Korea announces 2024 tax reform proposals, including clarifications of global minimum tax rules (2024)

Executive summary

On 25 July 2024, the Ministry of Economy and Finance of Korea announced the 2024 tax reform proposals (the 2024 Proposals). Unless otherwise specified, the 2024 Proposals will become effective for fiscal years beginning on or after 1 January 2025.

This Alert summarizes the key proposals.

Detailed discussion

Clarifications of the global minimum tax rules

The 2024 Proposals introduce and clarify the Global Anti-Base Erosion (GloBE) rules under Korea's currentAdjustment of International Taxes Act(AITA) to reflect the administrative guidelines and commentary of the Organisation for Economic Co-operation and Development's (OECD's) Pillar Two GloBE model rules. This rule will be effective for the reporting years beginning on or after 1 January 2025.

Details regarding the GloBE rules in the 2024 Proposals are outlined below.

Elimination of the share premium for shares held by major shareholders

Based on the Korean Corporate Income Tax Law (CITL), the transfer price in return for the share transfer between related party transactions shall be no less than at arm's length (or FMV). However, where the arm's-length price is not applicable or where no transfer price has been identified, supplementarily, the share value should be determined under the Individual Income Tax Law or Inheritance and Gift Tax Law (IGTL). In addition, by the provision of the IGTL, the value of shares held by the largest shareholders and their related parties is subject to 20% share premium, unless exceptions apply.

The 2024 Proposals eliminate the addition of share premiums for the computation of share value under the IGTL without any exceptions.

Extends application period for R&D and Integrated Investment tax credits

The 2024 Proposals extends the sunset period of the current research and development (R&D) tax credit from 20% to 50% for national strategic technologies (seven categories) and new growth/original technologies (14 categories) from 31 December 2024 to 31 December 2027. This three-year extension will also apply to the current integrated investment tax credits from 15% to 25% (excluding 4% additional credits) related to national strategic technologies.

Additionally, the 2024 Proposals include an increment in the deduction rate for investments exceeding the average investment amount of the previous three years, from 3%-4% to 10%, for integrated investment tax credits.

Adds tax incentive to promote the return of earnings to shareholders

The 2024 Proposals introduce a special tax incentive for listed corporations (excluding corporations such as real estate investment trusts (REITs) aimed at investment dividends) that (1) disclose a plan to enhance corporate value by the end of the fiscal year, and (2) increase the shareholder return amount by more than 5% compared to the average of the previous three years.

The increased amount will be eligible for a corporate tax deduction of 5% (limited to 1% of the total shareholder return amount). Meanwhile, individual shareholders (excluding nonresidents and corporate shareholders) of companies that receive this corporate tax exemption will be able to separately withhold a portion of the cash dividends received at a reduced rate.

The corporate tax special provision will apply to dividends distributed or treasury shares cancelled in fiscal years starting after 1 January 2025, and the tax exemption for individual shareholders will apply to dividends received after 1 January 2026.

Adds new rules for foreign investors with domestic exemptions on government bonds

Changes withholding taxation for foreign professional athletes

Under the current Korean CITL, business income paid to individuals is generally subject to the Korean withholding tax (WHT) at the rate of 3.3%, inclusive of 10% local income tax, and business income paid to foreign professional athletes for a contract period of three years or less is subject to a 22% WHT, inclusive of 10% local income tax.

The 2024 Proposals stipulate that business income paid to foreign professional athletes after 1 January 2025 will be subject to a 22% WHT rate, inclusive of 10% local income tax, regardless of the contract period.