On July 22, 2020, the Ministry of Economy and Finance publicly released the 2020 draft Tax Revision Bill (the 'Draft Bill').

Amidst the increasing risk of a global recession caused by the COVID 19 pandemic, the Draft Bill aims to: (i) promote investment and spending; (ii) enhance tax benefits to low-income earners and mid-sized and small-sized enterprises; and (iii) provide tax incentives for job creation in order to minimize the negative economic impact of COVID 19. The Draft Bill is also seeking to harmonize the Korean tax system to changes occurring in the global economy, to ease compliance burdens, and to avoid double taxation.

A summary of some key tax law proposals in the Draft Bill is provided below.

I. Dealing with the negative impacts of COVID 19 and invigorating the economy to prevent a post-COVID 19 recession

1. Extension of the carryforward period for tax deductions provided under the Special Tax Restriction Law ('STRL') (Article 144 of the STRL)

This proposal would extend the carryforward period to 10 years for all tax deductions provided under the STRL. The proposal is meant to reduce the investment risks of businesses. The proposed extended period will also apply to existing carryforward periods not expired as of the end of 2020.

2. Extension of the carryforward period for tax losses (Articles 13 and 17(13) of the Corporate Income Tax Law ('CITL') and Article 45 of the Individual Income Tax Law ('IITL'))

This proposal would extend the period for tax loss carryforward from the current 10 years to 15 years, in order to reduce the tax burden faced by businesses that have suffered economic loss as a result of the COVID 19 pandemic. This proposal will be effective for tax losses reported on or after January 1, 2021 (i.e., including the tax loss reported in the 2020 tax return).

3. Extension of the carryforward period for unused foreign tax credits and deductions of uncredited foreign tax after the carryforward period (Article 57 of the CITL, Article 57 of the IITL)

This proposal would extend the period for foreign tax credit carryforward from the current 5 years to 10 years. The proposal is intended to limit the impact of double taxation on cross-border transactions. The amount of uncredited foreign taxes remaining after the extended carryforward period will be deducted as an expense from the taxable income in the tax year immediately following the end of the carryforward period.

The extension will also apply to existing carryforward periods not expired as of the end of 2020.

4. Introduction of a new tax regime for financial investment income (Article 4, Article 87-2, Article 87-4 to 87-26, Articles 127 - 129, Article 148-2(3) of the IITL)

Currently, interest and dividend income is subject to tax. The Draft Bill will expand the rules to provide that all types of income that can be generated from the sale or disposal of financial assets (e.g. securities, derivatives, etc.) as defined in the Financial Investment Services and Capital Markets Law will be subject to tax. Capital gains generated from the transfer of debt securities or listed shares held by minority shareholders, currently exempt from tax, will eventually be subject to tax.

The proposal also prescribes the methods of calculating necessary costs, a basic deduction of KRW 50 million, tax reductions, and the carryforward of financial investment losses (for 5 years) in relation to the new tax regime. According to the proposal, the financial investment income will be the net gains (or losses) on the financial instruments for each tax period (from January 1 to December 31), which will be classified into: (1) capital gains from the transfer of domestic listed stocks; or (2) income from foreign stocks, non-listed stocks, debt securities, and derivatives. Depending on the classification, a prescribed amount (KRW 50 million for domestic listed stocks; KRW 2.5 million for others) will be deducted from the financial investment income and the non-deducted amount will be allowed to be carried forward for 5 years.

With respect to filing tax returns and making tax payments for financial investment income, the proposal would require financial institutions to withhold tax (generally at the rate of 20%) from the financial investment income calculated monthly for each taxpayer. If there is financial investment income generated other than through a financial institution, then this income is subject to a preliminary tax return semi-annually. A taxpayer should file a final tax return and provide information of his tax base and tax amount from financial investment income, by the end of the 5th month of the following year. In addition, there is a new higher progressive tax rate of 25% on financial securities income, and to the extent that the higher rate is applicable, then additional tax shall be paid in the final tax return, or alternatively, to the extent that a tax refund is due, due to the netting of gains and losses, a final tax return should be filed.

This proposal will be effective for financial investment income generated on or after January 1, 2023.

5. Rationalization of the tax regime for trust-type collective investment vehicles ('CIVs') (Article 4(17) of the IITL, Article 91-2 of the STRL)

This proposal provides for all income attributed to a CIV to be subject to tax, unless otherwise provided. The proposal is designed to tax certain profits of a CIV which are currently not subject to taxation.

Based on the Draft Bill, the following changes will be made: (i) income distributed by a CIV will be classified as dividend income or as financial investment income depending on its source; (ii) income generated by a qualified CIV will be taxed on a net basis and a carryforward of deductions will be allowed; (iii) by contrast, unqualified CIVs will be treated as entities subject to tax.

The proposal would require the submission of a report which provides information about the annual income from trust assets and details of the distribution and reserve details as an additional condition to be a qualified CIV under the Income Tax Law. According to the proposal, if an unqualified CIV does not distribute its interest or dividend income, the retained earnings of the unqualified CIV will be subject to corporate income tax and the beneficiaries will be deemed to receive dividend income, which shall be taxed again.

6. Reduction in the securities transaction tax ('STT') rate (Article 8 of the Securities Transaction Tax Law ('STTL') and Article 5 of the Enforcement Decree of the STTL)

In consideration of a newly introduced taxation regime for financial investment income and expanded taxation on capital gains from the transfer of stocks, the proposal would reduce the STT rates. Between 2021 and 2022, the STT rate will be reduced by 0.02% points. From 2023, when the financial investment income starts to be fully implemented, the following STT rates will apply: 0% for securities traded at KOSPI; 0.15% for KOSDAQ; 0.1% for KONEX; and 0.35% for others.

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