[Yoon Administration Tax Law] Corporate Tax Top Rate Reduced from 25% to 22%... Back to 'Original Position' After 5 Years

[Asia Economy Sejong=Reporter Kim Hyewon] The government will lower the top corporate tax rate from the current 25% to 22%. For small and medium-sized enterprises (SMEs) and mid-sized companies with sales under 300 billion KRW, a special tax rate of 10% will be applied up to a taxable income of 500 million KRW (currently 200 million KRW) to ease the tax burden.

By alleviating double taxation on dividends from domestic and overseas subsidiaries, the government aims to promote the inflow and distribution of overseas retained earnings domestically, and will also reform tax systems with strong regulatory characteristics, such as abolishing the investment and win-win cooperation promotion tax system.

The government announced the '2022 Tax Reform Plan' containing these details on the 21st.

Proportion of Tax Reduction Amount Relative to Tax Payment by Corporate Size

First, the government decided to adjust the corporate tax rate, which is higher than the OECD average, and simplify the complex taxable income brackets. The core of this corporate tax reform is to lower the top rate from the existing 25% to 22% and simplify the taxable income brackets to 2-3 tiers. This essentially reverses the top corporate tax rate increase to 25% implemented during the Moon Jae-in administration.

Currently, South Korea applies corporate tax rates ranging from 10% to 25% across four taxable income brackets. Among OECD member countries, only Costa Rica and South Korea have four or more taxable income brackets. Twenty-four countries apply a single tax rate.

The Ministry of Economy and Finance pointed out, "Excessive progressive taxation leads to a tax burden that reduces international tax competitiveness and causes economic inefficiency," adding, "Higher corporate tax rates than foreign countries are one of the reasons that increase domestic companies' overseas investments and restrict foreign investment."

With this corporate tax revision, SMEs and mid-sized companies with taxable income of 500 million KRW are expected to see a tax burden reduction of about 30 million KRW compared to the current system, and large companies with taxable income around 400 billion KRW are expected to see a reduction of about 3 billion KRW.

The government believes that lowering the top corporate tax rate will benefit shareholders through dividends, consumers through lower product and service prices, workers through increased employment and wages, and partner companies through expanded investment.

Adjusting and rationalizing double taxation on dividends from overseas and domestic subsidiaries is also a key part of President Yoon Suk-yeol administration's tax system reform to enhance corporate competitiveness. The aim is to open the path for overseas retained earnings to flow into the country and to promote dividends by raising the non-inclusion rate of dividend income, encouraging their use as investment funds.

The current tax credit method for double taxation adjustment is incomplete, requiring additional tax burdens when remitting dividends from overseas subsidiaries compared to the exemption method, which has been criticized for restricting the remittance of overseas retained earnings to Korea. Among 38 OECD countries, 32 have adopted the exemption method for overseas dividend income taxation. The government estimates that the overseas retained earnings of Korean overseas direct investment companies exceeded 100 trillion KRW as of the end of last year, indicating substantial remittance capacity. However, dividends from subsidiaries established in low-tax countries for tax avoidance purposes are not eligible for non-inclusion.

For domestic subsidiary dividends, double taxation adjustment will be rationalized by applying non-inclusion rates based on shareholding ratios (less than 30%, 30-50%, and over 50%) regardless of the company's form, with overall rate increases. However, for holding companies, there are brackets where the non-inclusion rate will be lower than the current rate, so a two-year grace period with special provisions will be implemented.

Additionally, to support companies affected by COVID-19 and reduce tax burdens, the limit on the deduction of carried-forward losses for general corporations will be raised from 60% to 80%.

The investment and win-win cooperation promotion tax system, introduced to encourage companies' retained earnings to be used for investment and wage increases, will be terminated upon its sunset this year due to low effectiveness. Instead, it will be replaced by other systems such as integrated investment tax credits and earned income increase tax credits.

The tax system on internal transactions to prevent unfair profit shifting will be revised to allow calculation of gift benefits by business segment, excluding profits unrelated to unfair profit shifting from gift benefits, and to exclude domestic transactions for export purposes from taxable transactions regardless of company size.

To enhance the effectiveness of the consolidated tax system, the scope of applicable subsidiaries will be expanded from 100% ownership (complete control) by the parent company to 90% or more ownership.

To resolve management uncertainties and stabilize employment in the duty-free shop industry, the patent period will be extended from 5 to 10 years, and patent renewals will be allowed up to two times for both large and small-medium enterprises. When it is difficult to calculate the export price of domestically manufactured goods from the manufacturing site, an estimated calculation method will be recognized, and the exchange rate applied in determining the taxable price for customs duties will be changed from the foreign exchange selling rate to the base rate.

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