Imposition of Retained Earnings Tax on Personal Similar Corporations Since 2022

Ministry of Economy and Finance Announces 'Purpose and Design Plan for Introducing Taxation System on Personal Similar Corporations'

Investment, Debt Repayment, Employment, and R&D Expenditures Excluded from Retained Earnings
"Scope of Exclusion to Be Expanded Reflecting Opinions from Business Community and Experts"

[Sejong=Asia Economy Reporter Joo Sang-don] The government has decided to impose taxes on the retained earnings of personal quasi-corporations where the largest shareholder and their special related parties hold more than 80% of the shares, starting from 2022. The target includes personal quasi-corporations whose non-business income ratio, such as interest and dividend income, and gains from disposal of real estate, stocks, and bonds, exceeds 50% for two consecutive years. However, amounts spent or reserved within two years for employment, investment, and research and development (R&D) will be excluded from the taxable retained earnings.

The Ministry of Economy and Finance announced this on the 4th through materials explaining the purpose and design plan of the personal quasi-corporation taxation system. The 2021 budget bill targets corporations where the largest shareholder and their special related parties hold more than 80% of the shares. This is based on the judgment that the shareholder effectively controls decision-making, and the economic substance of the corporation is identical to that shareholder. If such a personal quasi-corporation accumulates retained earnings exceeding 50% of net income or 10% of equity capital, it will be considered as dividends and subject to income tax.

The Ministry plans to exclude essential expenditures for actively conducting the corporation’s own business activities from taxable retained earnings through enforcement ordinances. Expenditures and reserved amounts for investment, debt repayment, employment, and R&D will also be excluded.

Regarding this policy, Choo Moon-gap, Head of Economic Policy at the Korea Federation of SMEs, said, "The two-year recognition period for exclusion from retained earnings is too short," adding, "For SMEs that need to reserve amounts annually, it should be at least 5 to 10 years."

The Ministry of Economy and Finance is considering broadening the scope of exclusions. A ministry official stated, "The bill on the taxation system for personal quasi-corporations will be actively discussed in the National Assembly starting next week and is expected to be finalized by early December. Based on this, enforcement ordinances will be drafted by early January next year." The official added, "At last week’s meeting, the construction industry requested that land purchase costs be excluded from retained earnings, and the shipping industry requested the same for ship purchase costs. We will review these and other proposals from the business community."

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