OnJuly 25, 2024, the Korean government announced the 2024 Tax Revision Bill (the“Bill”). The Bill includes significant revisions in corporate taxation, such asintroducing a tax scheme to promote shareholder returns and extending R&Dtax credits. After a pre-announcement and review by the State Council, the Billwill be submitted to the National Assembly on September 1, 2024. It isadvisable to monitor its progress within the National Assembly.
TheBill aims to enhance existing tax laws by offering shareholder-friendly taxbenefits and expanding tax incentives for activities that boost the economy,such as supporting and investing in promising SMEs, middle-market companies,and ventures.
1. RevisionHighlights
A. Shareholder-friendlyTax Reform and System Rationalization
(1) A New Tax Scheme toPromote Shareholder Returns
① Introduction of a corporate tax credit to promote shareholderreturns
TheBill introduces a new scheme designed to enhance corporate values byencouraging shareholder returns. This scheme applies to (i) KOSPI andKOSDAQ-listed companies (ii) that voluntarily disclose their value-enhancementplans and (iii) have increased their shareholder returns through dividends andshare buybacks, compared to the previous year, by more than 5% of the averageover the last three years. Under this scheme, companies can deduct 5% of the increasein shareholder returns exceeding 5% (with a cap at 1% of the total shareholderreturns for the relevant year).
Thisrevision applies to returns made through dividends and share buybacks inbusiness years starting on or after January 1, 2025.
② Separate taxation on dividends received byindividual shareholders
TheBill introduces a scheme for listed companies that receive corporate taxcredits for increasing shareholder returns. It allows for separate taxation on aportion of the cash dividends paid to individual shareholders (with a 9%reduction in the withholding tax rate). Additionally, shareholders have theoption to choose separate taxation on 25% of the amount subject to aggregatetaxation.
Thisrevision applies to dividends received on or after January 1, 2026.
(2) Rationalization ofthe requirements for eligible spin-offs related to treasury stock
TheBill eases the equity continuation requirements for eligible spin-offs by allowingeligibility even if shares of the spun-off company are not allocated to the treasurystock of the parent company. Furthermore, the Financial Investment Services andCapital Markets Act will be amended to restrict the allocation of new shares totreasury stock in the event of a spin-off.
Therevision applies to spin-offs occurring on or after January 1, 2025.
B. Extension and Expansion of Tax Benefits forSMEs and Middle Market Firms
(1) Extension of thegrace period for SMEs
① Extended grace period for SME tax benefits following size increase
Tosupport business growth, the Bill extends the grace period for companies thatexceed the SME threshold due to growth. The period is extended from three tofive years (and to seven years for companies listed on KOSPI or KOSDAQ).
Thisrevision applies to companies that exceed the SME threshold for the first timein the tax year containing the enforcement date of the Enforcement Decree ofthe Act on Restriction on Special Cases Concerning Taxation.
② Extension of SME provisions post-tax consolidation
TheBill extends the application period of SME provisions following taxconsolidation from three years to five years after the first consolidatedbusiness year.
Thisrevision applies to companies that implement tax consolidation for the firsttime on or after January 1, 2025.
(2) Adjustment of thescope of middle-market enterprises
Toimprove tax equity across industries, the Bill excludes real estate leasing fromthe industries eligible for middle-market enterprise classification. It also introducesmore specific industry size thresholds for middle-market enterprises as follows:
A table of mid-sized company scope adjustments and provides information on current and revised issues | | Current Provisions | Revised Provisions |
| Size | The average turnover over the preceding 3-year period is less than KRW 300 billion (KRW 500 billion for R&D tax credits). | The average turnover over the preceding 3-year period is less than 3 times the reference amount (5 times for R&D tax credits). Provide information on the standard amount by industry | Reference Amount (KRW 100 million) | Industry | | 1,500 | Clothes manufacturing, primary metal manufacturing, etc. | | 1,000 | Food manufacturing, construction, wholesale/retail, etc. | | 800 | Transport warehouses, information and communication, etc. | | 600 | Welfare and social security, other personal services, etc. | | 400 | Accommodation and dining, education services, etc. | |
(3) Special Tax Benefitsfor Venture Companies
① New special provision on taxation for the acquisition of multiplevoting shares by venture companies7
TheBill introduces a new provision allowing venture company founders whocontribute common shares in kind to acquire multiple voting shares to defercapital gains tax arising from this contribution until the multiple votingshares are converted back into common shares.
Thisrevision applies to common shares contributed in kind on or after January 1,2025.
② Extension of the special provision on stock options granted byventure companies
TheBill extends the special tax provision on profits from exercising stock optionsgranted by venture companies, moving the end date from December 31, 2024, toDecember 31, 2027.
(4) Adjustment andextension of the special provision on corporate tax base for shipping companies
Toenhance the global competitiveness of Korean shipping companies, the Billextends the application period of the special corporate tax base provision (commonlyknown as the "tonnage tax regime") by five years, shifting the enddate from December 31, 2024, to December 31, 2029. Additionally, the Billincreases the profit per ton and operating day for vessels other than thereference vessel (including vessels owned by the company, bareboat chartervessels with nationality acquisition conditions, and leased vessels withdeferred payment conditions) to encourage the expansion of the national flagfleet.
Oncefinalized, this revision will apply starting from the business year beginningon or after January 1, 2025.
C. Extension and Expansion of Tax BenefitsRelated to Investment and Employment
(1) Expansion of R&Dtax credits and integrated investment tax credits
① Extension of the application period forR&D tax credits and integrated investment tax credits for nationalstrategic technologies.
Thebill extends the application period for R&D tax credits and integratedinvestment tax credits for national strategic technologies from December 31,2024, to December 31, 2027.
② Increased tax reduction rate for excess investment in tangibleassets
TheBill increases the tax reduction rate for investments in tangible assets usedfor business, where the investment exceeds the average annual investment oracquisition over the three years preceding the relevant tax year. The rate isincreased from 3% (4% for national strategic technology commercializationfacilities) to 10%.
③ Introduction of a new gradual reduction structure for R&D taxcredits and integrated investment tax credits
To supportbusiness growth and mitigate the impact of sharply reduced tax credit ratesafter a company graduates from SME status, the Bill introduces a gradual reductionin the tax credit rate over three to five years following the loss of SMEbenefits due to increased revenue or other factors. The Bill also eliminatesthe credit rate for KOSDAQ-listed middle-market companies on R&D expensesincurred on or after January 1, 2025 (with a base rate 25% and an additionalrate of up to 15%).
Thisrevision applies to companies that lose SME status for the first time in thetax year beginning on or after January 1, 2025.
[Credit Rate Reduction]
It is a table on the deduction reduction rate and provides information on the tax credit for research manpower development and integrated investment tax credit | R&D tax credits | Integrated investment tax credits |
|---|
Standard | 1-3 years after SME graduation 20%
4-5 years after SME graduation 15%
6 years after SME graduation 8% | 1-3 years after SME graduation 7.5%
4 years after SME graduation 5% |
New growth/fundamental technologies | 1-3 years after SME graduation 25%
4 years after SME graduation 20% | 1-3 years after SME graduation 9%
4 years after SME graduation 6% |
National strategic technologies | 1-3 years after SME graduation 35%
4 years after SME graduation 30% | 1-3 years after SME graduation 20%
4 years after SME graduation 15% |
④ Expansion of R&D tax creditapplicability
Toincrease support for R&D efforts by businesses, the Bill expands the scopeof R&D tax credits for national strategic technologies and newgrowth/fundamental technologies to include rents for R&D facilities. Additionally,while the current law provides tax credits only for workers exclusively engagedin these areas, the Bill broadens eligibility to include workers involved instandard R&D activities as well, with credits determined based on theactual time spent on research.
Thisrevision applies to spending incurred in the tax year that includes theenforcement date of the Enforcement Decree of the Act on Restriction on SpecialCases Concerning Taxation.
(2) Expansion of integratedemployment tax credits
Toimprove the quality of employment, the current law grants tax credits only forincreases in full-time employment. The Bill, however, expands eligibility toinclude the employment of fixed-term workers (with contracts lasting less thana year but at least one month) and short-term employees (regardless of workhours, excluding day laborers).
TheBill also increases the tax credit amount per employee (from KRW 4-15.5 millionto KRW 4-24 million) and introduces additional tax deductions for increasedlabor expenses.
Furthermore,the Bill removes the follow-up management provision (retention requirement andcollection), providing an additional one-year credit for retained employment toalleviate the initial burden on businesses.
Thisrevision applies to increases in employment and labor costs starting in the taxyear beginning on or after January 1, 2025.
(3) New tax exemptioncriteria for earnings from employee discounts
To enhanceemployee welfare and clarify taxation requirements, the Bill establishes newcriteria for tax exemption on earnings from employee discounts. It stipulatesthat when employees of a company and its affiliates purchase goods or services fromthe company at a discounted price below the market value, the tax-exempt amountis “20% of the market price or KRW 2.4 million per year, whichever is greater.”To qualify for the tax exemption, the purchase must be for personalconsumption, the item must be prohibited from resale for a specified period,and the discount must be applied based on a standardized payment method.
Thisrevision applies to earnings incurred on or after January 1, 2025. While thisis expected to improve business welfare programs and significantly enhance thebenefits enjoyed by employees, there may be a substantial increase in the taxburden if the discount exceeds the exemption criteria, suggesting the need to explorealternative.
(4) Relaxed eligibilityrequirements for tax credits on overseas resource development investments
To strengthenthe stability of the resource supply chain, the Bill rationalizes the taxcredit scheme for overseas resource development investments. It expands thescope of tax credits to include overseas subsidiaries fully owned by two ormore Korean nationals (currently limited to foreign subsidiaries wholly ownedby a single Korean). Additionally, the Bill excludes equity required by the lawsof the relevant country to be owned by the government when calculating the shareholdingratio.
Thisrevision applies to investments made in the tax year beginning on or afterJanuary 1, 2025.
The above information is provided by SHIN & KIM(LLC) via abusiness agreement in cooperation with Invest Seoul.
