Bae, Kim & Lee LLC | View firm profile
The
Ministry of Strategy and Finance announced its proposed tax law amendments for
2018 on August 2, 2017. This tax alert highlights the proposed change to the
capital gains exemption currently available to foreign investors engaged in
on-the-market transactions.
In general, capital gains earned by foreign investors upon the
transfer of shares are generally subject to withholding tax at a rate equal to
the lesser of 11% of the gross proceeds realized or 22% of the net realized
gain, unless exempted by relevant tax laws or an applicable tax treaty which
Korea has entered into with the foreign investors’ country of tax residence.
Under current provisions of the Korean tax law, a foreign
investor that transfers shares through the Korean Stock Exchange are not
subject to withholding tax on realized capital gains to the extent that the
foreign investor has no permanent establishment in Korea through which the
capital gains are derived and does not own 25% or more of the total issued and
outstanding shares of the Korean company at any time during the calendar year
in which the sale occurs and during the five calendar years prior to the
calendar year in which the sale occurs.
This so-called 25% rule is applied as a threshold to impose
capital gains taxation only on the transfer of shares by foreign investors that
are majority shareholders in the Korean company. The proposed amendment reduces
the threshold from 25% to 5%, such that any foreign investor with 5% or more
ownership of the total issued and outstanding shares of a Korean company may be
subject to capital gains taxation on the transfer of shares in such Korean
company. The proposal indicates that all investments held prior to the
implementation of the amended provision will be subject to the current 25% rule
until December 31, 2018. The proposed amendments would otherwise apply to all
other share transfers from January 1, 2018 onwards.
The
proposal is aimed at increasing taxation on Korean-sourced income incurred by
non-residents and foreign companies. If approved by the National Assembly and
enacted, this amendment is expected to have a significant impact on the tax
exposure for foreign entities making investments in Korean companies going
forward.