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Tax Increases And Stimulus In South Korean Package

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

30 December 2014


The Government has announced details of the tax package that is intended to boost household income, and sustain South Korea's economic recovery, by way of increased wages, dividends and business investment in 2015, as well as a derivatives capital gains tax.

Firstly, to encourage an overall rise in earned income, businesses that increase employee wages will receive a 10 percent tax credit (five percent for large corporations) on the part of their wages bill represented by the increase, on the condition that wage growth exceeds average growth for the previous three years and the number of permanent employees does not decrease from the previous year.

The permanent employee condition does not include the boards of executive members, employees earning more than KRW120m (USD108,800) a year, or relatives of the largest shareholders.

Secondly, to boost dividend income, the withholding tax rate on dividend income earned on stocks held in listed corporations will be reduced from 14 percent to nine percent, and financial income, which had been taxed at the general income tax rate, is to be taxed separately at a 25 percent rate.

The reduced tax rates will, however, only apply to listed stocks whose dividend payout ratios or dividend yields are more than 120 percent of the market average and total dividend payouts rise by more than 10 percent from the previous year, as well as listed stocks whose dividend payout ratios or dividend yields are more than 50 percent of the market average and total dividend payouts increase more than 30 percent compared with the previous year.

Newly-listed stocks and stocks with no previous dividend payouts will be required to issue dividends in excess of 130 percent of the market average to qualify.

Thirdly, in an attempt to strengthen the link between corporate earnings and household income, businesses which do not spend a certain amount of earnings for the current fiscal year on business investment, employee wage rises and dividend payments will be subject to a new 10 percent tax.

The measure will be applicable to businesses with more than KRW50bn in equity capital, and to large conglomerates where mutual shareholding between affiliates is banned. Investment will exclude foreign investment in order to promote domestic investment. Employee raises will, again, exclude those for executive board members, employees earning more than KRW120m per year and those for relatives of the largest shareholders.

The three elements of the tax package will be in effect from January 1, 2015, but it was announced that a 10 percent capital gains tax on derivatives transactions, such as futures and options, will not be imposed until January 1, 2016. There will also be a one-year delay in a plan to tax members of the clergy in South Korea.

TAGS: individuals | capital gains tax (CGT) | tax | investment | business | capital markets | employees | corporation tax | tax credits | stock exchanges | tax rates | withholding tax | Korea, South | dividends | Investment | business investment | Invest | Investment

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