"Personal Similar Corporation Retained Earnings Tax Is Not Final"... Ministry of Economy and Finance Suggests Expanding Exclusion Recognition Scope

'Purpose and Design Plan for the Introduction of Taxation System on Personal Similar Corporations'

"We will continuously gather industry and expert opinions and actively reflect necessary improvements"
High possibility of expanding investments excluded from retained earnings

[Sejong=Asia Economy Reporter Joo Sang-don] On the 4th, the government announced its plan to revise and supplement the taxation system for personal-like corporations. While maintaining the broad framework of taxing retained earnings of corporations with large shareholdings by major shareholders and related parties that do not actively engage in business activities similar to individuals, the government plans to consider expanding the scope of exceptions if necessary to ensure that active and productive corporations are not disadvantaged.

On the same day, the Ministry of Economy and Finance stated through the "Purpose and Design Plan for the Introduction of the Personal-like Corporation Taxation System" that "we will continuously gather opinions from the industry and experts and actively reflect necessary improvements."

An official from the Ministry of Economy and Finance explained, "Starting next week, the bill on the personal-like corporation taxation system will be actively discussed in the National Assembly and is expected to be finalized by early December. Based on this, we plan to draft the enforcement decree by early January." He added, "Before the legislative notice of the enforcement decree, we will additionally collect and review opinions from the business community and experts regarding the scope of retained earnings exclusions."

The purpose of introducing the personal-like corporation taxation system is to prevent the phenomenon where corporations are newly established or individual businesses are converted into corporations to avoid the relatively high income tax burden (up to 42%) compared to corporate tax (up to 25%).

The taxation target is corporations where the major shareholder and their related parties hold 80% or more of the shares. This is based on the judgment that the shareholder effectively controls decision-making and that the economic substance of the corporation is identical to that shareholder. So-called "shell companies" that accumulate retained earnings exceeding 50% of net income or 10% of equity capital will be considered as distributing dividends and subject to income tax.

The Ministry of Economy and Finance also presented items excluded from retained earnings and targets excluded from application through the draft enforcement decree. Corporations where passive income such as interest, dividends, rent, and proceeds from the disposal of real estate, stocks, bonds, etc., unrelated directly to business operations, accounts for 50% or more for two consecutive years will be considered "passive business corporations," and excess retained earnings of these corporations will be taxed. This applies from the current retained earnings generated after the 2021 fiscal year, not the accumulated internal reserves.

At this time, expenditures essential to the management activities of corporations actively engaged in their own business will be excluded from taxable retained earnings. For example, if Corporation B, a manufacturer, has 10 billion KRW in income after corporate tax, distributes 2 billion KRW to shareholders, and sets aside 3 billion KRW for machinery to be purchased two years later, the amount set aside for investment will be excluded from taxation. Also excluded are amounts set aside for debt repayment, employment, and research and development (R&D) expenditures.

The Ministry of Economy and Finance plans to consider broadening the scope of such exclusions. However, it is difficult to apply differentiated taxation by industry, such as excluding traditional manufacturing industries from taxation as requested by the business community. An official from the Ministry said, "If certain industries are excluded from taxation, traditional manufacturing industries with excessive passive income may emerge." He added, "At last week's meeting, the construction industry requested that land purchase costs be excluded from retained earnings, and the shipping industry requested that ship purchase costs be excluded; these suggestions are also under review."

This content was produced with the assistance of AI translation services.