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South Korea Plans Tax Breaks For Business

by Mary Swire, Tax-News.com, Hong Kong

31 August 2005

The South Korean government has formulated a new fiscal incentive package in an attempt to help growth in the small business sector and to nurture the development of preferred industries, such as information technology.

According to a Ministry of Finance and Economy statement, the tax reform focuses on "boosting the domestic economy, expanding the economy's growth potential, securing tax revenue, boosting measures against a bipolarization in wealth distribution and to prepare for a rapidly aging society".

Part of the reform package will seek to encourage small and medium businesses to shift into sectors such as knowledge-based information technology and sciences through new tax exemptions on buying property or equipment related to their new businesses. These tax breaks, which will be valid until 2007, will apply to around 20 types of businesses, including logistics, research and development, science-technology services and film production.

Other businesses targeted by the government are those which have suffered as a result of weak consumer demand including restaurants and hotels, which will have their VAT rates reduced to 30% from 40% on restaurant and lodging business for two years beginning in January.

In a bid to stoke domestic spending and deter excessive levels of saving, tax breaks will be removed on certain savings products, such as interest income earned on some savings accounts for people aged 20 years and younger. Meanwhile the amount of pay withheld by companies for pension contributions will fall to 5% from the current rate of 10%. Interest income earned on some savings products related to house purchases will also no longer be tax exempt.

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