Korea

Country starter pack
Business practicalities in Korea
67
Tax credits and incentives
Tax treaty
Korea and Australia have a tax treaty that aims to
eliminate double taxation. Tax paid in Australia on foreign
income may be credited against Korean income tax. The
amount credited is limited to the lower amount of foreign
taxes paid and additional Korean tax due to the inclusion
of the foreign income. Unused credits can be carried
forward for up to five years. Korea also has treaties with
other nations if foreign income is coming from relevant
countries. To receive the reduced tax through tax treaties,
foreign companies receiving income from Korea must
apply before the income is paid.
Tax holidays
Under the Special Tax Treatment Control Law (STTCL),
some tax reductions or exemptions are available for
foreign-invested corporations as well as certain SMEs.
Tax credits are also available to promote research and
development activities. Temporary tax holidays are
introduced from time to time based on government
policy.
There are also tax incentives relevant to international
capital transactions, to facilitate restructuring of
corporations and financial institutions, to promote job
creation and to encourage the relocation of head offices
or factories in urban cities to rural areas.
Tax credit for SMEs
Various tax incentives are granted to SMEs. These include
a special tax exemption that ranges from five to 30 per
cent of taxable income, depending on the size and type
of business, and whether it is located in a metropolitan or
non-metropolitan area. Also, with the acquisition of some
business assets, three per cent of the acquisition cost
is deducted from corporate income tax. The deduction
applies to business assets such as machinery and
equipment, facilities for point-of-sales data management
systems and facilities used for information protection
(for which depreciation period is two years or more). In
addition, newly incorporated SMEs in non-metropolitan
areas are given a 50 per cent reduction in corporate
income tax for five years.
Foreign tax credits
Taxes imposed by foreign governments on income
declared by a resident taxpayer are allowed as a credit
(within specified limits) against income taxes to be paid in
Korea, or as deductible expenses. In general, credits are
more widely applied than deductions in these instances.
Excess foreign tax credits can be carried forward for five
years.
Tax credits for job-creating investments
If the number of regular employees in a current year,
does not decrease compared with that in the previous
year, investments that create jobs attract a tax credit
of three to nine per cent. The credit for an investment
that maintains the same employment numbers is one to
three per cent and such credit is only available for certain
companies like SMEs. The additional tax credit for job
creation has ceilings set at KRW 10 million (or KRW
15 million per employee between the ages 15 and 29 or
KRW 20 million per specified occupational high school
graduate employee) multiplied by the number of net new
employment. Unused tax credits can be carried forward
for five years.
Research and development (R&D) tax credits
Various tax incentives are provided to stimulate R&D
activities including deduction of R&D reserve, tax credits
for research, and manpower development expenses.
Companies may claim a tax credit in relation to qualifying
R&D expenditure as follows: three to six per cent (25 per
cent for SMEs) of the current R&D expenses; or 40 per
cent (50 per cent for SMEs) of the incremental portion
of the current R&D expenses over the average of the
previous four years. A tax credit (up to 10 per cent of the
investment amount) is available for investment in facilities
for technology and human resources development.
Unused tax credits can be carried forward for five years.
Investment incentives
Tax credits are generally available for investments in
facilities that enhance productivity, safety, job-creation,
and other aspects of a business.
Foreign direct investment tax incentives
High-technology businesses
Foreign invested companies that engage in certain
high-technology businesses, and service businesses that
provide extensive support to such industries, can apply
for 100 per cent exemption from corporate income tax
for five years, beginning from the first year of profitable
operations (or from the fifth year, if not profitable until
then) and a 50 per cent reduction for the following two
years in proportion to the foreign shareholding ratio. The
taxpayer can apply for 100 per cent exemption from local
taxes, such as acquisition tax and property tax on assets
acquired for their business for five years after the business
commencement date and 50 per cent reduction for the
following two years. Some local governments grant longer
exemption periods (up to 15 years) in accordance with
their local ordinances. Approved foreign investment also
can be eligible for exemption from customs duties, VAT,
and special excise tax on imported capital goods for the
first five years from the date of foreign investment report
under the FIPA.