South Korea To Entice Foreign Manufacturers With Tax Breaks

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

01 September 2003

The South Korean government is planning to simplify the tax code and offer further tax breaks for foreign firms in a bid to stimulate investment from overseas, which has decreased dramatically in recent months.

The new measures are expected to be put in place next year and will include the lowering of the minimum investment required to receive tax breaks from $50 million to $30 million for firms in the manufacturing sector. The level will also be reduced for companies operating in the logistics sector from $30 million to $10 million, though the period for which tax break will run is being shortened to seven years from ten years.

The government is also considering a move that will simplify the tax system for foreigners and this will likely mean a uniform tax rate of 17% on net income regardless of salary levels. Other measures include an increase in the tax deductions rate for corporate investment from 10% to 15%; and the minimum tax rate for small and medium sized firms will be reduced from 10% from 12%.

At the same time however, the government is intending to tighten tax law in certain areas, announcing the introduction of an all-inclusive inheritance and gift tax. In addition, capital gains tax for property sold within one year of purchase will be raised to 50% from 36%. A 40% rate will apply to those who sell within two years of purchase.

In July, the government announced further tax incentives aimed at firms in non-manufacturing arenas such as the media, movies, computer games and virtual reality product sectors. Under these proposals, foreign firms - regardless of size - wishing to set up new operations in Korea will pay no local or national taxes for a period of seven years, and will pay half the standard tax rate for the subsequent three years. The plan will also exempt foreign companies from paying both income and corporate taxes at the national level, and corporate registration, property and land taxes at the local level.

These measures arre being put in place to arrest an alarming decline in FDI into South Korea which dropped by over 40% year on year in the second quarter of 2003, according to the Korea Herald.

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