investment targets and provides buyer-focused location and incentives (e.g. providing amicable and convenient location, deregulation and simplifying related procedures). Free Economic Zones in Songdo or Jeju are expected to become outposts for the plan. Government-derived business and regional development projects will be developed. Regulation and policy for business and management will conform with global standards, especially in tax, accounting, advanced foreign exchange and intellectual property protection.

Chapter 01

In US$ millions

Source: Korea International Trade Association.

VI. Exports to Major Trading Partners, 2007-2008

Trading Partner 2007 2008

Amount % increase Amount % increase

1. China 81,985 18.0 91,389 11.5

2. US 45,766 6.0 46,377 1.3

3. Japan 26,370 (0.6) 28,252 7.1

4. Hong Kong 18,654 (1.7) 19,772 6.0

5. Singapore 11,949 25.9 16,293 36.3

6. Taiwan 13,027 0.2 11,462 (12.0)

7. Germany 11,543 14.8 10,523 (8.8)

8. Russia 8,088 56.2 9,748 20.5

9. Mexico 7,482 19.1 9,090 21.5

Table VI summarizes Korea’s exports to major trading partners.

11Business Environment in Korea

01 Chapter

■ Free trade agreements

Korea has successfully concluded a free trade agreement with Chile, Singapore, ASEAN and the United States (not yet ratified), and is currently in the process of negotiating with the EU, India and Canada, etc.

■ Low carbon, Green growth

While Korea has been participating in the UN Framework Convention on Climate Change (UNFCCC), it is not yet required to make an emission limitation or reduction commitment. Korea has been put under greater pressure to make a commitment to gas reduction as its greenhouse gas emission in 2005 reached 591 million C02 ton, ranking 6th amongst OECD members. Korea gives priority to the Comprehensive Measures which stem from the Climate Change Committee. The Committee seeks to reduce greenhouse gas emissions to a globally-accepted level and to develop the carbon market along with green technologies by laying out related legislations in a timely manner.

■ Progressing 10 service areas

The government has recognized that foreign expertise is valuable in contributing to the development of business services and recently announced development plans for ten major service areas including education, contents, IT, design, consulting, medical care, media, etc. The plan contains a strategy to attract prominent foreign institutions to establish branches in the ROK especially in the areas of education and medical care.

Public/private sector cooperation

The Lee administration encourages private-sector initiatives through a business-friendly government. In carrying out their regulatory functions, government agencies maintain a close rapport with the private sector.

Investment Opportunities and Incentives

Chapter 02

13Investment Opportunities and incentives

02 Chapter

Investment climate

■ Government attitude toward foreign investment

The government has adopted a policy to effectively induce and protect foreign capital. Foreign investment has been and will continue to be vital to the Korean economy; foreign investment contributes not only to the promotion of economic cooperation with foreign countries but also to the strengthening of the international competitiveness of the nation's industries and inducement of advanced technology. Various incentives and guarantees have been granted to attract foreign investment and to protect foreign-invested enterprises.

■ Trend and Liberalization of Foreign Direct Investment

Foreign Direct Investment (FDI) in Korea increased significantly during the Asian financial crisis which began in 1997, FDI in Korea has been important in the financial and corporate restructuring that was accelerated by the crisis.

Since the financial crisis, cross-border mergers and acquisitions have been one of

the most important forms of FDI in Korea. FDI through cross-border mergers and acquisitions in Korea increased from US$699 million in 1997 to US$2.48 billion in 2007 and US$4.43 billion in 2008, representing 38 percent of total FDI last year. A more liberalized environment for FDI have attracted foreign investors. In addition to strengthening the rights of foreign investors, the Korean government has taken measures to simplify procedures for mergers and acquisitions, reform bankruptcy laws, introduce short-term measures to facilitate asset transfer, permitted the establishment of holding companies, and allow foreign investment companies to freely acquire land without limitations on the size and use of land.

Total FDI in Korea amounted to US$10.9 billion in 2007 and US$11.7 billion in 2008.

■ Trade policy

The government policy on trade is generally based on the principle of free and fair trade. The Korean trade policy initiatives are consistent with the policy of the World Trade Organization agreement. Korea has developed its economy by striving for an improved balance of international payments, expanding trade through promotion of foreign trade and establishing a fair transactional order. The government encourages local industries to compete with foreign manufacturers in order to establish world class industries. Nevertheless, barriers to entry continue to exist in certain industries.

■ Taxation policy

Foreign invested companies engaged in a qualified high-technology industry or a business having extensive industrial supporting effect may be eligible for 100% income tax exemption for five years and 50% exemption for the following two years. Other taxes such as customs duties, income tax on dividends, and local taxes may also be exempt. Similar tax incentives are also available to qualified foreign investments in free-trade zones, foreign investment zones and customs duty-free areas.


Special investment opportunities

In the past, most opportunities for foreigners have involved establishing labor-intensive manufacturing or processing operations geared toward the export market. These days, investors obtain better returns by utilizing the skilled workforce in the higher-value and high technology fields. The increasing affluence of Korea's large middle class also presents opportunities for consumer products and luxury goods. Now, foreign investment may enter into retail trade as well as import and wholesale trade for most consumer products. Recently liberalized financial and business service sectors also appear to be a great opportunity to foreign investors.

Tax concessions

Foreign-invested corporations are eligible for tax exemptions and reductions in accordance to the Special Tax Treatment Control Law (STTCL). Local tax exemptions or reductions are granted to foreign-invested corporations located in industrial estates or designated rural areas outside of the Seoul Metropolitan area.

In addition, in order to encourage foreign investment in preferred industries, FIPL provides exceptional tax benefits for foreign-invested corporations and foreign investors. These include exemptions or reductions of individual income tax as well as reduction of customs duties and other taxes.

Tax incentives for foreign investment

The following businesses may be eligible to receive tax privileges when requested by a foreign investor.

1. Corporations utilizing advanced technology that is necessary to enhance the competitiveness of domestic corporations;

2. Qualifying corporations located in free-trade zones, foreign investment zones and duty- free areas; and

3. Other corporations enumerated in the Presidential Decree.

The tax privileges available to these companies are as follows.

1. Income taxes:

Income of a foreign-invested corporation is exempt from income taxes for five years(beginning with the fiscal year of net profit) Income taxes are reduced by 50 percent, in proportion to the foreign investor ratio for two years thereafter.

2. Acquisition, registration property:

For acquisition tax, registration tax and property tax on properties acquired and retained for carrying on business, the tax amount shall be reduced or exempt or a specified amount shall be deducted from its tax.

3. Dividends:

Income taxes on profits, dividends and distribution of surpluses distributed to foreign investor are exempt or reduced in the same method as other income taxes.

Chapter 02

15Investment Opportunities and incentives

02 Chapter

4. Customs duties, import value-added tax and individual consumption tax:

Capital goods brought into Korea by a foreign investor or a foreign-invested corporation shall receive 100 percent exemption from customs duties, value-added tax and individual consumption tax.

Tax incentives for small and medium-sized enterprises

The following are available to small and medium-sized enterprises (SMEs).

1. If SMEs acquire business assets such as machinery and equipment, 3 percent of the acquisition cost is deducted from corporate income tax.

2. Special tax exemption for SMEs:

SMEs engaged in certain types of businesses, such as manufacturing, mining, construction, distribution. etc, may receive tax exemption, which varies from 5 to 30 percent depending on type of business and location. This credit will be applicable to the tax year ending no later than December 31, 2011.

Tax incentives for R&D

1. Reserves for development of technology and manpower:

In cases where a corporation has set aside development of technology and manpower reserves for expenses on development of technology and manpower, on or before December 31, 2013, those reserves are considered as deductible expenses up to three percent of annual sales.

2. Tax credit for development of technology and manpower:

A corporation, excluding those that run a consumer service business, may receive tax credit for each taxable year on expenses related to the development of technology and manpower.

Exemption of Income from International Financial Transactions

A non-resident who is paid interest and commission falling under any of the following shall be exempted from income taxes.

1. Interest and commission on foreign currency bonds issued by the state, local governments, or domestic corporations;

2. Interest and commission paid on the foreign currency liabilities redeemable in foreign currency which a foreign exchange business under the Foreign Exchange Transactions Regulation (FETR) borrows from a foreign financial institution; or

3. Interest and commission paid on foreign currency bills or foreign currency deposit certificates that are issued or sold overseas by financial institutions under FETR.


Tax incentives in non-Metropolitan areas

The government grants various tax incentives to all corporations located in rural areas to promote a balanced development of urban and rural areas.

1. Incentives on corporations established in non-Metropolitan areas

The government has established several industrial areas that offer similar amenities to industries. These areas are not tax free, but the government offers various incentives to industries located within these areas in an effort to encourage manufacturing plants to locate outside of the Metropolitan area. Plant sites and other facilities can be purchased or leased at considerably lower prices than in other areas, and property tax concessions are available.

2. Special Taxation for Re-locating Factories to non-Metropolitan areas

If a domestic corporation re-locates its factory site to a non-Metropolitan area by December 31, 2011, an amount within the limits of the transfer marginal profits less the carryover deficits may not be subject for assessment.

3. Promotion of Special Taxation for fostering Jeju free international city

For corporations that are located in Jeju and meet certain qualifications, certain incentives on corporate income tax and customs duties are provided.

Free-trade zones

In order to encourage direct foreign investment and exports, Korea has established six industrial free-export zones located in Masan, Iksan, Kunsan, Daebul, Donghae, and Yulchon and four free-export zones in Incheon airport and various harbors located in Busan, Gwangyang and Incheon.

These zones are special areas where foreign-invested firms can establish bonded warehouses as well as manufacture, assemble or process products for export, using tariff-free imported raw materials and semi-finished goods. Application for approval and other required procedures have been simplified and are administered by special offices located within the free-export zones.

Many support and service facilities, including electricity, water, transportation, telecommunications, packing, storage, and machine repair and maintenance, are provided to investors. Corporations eligible for occupancy in the free-export zones must: (1) engage in manufacturing, processing or assembling of export goods; (2) be foreign invested (they can be 100 percent foreign owned, but joint ventures with Korean firms are preferred); and (3) engage in a business of a high-technology and labor-intensive nature with definite prospects for exporting.

Foreign Investment Zones

In an effort to attract large-scale foreign investment, the Foreign Investment Promotion Law (FIPL) also introduced the Foreign Investment Zone (FIZ) system. Unlike the past when the central government granted tax incentives to foreign direct investment (FDI) in pre-designated areas, FIPL grants local governments the autonomy to designate FIZ for FDI upon request from foreign investors. The FIZ system allows qualified foreign investors to designate an ideal site for their business and receive benefits.

Chapter 02

Investment Opportunities and incentives 17

Restrictions on Foreign Investment and Investors

Chapter 03

19

Regulatory legislation

The Foreign Investment Promotion Act (FIPA) has been enacted to facilitate foreign investment through support and provision of convenience for foreign investment. The FIPA is the basic law for foreign investment and its subordinate acts include the Enforcement of the Foreign Investment Promotion Act. Enforcement Promotion Act and Enforcement Regulations stipulating matters delegated by the Foreign Investment Promotion Act and matters required for enforcement, and regulations on foreign investment and technology import.

Also, unless stated otherwise in the FIPA, the Foreign Exchange Trade Act will apply to matters related to foreign exchange and external dealings related to foreign investments. The Tax Exemptions and Exceptions Act and its regulations on tax reductions on foreign investments etc. will apply to tax reductions for foreign investments.

However, since foreign-invested companies are local corporations established under domestic law, the same laws that apply to purely domestic corporations will apply even if the foreign-invested company has gone through the processes as prescribed in the FIPA. Therefore, if approval and permission under each law are required, the relevant business may be conducted only after the required processes are completed.

Restrictions and Bans on Foreign Investment

Out of a total of 1,145 categories under the Korean Standard Industrial Classification (KSIC) system, the FIPA excludes 62 categories including public administration, diplomacy, national defense, etc. from foreign investments. Although foreigners can invest in all of the remaining 1,083 investment categories, 28 categories have restrictions on the foreign investment ratio (restricted categories).

■ Foreign Investment Excluded Categories

Categories under exclusion for foreign investment have public features for which it is difficult to apply the Foreign Investment Promotion Act (FIPA). In principle, these categories are excluded from foreign investments. Related notices are made in the regulations on foreign investment and technology import.

Restrictions on foreign investment and investors

03 Chapter

• Postal business, central bank, private mutual-aids, other financial market management businesses, other financial support services etc.

• Legislative • judiciary • administrative bodies, official foreign residences in Korea and other international and foreign institutions

• Economic R&D and other humanities and social science R&D

• Educational institutions (infants, primary school to college level, special schools, etc.)

• Artistic, religious, environmental/political/labor movement organizations etc.Fat.


■ Foreign Investment Restricted Categories

In principle, foreign investments in the restricted categories listed below are prohibited. However, investments are allowed within certain permitted levels as specified. Categories in which foreign investment is prohibited are listed in the regulations on foreign investment and technology import notice.

Foreigners are not permitted to invest in a company that operates a business in both an excluded category and a partially permitted category. When investing in companies that operate more than two (2) businesses in a category in which partial foreign investment is permitted, the investment ratio cannot surpass the ratio of the category with the lowest investment.

Foreign Investment Restricted Categories (As of February 29, 2008)

Business Categories(KSIC) Permitted Level

Cultivation of grains and other food crops(01110)

Excludes rice and barley cultivation

Beef cattle breeding (01212) Permitted when the foreign investment ratio is less than 50%Coastal fishing (03112)

Other basic inorganic chemical production(20129) Permitted with the exception of

production • supply of nuclear generator fuelsOther non-ferrous metal refining, smelting,and alloy production (24129)

Nuclear Generation (35111) Prohibited

Hydro power generation (35112)Thermal power generation (35113)Other power generation (35119)

The sum of generation facilities purchased by foreigners from KEPCO must not surpass 30% of the total domestic generation facilities

Power transmission and supply (35120) - Foreign investment ratio must be below 50%

- Ratio of voting stocks held by foreign investors < primary domestic shareholder ratio

Radioactive waste collection,transportation and handling (38240)

Excludes radioactive waste management business under Article 82 of the Electricity Business Act

Meat wholesale (46312) Permitted when the foreign investment ratio is below 50%

Inner harbor passenger transport (50121)Inner harbor freight transport (50122)

- Permitted for the transport of passengers or freight between South and North Korea

- Joined with shipping companies of the ROK- Foreign investment ratio must be below 50%

Regular aerial transport (51100)Special aerial transport (51200)

Permitted when the foreign investment ratio is below 50%

Newspaper publication (58121) Permitted when the foreign investment ratio is below 50%

Magazines and periodicals publication (58122) Permitted when the foreign investment ratio is below 50%

Radio broadcasting (60100) Prohibited

Terrestrial broadcasting (60210) Prohibited

Program provider (60221) Permitted when foreign investment ratio is below 49%

Cable broadcasting (60222) General cable broadcasting permitted when foreign investment ratio is below 50%

Chapter 03

21Restrictions on foreign investment and investors

03 Chapter

Satellite and other broadcasting (60229) Permitted when foreign investment ratio is below 33%

Cable communications (61210) Permitted when the sum of shares held by foreign governments or foreigners is less than 49% of the total issued shares.

- However, there are no restrictions on additional communications businesses

Mobile communications (61220)

Satellite communications (61230)

Other electronic communications (61299)

News (63910) Permitted when foreign investment ratio is below 25%

Domestic bank (64121) Permitted for commercial banks and regional banks

Foreigner Land Acquisition Policy

In principle, foreigners are free to acquire land in Korea except for areas where approvals are required, such as military facilities, cultural assets, ecological preservation, and some lands on islands required for military purposes. After a contract for land acquisition is concluded, a report on the acquisition should be prepared. However, under the principle of reciprocity, the people and/or corporations of nations that forbid Korean people and/or Korean corporations from acquiring land might be forbidden or restricted from acquiring land in Korea.

Guarantee on Overseas Remittance

Overseas remittances of gains from the stocks acquired by foreign investors and stock transactions, principal and fees paid with respect to a loan contract under the Foreign Investment Promotion Act (FIPA), and compensation under a technology import contract are allowed in accordance to what has been permitted and reported under the foreign investment technology import contract at the time of the remittance.

Patents, trademarks and copyrights

Patents and trademarks must be registered with the Patent Bureau through a licensed Korean agent in accordance with relevant laws to be protected. Foreign investors are able to register patents or trademarks in their own name and receive the same benefits as Koreans. The duration of a patent is twenty years and can be extended up to five years. Trademark protection is granted for ten years from the date of registration and is renewable. If a trademark or a patent is not utilized by the patentee, another person can request a judgment that allows use of the registered patent or trademark. However, the patent is not automatically cancelled simply because the Patentee does not use it.

Foreign and domestic authors can secure copyrights in Korea. Copyrights are registered with the Ministry of Culture and Tourism. A copyright is effective until 50 years after the death of the author.

Labor Relations

Chapter 04

23Labor relations

04 Chapter

Labor relations

■ Availability of labor

Korea's labor force, a vital national resource, is generally regarded as highly literate, motivated and hardworking. In January 2009, approximately 59.5 percent of the population 15 years old and over participated in economic activities; males accounted for 57.3 percent and females accounted for about 46.4 percent of the workforce. Unemployment in Jan 2009 was about 3.6 percent. The number of skilled workers and technicians has been steadily increasing as a result of the increase in the number of vocational and technical training programs. The quality and education standard of the labor force is considered very good. Currently, however, there are shortages of manual and factory labor in some industries.

■ Employer/employee relations

Domestic labor laws are fairly strict and specific as to rights of workers. Korea is now working to improve its labor relations laws and systems, such as union pluralism and a full-time union official system, in line with international standards. The number of recorded labor disputes in 2008 was 108, the lowest ever since 1998 as a result of autonomous dispute settlements, commitment to transparent management and employment security as well as reform of irrational practices.

Reduced labor disputes

Year 2002 2003 2004 2005 2006 2007 2008

No. of disputes 322 320 462 181 138 115 108

■ Unions

Currently, there are about 5,800 company unions in Korea, which decreased from 6,150 in 2001. There are also several industry unions. Union and union-eligible Korean employees are estimated to number around 15 million out of a total workforce of 23.5 million.

The Korean government has shown consistent responses to labor disputes on the basis of “dialogue and compromise” and “laws and principles.” The Korean government has also made efforts to establish an industrial relations culture in which employers and unions solve their problems through dialogue and compromise. Thanks to these efforts, in recent years, industrial relations have stayed stable and the number of labor disputes and illegal disputes have gradually declined.

■ Wages and salaries

In accordance with provisions of the Minimum Wage Law, the Minister of Labor has set minimum wage standards applicable to all firms in all industries. Minimum wage levels are reviewed annually by the Minister of Labor. Wages must be above the minimum wage set by the Ministry of Labor every year. In 2008, the minimum wage standard has been set at KRW 3,770 per hour, and KRW 30,160 per day (8-hour day).

Salary ranges for executives and professionals vary widely as they depend on the industry, the company and the seniority or position of the individual.

■ Equal opportunity

The Korean Gender Employment Equality Law prohibits gender discrimination against any worker. Workers doing the same work of equal value are to be paid at the same wage scale. An employer violating these provisions is subject to penalty.


Chapter 04

■ Health and safety

One of the Korean government's priorities for social welfare is to extend the number of social insurance programs to cover more employees. The main social insurances are Unemployment Insurance, Workers' Accident Compensation Insurance, National Pension and Health Insurance. The premium cost of these insurances is shared by the employer and employee.

■ Dismissals of employment

It is possible to dismiss an employee for a legitimate reason and with 30 days advance notification or payment of a month’s wage. However, a Labor Dispute Mediation Committee exists for the purpose of conciliation, mediation and arbitration of labor grievances. The Labor Committee is empowered to examine whether an employee has been dismissed for just cause and may also order that an unjustly dismissed employee be reinstated. Foreign investors should consult with qualified legal counsel for explanations regarding legal aspects of labor practices and dismissal procedures. If a worker continuously employed for one year or more is terminated for any reason, severance pay of at least one month or pay equivalent to an average of 30 days must be paid to the worker for every year of employment. For this purpose, the average pay is computed on the basis of compensation for the three months immediately preceding the termination.

■ Retirement pension

To guarantee worker's income and stable life following retirement, employers will accumulate and invest the funds for retirement pay into an external financial institution during the worker's period of service. Upon the worker's retirement, the funds shall be paid to the worker as pension, or in lump sum.

■ Social security

Worker’s accident compensation insurance is mandatory for all business establishments. In cases of job related accidents, medical costs must be covered for workers, as well as 70 percent of wages during the period they are out of work according to the Industrial Accident Compensation Insurance Law. In case of death, 1,300 days of wages and funeral expenses (120 days wages) must be paid to the worker's family.

Foreign personnel

■ Passports and visas

Foreign nationals who want to enter Korea must have a valid passport issued by their country of origin. Possession of confirmed outbound tickets entitles visitors to stay up to 30 days without a visa. Those who plan to stay in Korea for longer than 30 days must obtain visas before entering Korea.(Exceptions: Canada is allowed up to 6 months, and U.S., Australia, Hong Kong, Slovenia and Japan are allowed up to 90 days.)

25Labor relations

04 Chapter

■ Scope of activities and employment for foreigners staying in Korea

There is no legal limit to the number of foreigners that can work in Korea or in a specific company. However, all foreigners must obtain a visa and a work permit if they wish to stay and work for more than 90 days.

Foreigners are granted rights to any activities authorized by their visa, and may stay

as long as their given period of stay. They are not, however, allowed to participate in any political activities except when specifically permitted by law. Foreigners seeking employment during their stay in Korea must have a work visa, and may only work in workplaces designated by the local or district Immigration Office. If they wish to change workplaces, permission must be received from the local Immigration Office prior to the change.

Living conditions

Living costs in Korea are relatively high, compared to those of the United States and most European countries. The cost of typical expatriate housing in Seoul can be quite expensive, depending on the type of housing and location.

Expatriates with a Korean assignment for one year or more are commonly accompanied by their families to Korea. There are several schools for foreigners; the three best known are Seoul Foreign School, Seoul International School and Yongsan International School of Seoul. Public entertainment is readily available in Seoul and the other big cities. The Sejong Cultural Center and Seoul Arts Center in Seoul provide performances by artists from around the world. Recreational activities such as golf, tennis and skiing are available at many locations.

Exporting to Korea

Chapter 05

27Exporting to Korea

05 Chapter

General

Korea's economic dependency on foreign trade is demonstrated by the fact that it accounted for 110.6 percent of GNI during 2008. Japan and the United States have long been the largest exporters to Korea, and recently imports from China have grown significantly. In Korea, the greatest sources of imports are China and Japan, followed by the United States and the European Union (EU). In 2008, raw materials were the largest imported item, which accounted for 60 percent of total imported goods.

Upon concluding the Uruguay Round of trade negotiations and following Korea’s admission to OECD, the government has accelerated import liberalization by removing some of the institutional barriers that restrict imports and also by simplifying regulations. Korea has entered into free trade agreements (FTAs) with Chile, Singapore, EFTA, and ASEAN as of 2008. FTAs with Canada, US, Mexico, India, etc. are currently under negotiation or subject to ratification as of 2009.

Globalization and the growth of the Korean economy have led to a dramatic increase in the volume of cross-border transactions between Korean taxpayers and their overseas related parties. The import price should not be subject to influence due to special relationship or in other words, should be conducted at arm’s length. The KCS has introduced a new system called Advanced Customs Valuation Arrangement (“ACVA”) in 2008, which provides a mechanism that enables taxpayers and the KCS to agree on an appropriate dutiable value of imported goods sourced from related parties.

The Korean government requires that all importers have a general license or a special license for all imported items. Each specific license covers only one transaction and is necessary in order to secure credit letters. Imports are allowed mainly through licensing, prior deposits and foreign exchange allocations. Tariffs, where they exist, are frequently high, but have been steadily decreasing. Tariffs on 506 types of imported items are zero as of 2009.

Customs duties

■ Customs valuation

The dutiable value of imported goods is an adjusted transaction value that includes the cost, insurance, and freight (C.I.F.) incoterms at the time of declaration.

Tariff rates fall into two categories, as shown below.

1. General rate (basic rate and provisional rate)

2. Special rate (antidumping duties, retaliatory duties, etc.)

■ Exemption or reduction of customs duties

The following goods may be eligible for exemption or reduction of customs duties.

1. Goods for diplomats, government use and academic research

2. Foreign goods for use in the defense industry and environmental pollution control

3. Raw materials for the production of aircrafts

4. Goods to be re-exported

5. Deteriorated or damaged goods

6. Re-imported goods


■ Refund

Goods for which customs duties have already been paid at the time of importation intended for use in the manufacturing or processing of goods to be exported, the customs duties are refunded up to the limit of the amount of customs duties previously paid.

Individual excise tax

Individual excise tax is levied on the import of automobile and certain luxury items. Rates vary depending on the type of the product.

Value-added tax (VAT)

A flat 10 percent value-added tax is imposed on all imports unless customs duties on such imports are exempt. The taxable value of imported goods is equal to the total amount of the transaction value for customs duties, individual excise tax and liquor tax, if any.

The following goods, on which customs duties are exempt, may also be exempt from VAT.

1. Goods imported as commodity samples and advertising materials

2. Goods re-imported after export

3. Goods imported temporarily under the terms of re-export

4. Duty-free goods

Documentation procedures

The documents necessary to obtain import permission for import vary depending on the type of product, origin of the import and the kind of business in which the applicant is engaged.

Local agent

Local laws do not necessarily require foreign manufacturers to have a local agent for exports to Korea. However, as a general practice, a local agent managed by home office personnel with Korean staff is established to assist in the marketing of products in Korea.

Chapter 05

Exporting to Korea 29

Accounting Requirements and Practices

Chapter 06

31

Auditing standards

The FSC and the KICPA are responsible for issuing auditing standards. Auditing standards are designed to ensure uniformity and objectivity in the audit of companies whose financial statements are subject to external audit. Audit procedures generally resemble those followed in English-speaking countries.

As a member of the International Federation of Accountant (IFAC), Korea is planning to adopt the new International Standards on Auditing (ISA) in 2010. The new standards require the auditors to specifically document the audit procedure’s scope, timing and direction.

The form of the auditor's opinion is similar to the U.S. standard short-form opinion. Reports can be qualified for reasons similar to those acceptable in U.S. practice.

Accounting Standards, Commercial Law and Tax Law

In Korea, laws that regulate financial reports resulting from management activities include the Commercial Law, Tax Law, Financial Investment Service, Capital Markets Act, law with respect to external audit for corporations, Certified Public Accountant Law, Accounting standards and Auditing standards. According to the Commercial Law, financial statements include balance sheet, income statement, statement of appropriation of retained earnings and deficit reconciliation statement. However, the accounting standards also include statements of cash flows and footnotes to the financial statements. The accounting standards are based on an accrual basis and realization principle while Tax Law is based on the settlement principle of claims and obligations and fair taxation.

Introduction of the International Financial Reporting Standards

The Korea Accounting Standards Board (KASB) issued the 'K-IFRS' in December 2007, which refers to the new Korean accounting standards revised in accordance with IFRS.

Companies wishing to apply IFRS have been permitted to do so from 2009. In 2011, it will become compulsory for all listed companies, including those listed in the KOSDAQ exchange, to apply IFRS. To reduce the burden on non-listed companies, however, the accounting standards that use simple accounting methods have been enacted and applied. Also, in shifting basic financial statements from separate financial statements to the consolidated financial statements, business capacities will be taken into consideration: businesses with over KRW 2 trillion in assets will provide quarterly and semi-annual consolidated financial statements beginning in 2011, whereas businesses with less than KRW 2 trillion in assets must do so beginning in 2013.

Basic financial statements

The basic financial statements consist of a balance sheet, an income statement, a statement of appropriation of retained earnings, statement of changes in shareholders’ equity and a statement of cash flow. Notes to the financial statements are also required. Financial statements are prepared in two forms: one for financial businesses and the other for non-financial businesses.

Accounting requirements and practices

06 Chapter


Chapter 06

Significant accounting policies

■ Marketable securities and investments in securities (SKAS No. 8 & No. 15)

Marketable securities and investments in securities are stated at cost as determined by the weighted-average or moving-average method. If market value differs from acquisition cost, marketable securities and investments in marketable securities should be recorded at market value. However, investments in company stocks over which the investing company exerts significant influence on the investees’ decision-making through either representation on the board of directors, share of managerial personnel and/or material intercompany transaction, or by directly or indirectly holding over 20 percent of total outstanding common shares are recorded using the equity method of accounting.

■ Inventories (SKAS No. 10)

Inventories are stated at the lower of cost or market value. Cost may be determined by the specific-identification, FIFO, LIFO, moving-average, weighted-average or retail inventory method.

■ Tangible assets (SKAS No. 5)

Tangible assets should be valued at acquisition cost or fair value. Depreciation is generally computed by the straight-line, declining- balance, production unit or other reasonable method over the estimated useful lives of the assets.

■ Intangible assets (SKAS No. 3)

Intangible assets should be valued at acquisition cost and net of amortization. Goodwill and negative goodwill are recognized regarding the purchase of another business and are amortized over an estimated lifespan (within 20 years). Enterprises may record patents, utility model patents, design rights, trademarks, mining rights, fishing rights, land use rights, etc., as intangible assets. Research costs are charged to operations as incurred. Costs for new products or technologies which can be clearly defined and measured and can also have probable economic benefits in the future are capitalized as development costs and amortized.

■ Exceptions to accounting for small and medium-sized entities (SKAS No. 14)

The objective of this statement is to prescribe the standards on recognition, measurement, and disclosure that may be applied differently from those prescribed in other Korea Accounting Standards to alleviate the accounting burden of small and medium-sized entities that have only a small number of interested parties.

• For derivatives whose fair values cannot be determined because they are not traded in a standardized market, accounting for valuation of such derivates after contractual agreement may be omitted.

• Application of the equity method may be omitted to equity securities that are capable of effecting significant influence. Nevertheless, the equity method shall be applied to subsidiaries that are subject to the scope of preparing consolidated financial statements.

• Receivables and payables arising from sales transactions made on conditions of long-term deferred payments and from other transactions involving long-term loans or borrowings may be accounted for at their nominal values on the balance sheet.

33

06 Chapter

• When issuing stock options that require either the issuance of new common stocks or the distribution of treasury stocks at the exercise price on the date of exercise, accounting treatments may be omitted until the exercise date. If new common stocks are issued at the date of exercise, the difference between the exercise price and face value of the new stocks shall be accounted for as paid-in capital in excess of par value. On the other hand, if treasury stocks are distributed at the date of exercise, the difference between the exercise price and carrying amount of the treasury stocks shall be accounted for as a gain or loss on disposal of treasury stocks.

• The amount of corporate income tax expense may be equal to the amount that must be paid in accordance with relevant laws, such as the corporate income tax law.

• Segmented information may be also omitted.

• Earnings per share may be omitted in the income statement.

■ Income taxes (SKAS No. 16)

Income tax expense includes the current income tax under the relevant income tax law and the changes in deferred tax assets or liabilities. Deferred tax assets and liabilities represent temporary differences between financial reporting and the tax bases of assets and liabilities. Deferred tax assets are recognized for temporary differences which will decrease future taxable income or operating loss to the extent that it is probable that future taxable income will be available against which the temporary differences can be utilized. Deferred tax effects applicable to items in the shareholders’ equity are directly reflected in the shareholders’ equity.

■ Interim financial reporting (SKAS No. 2)

Quarterly financial statements of all listed companies should be disclosed within 45 days of the date marked on the balance sheet.

Accounting requirements and practices

Tax System and Administration

Chapter 07

35Tax system and Administration

07 Chapter

Principal tax system

The principal taxes that support the various levels of governments are as below.

XII. Principal Taxes in Korea

Nationaltaxes

Internaltaxes

Customsduties

Earmarkedtaxes

Directtaxes

Indirecttaxes

Corporation taxIncome tax (Individuals)Inheritance and gift taxComprehensive real estate holding taxAsset revaluation tax

Value-added taxIndividual excise taxLiquor taxStamp TaxSecurities transaction tax

Transportation/Energy/Environment taxEducation taxSpecial tax for rural development

Localtaxes

Province taxes

City and county taxes

Ordinary taxes

Earmarked taxes

Acquisition taxRegistration taxLeisure taxLicense tax

Community facility taxLocal education tax

Ordinary taxes

Earmarked taxes

Resident taxProperty taxAutomobile taxDriving taxAgricultural income taxButchery taxTobacco consumption tax

Urban planning taxBusiness place taxRegional development tax


Chapter 07

Legislative framework

■ Statute law

The National Assembly, the legislative body, enacts tax laws that are applicable throughout the country. Tax laws authorize the Ministry of Strategy and Finance (MOSF) and the National Tax Service (NTS) to issue the related rulings and guidelines in enforcing the tax laws. Tax rulings from MOSF or NTS, are important in determining the interpretation of tax legislation.

Substance over form

In general, substance takes precedence over form in interpreting the tax obligation of the taxpayer.

Income tax

■ Concepts of income taxation

The tax system for corporations is a unitary system; a taxpayer is assessed in a single assessment on all income derived. On the other hand, the tax system for individuals is a comprehensive system that separates income into three groups (i.e. global income, capital gains and severance payment). A taxpayer is separately assessed on income in each of the three groups.

■ Classes of taxpayer

Income taxpayers are classified as follows.

1. Resident corporation — A domestic corporation with its head, main office or place of effective management in Korea, taxed on its worldwide income.

2. Nonresident corporation — A foreign corporation which earns income from domestic sources in Korea, taxed only on income derived from Korea.

3. Individuals:

a. Resident — An individual who has a domicile or has resided in Korea for one year or longer is subject to income tax on all income derived from sources both within and outside Korea. However, for foreign residents who have not stayed in Korea for more than five years within a ten year period from the end of the year, income incurred from overseas shall be taxable only when the money is paid out in Korea or the money is transmitted to Korea.

b. Nonresident — An individual who is not deemed to be a resident. A nonresident is subject to income tax only on income derived from sources within Korea.

■ Taxable income

Income from all sources (e.g., business income, dividends, rents, interest, royalties, salaries, and profit realized from the sale of property), whether received inside or outside Korea, is subject to income tax, with the exception of the following:

1. Income earned outside Korea by nonresident aliens is not subject to income tax

2. Certain income earned by individuals and corporations in Korea may qualify for tax- exempt treatment under various tax laws

37

07 Chapter

Tax system and Administration

■ Tax year

Businesses can use their own business year to file their income tax returns within one year. They should report their own fiscal year to the local tax office along with the submission of a corporation establishment report. Individuals are required to file their global income tax returns no later than May 31 of the following year.

For a branch office of a foreign company, the filing of corporate income tax returns

may be extended after obtaining approval from the tax authorities within 60 days from the end of the respective tax year.

Tax incentives in special business areas

■ Free Trade Zones

Korea has established seven Free Trade Zones (FTZ), at Masan, Busan, Gwangyang, Ulsan, Pohang , Gimje, and Pyeongtaek to encourage direct foreign investment and exports. These zones are special industrial areas where foreign-invested firms can establish bonded warehouses as well as manufacture, assemble or process products for ultimate export, using tariff-free imported raw materials and semi-finished goods.

■ Free Economic Zones

Korea adopted the Act on Designation and Management of Free Economic Zones in July 2003. A Free Economic Zone (FEZ) is an area designated to provide corporations with an optimal environment to engage in global business activities. The six (6) FEZs have been designated and are currently under operation. Tax incentives, including exemption from individual and corporate income taxes as well as local taxes, are available for qualified foreign investment corporations operating businesses in FEZs.

■ Foreign Investment Zones

In an effort to attract large-scale foreign investment, the Korean government has established the Foreign Investment Zone (FIZ) system. The FIZ system allows qualified foreign investors to designate an ideal site for their business and to receive benefits. Tax incentives, including the exemption from individual and corporate income taxes as well as local taxes, are available for qualified foreign invested corporations operating businesses in FIZ.

■ Enterprise Development Cities

Enterprise Development City (EDC) is a city whose development is led by developers of a private sector with the purpose to host economic activities including manufacturing and tourism industries. The Ministry of Construction and Transportation (MOCT) has designated the following six (6) enterprise cities: Wonju, Chungju, Muan, Taean, Muju, and Yeongnam (as of 2009). Tax incentives, including the exemption from individual and corporate income taxes as well as local taxes, are available for qualified foreign invested corporations that operate businesses in an EDC.


Chapter 07

■ Tax holidays

Under the Special Tax Treatment Control Law (STTCL), tax reduction or exemption for foreign-invested corporations and certain small & medium size enterprises (SMEs) is the most common type of tax holiday in Korea. Temporary tax holidays (e.g. tax holidays with respect to Jeju free international city, etc) are introduced from time to time based on the government policy.

Capital taxation

For corporations, there is no additional capital tax except registration tax, which is assessed at the rate of 0.48 percent (1.44 percent in the Seoul metropolitan area) on paid-in capital including education surtax.

For individuals, there are no wealth taxes. However, taxes are payable on inheritance and gifts.

International aspects

■ Foreign operations

Domestic profit-seeking corporations, including branches of foreign corporations, are subject to income tax on all worldwide income, regardless of source. Foreign profit-seeking corporations are subject to income tax only on income derived within Korea.

■ International finance center operations

There are no special benefits granted at the moment intended to attract multinational corporations' headquarters and administrative offices in the country.

Administration of the tax system

The administration of the tax system is governed by MOSF. The Office of Tax and Customs at MOSF is responsible for planning and drafting tax laws, while NTS is responsible for enforcement of such laws.

Corporate taxpayers

■ Compliance

Corporate taxpayers are required to file annual self-assessed tax returns with the tax authorities. The returns are subject to examination by the tax authorities, who generally have the right to audit the tax returns within five years after the statutory filing due.

39

07 Chapter


■ Tax returns and assessments

A corporate tax return must generally be filed within three months after the fiscal year-end. The tax return must be accompanied by the financial statements of the relevant tax year. A corporation subject to the Law on External Audit of Corporations is additionally required to submit a statement of cash flows along with the tax return.

If a corporation discovers errors or omissions in its tax return after filing, it is allowed

to file an amended return before the issuance of an assessment notice by the tax authorities. Underreporting penalty may be reduced by 10 to 50 percent if an amended return is filed within six months to two years from the statutory filing due.

■ Appeals

A variety of tax appeal procedures are available in Korea. After receiving a pre-assessment notice from the tax authorities, a preliminary appeal can be filed to the regional or district tax office, which should render a decision within 30 days. Once a formal assessment is issued, taxpayers are generally required to pay the tax assessment within the time limit and then to file a notice of objection to the head of the regional or district tax office. Upon receiving a notice of objection, the regional or district tax office should issue a decision within 30 days. If the dispute is not resolved, an appeal can be made either to NTS or the Tax Tribunal. NTS and the Tax Tribunal are supposed to make its decision within 90 days, but the decision could be delayed depending on circumstances. If the tax payer is not satisfied with the result of all these prior appeal process, it can file an appeal to the judicial court as the last resort. .

■ Payment and collection

Corporate income taxes are paid by means of one interim filing and payment due within two months after the first six months of the fiscal year, with the final payment due when the annual return is filed. All for-profit corporations are required to pay an amount equal to one-half of the prior year's tax, or the actual tax calculated by performing book-to-tax adjustments based on the financial results of the first six-month period of the fiscal year. If the corporation fails to pay all or part of the tax due, the tax authorities will collect the amount in arrears plus interest.

■ Withholding taxes

Employers are required to withhold taxes from their employees' wages. In addition, taxes are usually withheld from interest, dividend and royalty payments. Taxes withheld must be paid through a commercial bank within ten days after the end of the month in which the withholding was made. If payment is late, it must be made directly to the appropriate tax office and is subject to a maximum 10 percent penalty.

■ Tax audits

The regional and district offices of the National Tax Service (NTS) conduct tax audits by reviewing the tax return, accounting books and supporting documents. During the course of a tax audit, the taxpayer may be requested to explain questionable items and present additional supporting documents to NTS. If NTS is not satisfied, additional taxes may be assessed and must be paid, even if a taxpayer intends to pursue an appeal.

The tax authorities have the right to conduct an audit at any time, generally within five years after a return is filed.


Chapter 07

■ Penalties

If a corporation fails to file a tax return in a timely manner or to keep adequate records, a penalty may be assessed. The penalty is equivalent to 20 percent of the calculated tax or 0.07 percent of gross revenue, whichever is greater.

Understatement of income in filing a tax return is subject to a penalty of 10 percent of the additional income tax attributable to the understated taxable income. In cases where the understatement of income in filing a tax return is caused by unjustifiably means such as false records or a fraud, the penalty increases to 40 percent of the calculated tax or 0.14 percent of such gross revenue, whichever is greater.

Interest is charged at the rate 0.03 percent per diem for nonpayment or insufficient payment of corporate income tax.

If a corporation has failed to withhold taxes or to pay withheld taxes by the due date, a 5 to 10 percent penalty is imposed, depending on the number of days the payment was delinquent.

■ Statute of limitations

If a taxpayer files an income tax return within the statutory due, the tax authorities may, in general, review the tax return at any time within five years after the return was filed.

Individual taxpayers

■ Tax returns and income tax liability

In general, taxpayers reporting global income, capital gains, or retirement income must file an annual income tax return on or before May 31 of the following year or before permanently leaving Korea. Korean tax law segregates earned income into Class A or Class B income, depending on who the payer is.

1. Class A earned income — Employment income received from a domestic (Korean) corporation or a Korean branch office of a foreign corporation for services rendered in Korea.

2. Class B earned income — Employment income received from a foreign corporation outside Korea. However, even if foreigners who work in Korea are paid their wages overseas, the wages are considered Class A income if they are charged back to Korea and expensed by the local employer.

A taxpayer who receives only Class A wage and/or retirement income is generally not required to file an annual tax return since the employer is required to withhold income taxes at the source on a monthly basis and make a year-end settlement.

However, Class A wage earners who receive other types of income such as interest, dividends, business income, other income, rents or Class B income are required to file a global income tax return in May of the following year.

A class B income earner has the option of either filing an annual return in May of the following year and paying the taxes due by May 31st or joining an authorized taxpayers' association, through which monthly tax payments must be made. In return for timely payments through an authorized taxpayers' association, the taxpayer can enjoy a 10 percent credit on the income tax liability.

An amended return to correct errors or omissions can be filed before issuance of an assessment notice by the tax authorities.

41

07 Chapter


■ Withholding tax on wages and salaries

Any business that employs personnel on a regular basis and pays salaries and wages is required to withhold income taxes and related social security taxes.

At the end of each year, the employer is required to give each employee a withholding statement, which must also be submitted by the employer to the tax authorities by the end of February next year. A copy of the withholding statement must be attached to the tax return.

■ Other

Generally, taxation of interest and dividends not exceeding KRW 40 million per annum are finalized by withholding at source and such income is excluded from total global income filing obligation. Otherwise, they are included in the global income.

■ Penalties, tax audits, appeal procedures

For late filing or failure to file a complete global income tax return, taxpayers are subject to 20 percent penalty on the income tax related to the under-reported income. In addition, the penalty for failure to pay the income tax in a timely manner is 0.03 percent interest per diem.

■ Spouse income

There is generally no provision for the filing of joint tax returns under the Korean Income Tax Law. If a taxpayer's spouse also works in Korea, a separate individual tax filing may be made.

■ Exit permits

Although no specific exit permits are required, all individuals are required to have met their tax obligations and to have filed a final tax return before permanent departure from Korea.

Taxation of Foreign Corporation

Chapter 08

43

General

All business entities in Korea and foreign entities with income derived from Korea are subject to corporate income tax on business profits, capital gains and all other income. Liquidation income is taxable for domestic corporations but not for foreign companies. Dividends are included in the taxable income when declared if the shareholder is a corporation unless the anti-tax haven rule under the Law for Coordination of International Tax Affairs (LCITA) is applicable. For domestic corporations receiving dividend from domestic subsidiaries, 30 percent to 100 percent of dividend received deduction is available depending on their share holding ratio.

Territoriality

A corporation having its head office or principal office in Korea is a domestic corporation. Effective from the fiscal year commencing on or after January 1, 2006, a corporation with a place of effective management in Korea is also treated as a domestic corporation. Domestic corporations are taxable on their worldwide income.

Foreign corporations with income derived from sources in Korea are subject to corporate income tax on such income. If the foreign corporation has no "domestic place of business" in Korea, it will be subject to tax on its Korean-source income on a withholding basis in accordance with the tax laws and any applicable tax treaty. Any Korean source income attributable to a domestic fixed place of business of a foreign corporation will be subject to Korean income tax.

Business income

Generally, sale of goods or merchandise by a foreign corporation having no fixed business place in Korea is not subject to Korean income taxation in accordance with the relevant tax treaty.

Permanent establishment (PE)

Any site where employees of a foreign corporation dispatched to a Korean corporation conduct the business of the foreign corporation either in whole or in part generally constitutes a permanent establishment (PE) of the foreign corporation in Korea. A PE also includes any site where employees of a foreign corporation provides services for more than 6 months during a period of 12 consecutive months or if services are performed for not more than six months during a period of 12 consecutive months, but similar services are continuously or repeatedly performed for two years or more.

Dependent agent PE

Generally, an agent of a foreign corporation who habitually exercises authority to conclude contracts (including consulting or negotiating important terms and conditions of the contract) in the name of the foreign corporation or who maintains a stock of goods or merchandise in Korea belonging to a foreign corporation from which the agent regularly fills orders on behalf of the foreign corporation will be deemed to be a PE of the foreign corporation in Korea.

Taxation of foreign corporation

08 Chapter


Chapter 08

Branch operations

A branch is a form of PE, which is a taxable presence in Korea. A Korean branch is subject to Korean income taxation to the extent the income is attributable to the branch’s operation.

■ Remittance of branch profits

The remittance of earnings from a branch to its overseas head office does not attract withholding taxes.

■ Tax rates

Branches are subject to corporate income tax at normal corporate tax rates.

■ Branch profits tax

If the tax treaty between Korea and the country of which the foreign corporation is a resident allows the imposition of a branch profits tax (i.e. Australia, Brazil, Canada, France, Indonesia, Kazakhstan, Morocco and the Philippines), the tax is imposed on the adjusted taxable income of the Korean branch of the foreign corporation. Branch profits tax is levied in addition to the regular corporate income tax.

Income from subsidiaries

■ Dividends

A resident corporation must include all dividends received in the taxable income. Cash and stock dividends received by domestic corporate shareholders from both domestic and foreign corporations are generally included in the corporate taxable income and taxed at normal corporate tax rates. Domestic corporations must withhold taxes on dividends paid to individuals (both resident and nonresident) and nonresident corporations. No withholding is required on dividends paid to a resident corporate shareholder.

Nonresident individuals and corporations are generally subject to 20 percent withholding tax, plus 10% resident surtax on dividend income from a domestic corporation unless a relevant tax treaty indicates otherwise. Tax treaties generally take precedence over the domestic tax law.

■ Interest

Interest income paid by a subsidiary to its overseas parent or affiliate is subject to withholding tax.

■ Royalties and service fees

Generally, royalties also attract withholding tax.

■ Capital gains

Capital gains resulting from the disposal of the shares of a Korean corporation are generally subject to withholding tax unless the tax treaty provides otherwise.

45

08 Chapter

Taxation of foreign corporation

■ Rentals

Rental income received for use of industrial, commercial or scientific equipment may not be subject to Korean income taxation unless such rental income is attributable to a Korean fixed place of business or the relevant tax treaty provides otherwise.

Taxation of foreign shareholders

A change in the shareholding of a domestic corporation has no effect on the basis of computation of taxable income. From the shareholder’s point of view, in cases of dissolution of a corporation, merger or split-off, if the shareholder receives proceeds that exceed costs, the excess amount will be deemed as a dividend and subject to income tax.

■ Mergers

Capital gains resulting from the transfer of a business or from the merger of two or more corporations are included in the taxable income of the transferor or the merged corporation. Where the proceeds received by the merged and dissolved corporation’s shareholders exceeds the acquisition costs of such shares, the difference will generally be deemed as a dividend subject to income tax.

■ Split-off (Injuk-boonhal)

A split-off is defined as the separation of a corporation’s business division to a new entity as a subsidiary of that corporation’s parent or shareholders. The excess portion of compensation paid to shareholders over their acquisition cost will generally be deemed as a dividend subject to income tax.

■ Spin-off (Muljuk-boonhal)

A spin-off is defined as the separation of a corporation’s business division to a new entity as a subsidiary of that corporation. In the case of a spin-off, if the consideration for the transferred assets and liabilities to the new corporation exceeds the book value of the parent corporation, such gains would normally be treated as taxable income for the parent company. However, if the requirements for a qualified spin-off are met, taxation may be deferred until the relevant shares are transferred.

■ Liquidation

Basically, liquidation income of domestic corporations is subject to corporate income tax at regular tax rates (i.e. tax base of up to KRW 200 million is taxed at 11 percent (10 percent from FY2010); excess over KRW 200 million is taxed at 22 percent (20 percent in FY2010). A final tax return must be filed within three months from the final settlement. Liquidation income taxation is not applicable to changes in organizational structure. Liquidation income of Korea branches of foreign corporations is not subject to tax.


Chapter 08

■ Acquisitions

•Assetacquisition

Asset acquisition may take the form of a business transfer, which is defined as a “comprehensive transfer of all the rights and obligations of a transferor related to the business” under the tax law. In cases where a transferee acquires only a portion of the target business assets or liabilities, it is usually called an “asset transfer” which is not considered a comprehensive business transfer. Generally, the seller in a comprehensive business transfer is not required to charge the 10 percent VAT for the assets transferred to the buyer. However, an asset transfer is generally subject to 10 percent VAT. Interest on loans borrowed for the purpose of funding for asset acquisition can be expensed when incurred.

•Shareacquisition

If a shareholder and its related parties collectively become a controlling shareholder in a Korean company (i.e. holding more than 50 percent of the shares) deemed acquisition tax may apply. In this case, the acquirer is deemed to be indirectly acquiring assets of the corporation that would be subject to the asset acquisition tax (i.e. land, buildings, vehicles, golf memberships, etc.). In addition, a transfer of Korean shares is subject to securities transaction tax at the rate of 0.5% (0.3% in the case of listed shares).

Taxation of foreign corporation 47

Partnerships and Joint Ventures

Chapter 09

49

Partnerships

■ Entities Affected

The following entities are entitled to elect partnership taxation:

1. An association (Johap under the Civil Law)

2. An anonymous association (Ikymyong Johap under the Commercial Code)

3. An unlimited corporation (Hapmyong Hoesa or Hapja Hoesa under the Commercial Code)

4. Other similar groups mostly rendering personal services under some special law:

- Association: legal association

- Unlimited corporation: legal, patent and labor firms and joint corporations of judicial agents

- YH corporation (Yuhan Hoesa): legal, accounting and customs firms

■ Application for the Treatment or Waiver

A partnership is required to file an application or waiver form to the concerned tax office before the first day of taxable year when the partnership taxation is to be applied or waived. A Partnership taxation system has been newly implemented on December 31, 2007 and became effective starting 2008. Once elected, it cannot be waived for five years from the date the application is filed. If the treatment is to be effective from the first taxable year after incorporation/association, an application needs to be filed within one month from the first day of the first taxable year.

■ Taxation

A partnership entitled to this treatment is not subject to corporate income tax on its income. Instead, each partner is subject to corporate income tax or individual income tax with respect to the relevant share of the profit.

■ Allocation of Profit or Loss

Partners are categorized into four partner groups (resident, non-resident, domestic corporation and foreign corporation). Profits or losses are calculated by each group and allocated to partners according to its profit/loss allocation ratio on the closing day of taxable year. However, passive investment partners are excluded from the allocation of losses.

Losses are allocated on the closing day of the taxable year up to the outside basis. Losses exceeding the outside basis may be carried over for up to ten years and may be offset with future outside basis of the relevant partner.

Partners regard their distributed profit or loss as income or loss under Individual Income Tax Law or CITL. However, a passive investment partner’s income is considered as dividend income. They are included as individual income and corporate income tax base for the concerned taxable year.

Partnerships and joint ventures

09 Chapter


Chapter 09

•TransactionsbetweenPartnershipandPartners

In cases where a partner trades with a partnership but not as a partner, the partner and partnership include the transaction’s profit/loss as gain/loss when calculating the taxable year’s income. In this case, the partnership and the partner are considered related parties.

•TransferofPartnershipShareandAssetDistribution

1. Outside Basis Adjustment

When a partner buys, inherits or gives shares of a partnership as a gift, or when a partner receives a share of partnership’s income in a partnership, the partner’s outside basis is adjusted upward.

2. Transfer of Partnership Share and Asset Distribution

Capital gains are calculated by considering the outside basis as acquisition cost and any gain is subject to capital gains tax or corporate income tax.

■ Reporting Obligation of Partnership Tax Return

A partnership is required to report the taxable year’s income and distribution return to the relevant tax office by the 15th day of the third month after the closing day of each taxable year. The balance sheet, income statement and outside basis adjustment statement prepared in accordance with the Korean GAAP must all be attached. In cases where a partnership fails to file the return, a penalty of 4% for non-reporting and 2% for under reporting will be imposed on the income, respectively.

Joint ventures

Joint ventures are usually in the corporate form (Chusik Hoesa or Yuhan Hoesa) and are taxed accordingly. A joint venture between Korean and foreign investors is eligible for certain tax exemptions available under STTCL.

Partnerships and joint ventures 51


Chapter 10

53

Territoriality and residence

■ Resident

An individual who has a domicile or has resided in Korea for one year or longer is subject to income tax on all income derived from sources both within and outside Korea. However, for foreign residents who have not stayed in Korea for more than five years within a ten year period from the end of the year, income incurred from overseas shall be taxable only when the money is paid out in Korea or the money is transmitted to Korea.

Also, foreign engineers or technicians fulfilling certain conditions can benefit tax exemption for wages and salaries received from Korean employer by submitting an application to the appropriate tax authorities through their employer.

■ Nonresident

An individual who is not a resident of Korea is deemed to be a non-resident and is subject to withholding taxes.

Taxable Income

Individual income can be categorized as taxable, nontaxable or tax exempt. Taxable income includes global income and scheduler income, each of which is subject to tax under a unique tax rate structure. Global income includes interests, dividends, real estate rental income, business income, wages and salaries, pension income and other income. Scheduler income includes retirement income and capital gains, which are taxed separately at varying rates.

Taxation of Foreigners

An individual classified as a non-resident should pay tax on domestically sourced income. Personal deduction shall be provided only to the nonresident him/herself (spouse and other dependants are not eligible for deduction) and special deductions shall not be permitted.

Non-resident income taxation

■ General

A non-resident is subject to taxation on income derived from sources within Korea. Global taxation is applied if a person has a place of business in Korea or earns income from real estate located in Korea (excluding capital gains from the transfer of land or buildings). For nonresidents having no place of business or no income from real property in Korea, tax withholding is made on each type of Korean sourced income. All locally sourced income is subject to global taxation, except for severance pay and capital gains, all of which are taxed in the same manner as they would be if earned by a resident.


10 Chapter


Chapter 10

■ Income from Domestic Sources

•InterestIncome:

Interest and discount on bonds or securities issued by the central or local government as well as other profit from a trust or non-commercial loan as prescribed by the tax law shall be regarded as domestic sourced interest income. However, interest paid on funds borrowed directly by a Korean resident's PE in a foreign country or by a Korean corporation for its business outside Korea shall not be considered as domestic sourced income.

•Dividendincome

Distributions of profits or surplus and advance payment of dividends under the Korean Commercial Code without surplus or cumulative earnings received from a domestic corporation or other business entity

•Realestateincome

Income arising from the transfer of a lease, or any other interest from real estate located in Korea, including titles to real estate, mining rights, mine lease-holding rights, or quarrying rights located in Korea, excluding income subject to capital gains tax

•Incomefromleaseofvessels,aircraft,etc

Income arising from the lease of vessels, aircraft, registered automobiles or heavy equipment to residents, domestic corporations, or Korean places of business of non-residents and foreign corporations

•Businessincome

Income arising from performance of services in the following industries: livestock, forestry, fisheries, mining, quarrying, manufacturing, electricity/gas/water services, construction, communications, real estate dealing, services, and professional services (excluding personal service income).

•Personalserviceincome

Payments in consideration for providing personal service as prescribed in the tax law

•Capitalgainsontransferofrealestate

Gains derived from the transfer of land and buildings located in Korea

•Wageandsalaryincomeincludingpensionorseverancepay

Amount received as payment for labor performed in Korea

•Royalties

Consideration for the use of assets or technical information or for the right to use such assets or technical information, and income arising from the transfer of said assets or technical information.

55

10 Chapter


•Capitalgainsontransferofassetsotherthanrealestate

Gains arising from the transfer of investment securities or shares invested in a domestic corporation or other securities issued by a domestic corporation. However, gains arising from the transfer by a non-resident of domestically listed shares or corporate shares registered with the Korean Securities Dealers Association in the stock market may not be taxed unless the foreign transferor and its related parties as a whole did not own 25% or more of the shares of the publicly listed entity during the year of transfer and the preceding 5 years.

•Otherincome

Other incomes as prescribed in the tax law

Special provisions

■ Tax benefits for foreigners

Foreign executives or employees shall be eligible for an exemption from individual income tax on an amount equivalent to 30 percent of their gross pay for their services in Korea that is provided no later than December 31, 2009. Foreigners may elect to apply 15% flat tax rate for their earned income, derived by providing services in Korea until December 31, 2012.

Deductions

■ Business deductions

In the case of an individual that engages in a personal business, business expenses (including office rental, moving, travel, operation of an automobile and entertainment) are deductible from business income for tax purposes within certain limits.

Certain other deductions are allowed, including but not limited to those listed below:

1. Earned income deduction — A special deduction that fluctuates according to an individual's income level.

2. Pension premium deduction: Pension contribution paid by a taxpayer him/herself based on National Pension Law, Soldier Pension Law, Civil Service Pension Law etc., is fully deductible.

3. Special deduction: If a taxpayer wishes to have the special deductions, he/she must submit the necessary supporting documents.

4. Other deductions:

a. A deduction for deposits in a qualified individual pension savings up to a maximum of KRW 3 millionb. A deduction of 15 percent of investments in venture capital associations, new technology business investment associations, or venture capital companies, up 50 percent of global income for the year.

c. A deduction for expenditures by credit cards or by cash receipt usage up to 20% of such expenditures in excess of 20% of gross income (maximum limit is at the less of 20% of the total salary income or KRW 5 million).

d. A deduction for the deposits in a private retirement pension plan up to KRW 3 million including a deduction for the deposits in the individual pension savings described above in a.


Chapter 10

■ Personal deductions

Korean tax law provides all resident taxpayers with personal deductions from individual taxable income. (A nonresident can claim only the basic deductions.) Details of personal deductions are as follows:

1. A basic deduction of KRW 1.5 million per annum.

2. A deduction of KRW 1.5 million for a spouse who lives with the taxpayer and who has less than KRW 1 million of income per annum.

3. An exemption of KRW 1.5 million is allowed for each eligible dependent who lives with the taxpayer and has an adjusted gross income of less than KRW 1 million per annum.

4. An exemption of KRW 2 million for each handicapped person in the taxpayer's household. The handicapped person may be the taxpayer, spouse or other dependent. To qualify for the deduction, the spouse and/or dependent are not permitted to have an adjusted gross income in excess of KRW 1 million per annum.

5. An additional exemption of KRW 1 million is allowed for each dependent age 70 or over in the taxpayer's household. To qualify for the deduction, the spouse and/ or dependent are not permitted to have an adjusted gross income in excess of KRW 1 million per annum.

6. An additional exemption of KRW 500,000 is allowed for female householders with dependents.

7. A childcare deduction of KRW1 million per child for a working woman or a working man without spouse who has children of the age of six or less.

8. In cases where there are two children qualified for personal deduction, an additional deduction of KRW 500,000 is available. In cases where there are more than two children qualified for personal deduction, additional deduction of KRW 1 million per child exceeding two is available in addition to the deductions listed above. (For example, KRW 500,000 for two children, KRW 1.5 million for three children, and KRW 2.5 million for four children).

Nonresidents are only allowed to claim the personal deductions noted in 1 and 8.

Tax computation

The basic income tax formula is outlined as follows:

1. All worldwide income less nontaxable income equals gross income.

2. Gross income less personal deductions and other deductions equals taxable income.

3. Taxable income multiplied by the applicable tax rate equals income tax liability.

4. Income tax liability less income tax credits and tax credits for approved tax-exempt income equals net tax payable.

5. Net tax payable less taxes withheld and interim tax payments equals the income tax due with the tax return.

57

10 Chapter


■ Tax rates

Individual income tax rates are in four brackets from 6 percent on the tax base of up to KRW 12 million to 35 percent on the excess of KRW 88 million.

■ Foreign tax credit

Taxes imposed by foreign governments on income recognized by a domestic taxpayer are allowed as a credit against the income taxes to be paid in Korea. Tax credit is limited to the lower of the foreign taxes actually paid and the Korean income tax liability attributable to the relevant foreign sourced income. Where the amount of foreign income tax paid is in excess of the deduction limit, the unutilized foreign tax credit can be carried over for five years.

■ Special tax credit for wage and salary income

The tax credit available for wage and salary income earners is limited to KRW 500,000 per year.

Taxable income Tax on (1) Percentage on excess

Over (1) Not over

0 \ 12,000,000 - 6

\ 12,000,000 46,000,000 \ 720,000 16

46,000,000 88,000,000 6,160,000 25

88,000,000 16,660,000 35

Transfer Pricing Regulations

Chapter 11

59Transfer pricing regulations

11 Chapter

Overview

Korean transfer pricing regulations were formally introduced when LCITA came into force in January 1996. As Korea is a member of the OECD, the Korean transfer pricing regulations are fairly consistent with the OECD Guidelines.

Under LCITA, the arm’s-length principle is emphasized in determining the proper level of prices charged in transactions between Korean resident corporations and overseas related parties. LCITA defines the arm’s length price as a price established, or that can be expected to be established, in a normal transaction between independent third parties having no special relationship.

LCITA provides the following transfer pricing methods as applicable in determining the arm’s length price:

1. Comparable uncontrolled price (CUP) method

2. Resale-price method (RPM)

3. Cost-plus (CP) method

4. Profit-split method (PSM)

5. Transactional net margin method (TNMM)

6. Other reasonable method

The definitions of the methods listed above are basically the same as those described in the OECD Guidelines. The regulations provide that in selecting the most reasonable method to be used under the given facts and circumstances, the first three traditional transaction methods shall be given priority.

Documentation Requirements

The LCITA requires taxpayers engaging in transactions with overseas related parties to submit three primary types of transfer pricing form as below when filing their tax returns.

1. A summary of international intercompany transactions

2. Disclosure and justification of transfer pricing method.

3. Summary of income statements of overseas related companies

When requested by the tax authorities, a taxpayer must submit the required information within 60 days from the date of request. If the taxpayer cannot submit the required documents by the submission due date due to certain causes prescribed in LCITA, the taxpayer may request a one-time 60-day extension by applying for the extension 15 days before the original submission due.

LCITA allows the tax authorities to request a taxpayer to submit related information, if deemed necessary for enforcement.

Corporate Income Tax Adjustment

If the tax authorities adjust transfer prices between a Korean company and its foreign affiliates based on the arm’s length price, which results in an increase the taxable income of the Korean company and the amount of the adjustment is not repatriated back to Korea within a specified time period, certain secondary adjustments may be applicable such as treatment as deemed dividends, income outflow, contribution of paid-in capital, etc, in addition to the corporate income tax assessment thereon.


Chapter 11

Penalties

In the wake of a transfer pricing adjustment, penalties may be imposed for understating the tax base or for underpayment. .

Penalty relief for taxpayers maintaining contemporaneous transfer pricing documentation

The underreporting penalty can be waived if a taxpayer properly prepares and maintains contemporaneous transfer pricing documentation at the time of filing the corporate income tax return, and the transfer pricing method was reasonably selected and applied.

A taxpayer wishing to obtain such penalty relief should maintain the proper documentation and submit them upon the request by the tax authorities. The penalty waiver provision is applicable from transfer pricing adjustments occurring on or after January 1, 2009.

Advance Pricing Approval

Two types of APAs are available in Korea: unilateral and bilateral. Bilateral APAs are approved through mutual agreement between competent authorities. Unilateral APAs are approved by the head of NTS.

Taxpayers wishing to obtain an APA for transactions with its foreign affiliates should submit an application for an APA to NTS by the end of the first fiscal year to be covered the APA.

Bilateral APAs can be rolled back for up to five years while unilateral APAs may be rolled back for up to three years.

Taxpayers obtaining an APA are required to file an annual report, which demonstrates that transfer prices were determined by the method agreed upon under the APA, within six months of the annual tax return submission due date.

Mutual Agreement Procedure (MAP)

If a Korean resident individual or domestic company, a nonresident individual or a foreign company with PE in Korea, requests that his/her/its case be resolved through consultation with the competent authorities under an applicable tax treaty, the Minister of Strategy and Finance or the Commissioner of the National Tax Service shall initiate mutual agreement procedures (MAP).

Once MAP is initiated, the application due of a tax appeal

Transfer pricing regulations 61

HowSamil PricewaterhouseCoopers can assist you

Chapter 12

63Introduction to Samil PricewaterhouseCoopers/PricewaterhouseCoopers

PricewaterhouseCoopers worldwide organization

PricewaterhouseCoopers (www.pwcglobal.com), the world’s largest professional services organization, helps its clients build value, manage risk and improve their performance.

Drawing on the talents of more than 155,000 people in over 150 countries, PricewaterhouseCoopers provides a full range of business advisory services to leading global, national and local companies and to public institutions. These services include audit, accounting and tax advice; management, information technology and human resource consulting; financial advisory services, including mergers and acquisitions, business recovery, project finance, and litigation support; business process outsourcing services; and legal services through a global network of affiliated law firms.

PricewaterhouseCoopers refers to the member firms of the PricewaterhouseCoopers worldwide organization.

Samil PricewaterhouseCoopers

■ PricewaterhouseCoopers in Korea

Samil PricewaterhouseCoopers (“Samil”) was formed in 1971 and is the largest professional services firm in Korea. Samil PricewaterhouseCoopers provides internationalized professional services through the global network. Samil's professionals include both Korean and U.S. CPAs, as well as specialists in international taxation, information technology, manufacturing consulting, business strategy, international trade and investment, and performance evaluation. All of our professionals possess extensive know-how and experience in their fields and are working to increase the value of our clients.

■ Samil’s Line of Services (LoS)

•Assurance

Samil, with its industry-focused services and auditor certification system, is the market leader in audit and serves many of the leading companies in Korea. Samil set up an IFRS taskforce in 2005 and has since supported the preparations by the Korean government and companies to implement the global accounting standards. Samil’s Assurance team works globally as well through Global Customer Service and overseas listing services. Service areas of Assurance cover the followings:

-Audit service

-IFRS introduction and advisory service

-Global Customer service

-Overseas listing consulting

-Audit service on systems and processes (ERP)

-Accounting consulting service

12 Chapter


Chapter 12

•PerformanceImprovementConsulting

Samil’s PIC operates service-specific teams to deliver greater added values to clients. Experts of each team applies extensive industry/functional knowledge and experience to identify client issues in advance, as well as develops and executes breakthrough strategies to help improve competitiveness and profitability for clients. PIC also cooperates closely with overseas experts in the PwC Global Network to discover global best practices and apply them to companies operating in Korea. Service areas of PIC cover the following:

-Finance & Accounting (Advisory on global GAAP embedding, efficient financial processes)

- GRC (Governance, Risk and Compliance)

- Operations & Strategy (Business Process Reengineering, Revenue Enhancement)

- Technologies (ERP system deployment, IT governance, Information Strategy and Planning)

•Tax

Tax systems of countries around the world are constantly changing and the ROK is no exception. Business environments and tax advisory markets are changing rapidly as partnership taxation became effective in January 2009. Also, consolidated tax payment will be implemented in 2010, and further, IFRS introduction will be completed by 2011. Samil’s team of tax professionals, consisting of Korean and U.S. CPA's and former tax officials, have over 25 years of extensive experience and have been pioneers of new services. Samil s Tax is proud of a proven track record in the following areas:

- Korean/International tax (including domestic and international M&A related tax advisory, tax risk management)

- Transfer Pricing (Audit, dispute resolution, risk minimization)

- Customs and world trade (tariff risks and plans, tariff law compliance)

- Tax appeal and ruling request assistance

- Taxation for real estate investment and development

- International assignment solutions

•Transactions&FinancialAdvisoryServices

Samil’s TS-FAS group provides comprehensive financial, economic and strategic advices to clients in various industries regarding transaction activities and M&A deals. We have seen major deals involving firms operating in the RPL are increasing in numbers, and such deals within and out of border are expected to continue to grow. Samil’s professionals and their diverse backgrounds and expertise in a range of fields deliver creative solutions and ideas to add value to clients future decisions. Service areas provided by TS-FAS group are as follows:

-M&A advisory services

-Due diligence

-Capital raising & project financing

-Business recovery services

-Valuation

-Pre & post deal services

www.samil.com

0910W-BR-048

© 2009 Samil PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to Samil PricewaterhouseCoopers or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

Date post:	01-Aug-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Doing Business in Korea 2009 - Enterprise Ireland€¦ · Samil PricewaterhouseCoopers LS Yongsan...

Documents