Corporate Retained Earnings Impact Growing... "Not Seen as Real Estate or Land Investment"

Government Adjusts Enforcement Decree on Taxation of Retained Earnings in Private Quasi-Corporations

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is attending the Government Policy Coordination Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 29th. Photo by Jinhyung Kang aymsdream@

[Asia Economy Reporter Jang Sehee] The government has decided to impose taxes on companies that accumulate large amounts of cash (retained earnings) within their firms. Expenses used for investment, employment, and research and development (R&D) will be excluded from the tax base. However, the industry argues that costs related to real estate and land should also be deducted from retained earnings.

According to the Ministry of Economy and Finance on the 7th, expenses used for purchasing real estate buildings and land are expected to be included in retained earnings. This is because the amounts for buildings and land are too large and represent a broader scope than the existing investment tax credit standards. Tax law also limits the scope of investment to machinery and equipment. Additionally, the government plans to exclude from retained earnings the labor costs necessary for 'maintenance' as well as those for increasing employment.

The purpose of introducing a taxation system for personal-type corporations is to prevent the phenomenon where individuals establish new corporations or convert sole proprietorships into corporations to avoid the relatively higher income tax burden (up to 42%) compared to corporate tax (up to 25%).

The tax applies to corporations where the largest shareholder and their special related parties hold 80% or more of the shares, and it will be applied to retained earnings generated from the 2021 fiscal year onward. The Ministry of Economy and Finance estimates that only a single-digit percentage of all corporations will be subject to retained earnings taxation.

There are even talks that the government might follow the path of abolishing the excess retained earnings tax, which was introduced in 1991 and abolished in 2001, amid concerns raised even within the ruling party. At that time, the system was abolished due to its ineffectiveness in inducing dividends. In fact, the small and medium-sized business sector is opposing the tax, arguing that taxing retained earnings from next year would constitute double taxation along with corporate tax and that without retained earnings, investment capacity would decline.

Experts also point out that the policy’s effectiveness is unclear and that it could hinder corporate investment. Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "It is not appropriate to tax based on how income is retained rather than on the income itself," adding, "Collecting additional taxes on assets other than cash should be considered a strong tax increase."

Professor Kim Woo-chul of the University of Seoul’s Department of Economics advised, "If real estate and land are regarded as investments, there is a risk of excessive concentration of investment in real estate," and suggested, "Rather than expanding the scope of investment, an evaluation of whether the retained earnings policy has actually had a significant effect is necessary."

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