[2023 Tax Reform] Foreign Company Stock Options: Business Locations Must Submit Transaction Records

Submission Required for Stock-Based Compensation Grants, Exercises, and Payments
Applicable from Stock-Based Compensation Exercised or Paid in 2024

Tax obligations for stock-based compensation received from foreign companies, such as stock options, will be newly established.

On the 27th, the Ministry of Economy and Finance disclosed an amendment to the Income Tax Act in the '2023 Tax Law Revision' that mandates the mandatory submission of transaction details for employees' overseas stock-based compensation.

Stock-based compensation refers to the right to acquire or purchase shares at a predetermined price. Since it is received as compensation for labor, stock-based compensation is also subject to comprehensive income tax reporting. Recently, despite an increase in cases where foreign corporations provide stock-based compensation, issues of tax evasion have arisen due to difficulties in filing comprehensive income tax returns.

Such cases are frequent due to the classification system of earned income. Typically, earned income is divided into 'Type A,' where domestic corporations withhold taxes when paying salaries, and 'Type B,' where withholding is not done. Foreign companies with business establishments in Korea are classified as domestic corporations under the Corporate Tax Act and withhold taxes on earned income. However, stock-based compensation from foreign parent companies has been classified as 'Type B,' and withholding has not been performed.

Accordingly, the government requires that when employees working at domestic business sites receive or exercise stock-based compensation from foreign corporations that are overseas controlling shareholders, the transaction details must be submitted. The submitting party is the domestic corporation where the employee works or the domestic business site of the foreign corporation.

Overseas controlling shareholders are broadly classified into two categories. For employees of domestic corporations, it refers to foreign corporations that directly or indirectly own 50% or more of the shares of the relevant corporation. For employees at domestic business sites, it refers to the foreign corporation's head office or branch and another foreign corporation that directly or indirectly owns 50% or more of the foreign corporation's shares.

The submitted data includes details of granting, exercising, and paying stock-based compensation, exercise/payment gains, and personal information of employees. The submission deadline is March 10 of the year following the date the stock-based compensation is exercised or paid.

This measure will apply to stock-based compensation exercised or paid from January 1 of next year.

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