[2021 Tax Revision] Non-Capital Areas, Up to 13 Million Won Deduction for Youth Hiring, Earned Income Tax Credit Income Limit Increased by 2 Million Won

9% Separate Taxation on Interest Income from Government Bonds for Individual Investors
Value-Added Tax Exemption for 'Cleaning, Laundry, and Kitchen Services'
40% Income Deduction for Youth Long-Term Funds and Tax Exemption on Interest Income from Youth Hope Savings
Accelerating Nationwide Employment Insurance Infrastructure... Monthly Submission of Simplified Payment Statements

[Asia Economy Reporter Jang Sehee] From now on, small and medium-sized enterprises (SMEs) in non-metropolitan areas that hire youth, persons with disabilities, or seniors aged 60 and over can receive a tax credit of 13 million KRW per person. The employment increase tax credit, which was scheduled to end this year, will be extended for three more years until 2024. This decision was made considering the significant impact on vulnerable employment groups due to the contraction of the job market caused by the COVID-19 pandemic.

Only in regions outside the metropolitan area, large corporations can receive a tax credit of 5 million KRW per person, mid-sized companies 9 million KRW, and SMEs 13 million KRW. This is an increase of 1 million KRW from the originally planned credit amount. The purpose is to alleviate the employment polarization by class and region caused by COVID-19. However, this is temporarily applied only to employment increases in 2021 and 2022.

The Ministry of Economy and Finance announced the '2021 Tax Reform Proposal' containing these details on the 26th.

Employment Increase Tax Credit Extended for 3 More Years... Requirements for Tax Credit on Employment of Career-Interrupted Women Relaxed from '3 Years After Resignation' to '2 Years'

The application period for the employment increase tax credit, which was scheduled to end this year, will also be extended until the end of 2024.

The employment increase tax system provides an annual tax credit of 4 million to 13 million KRW per additional employee compared to the previous year, deductible from income tax and corporate tax. This year, even if employment decreased in 2020, it is considered as maintaining employment, so the tax credit benefits based on the 2019 employment increase will continue to apply.

If the increased employment is maintained, large corporations can receive the credit for two years, and SMEs and mid-sized companies for three years.

The requirements for tax credits for companies hiring career-interrupted women are also relaxed from 3 years after resignation to 2 years. Companies hiring career-interrupted women receive a tax credit on their wages for 2 years: 30% for SMEs and 15% for mid-sized companies.

The tax reduction system for start-up SMEs will be extended for 3 more years until the end of 2024, and the preferential reduction target (subsistence-level start-ups) will be significantly expanded from annual sales of 48 million KRW to 80 million KRW or less. The start-up SME tax reduction system provides a 50-100% reduction in income tax and corporate tax for 5 years after establishment. Currently, for general start-ups, a 50% reduction is given for 5 years outside the metropolitan area’s overconcentration control zone, and for subsistence-level start-ups, a 50% reduction for 5 years within the metropolitan overconcentration zone and a 100% reduction for 5 years outside the metropolitan area are provided.

Earned Income Tax Credit Income Limits Raised by 2 Million KRW... VAT Exemption for Cleaning, Laundry, and Kitchen Service Outsourcing

This revision also includes support measures for low-income and vulnerable groups. To support income for low-income households, the income limits for earned income tax credit by household type will be raised by 2 million KRW each.

Based on total household income, the limits are 22 million KRW for single-person households, 32 million KRW for single-earner households, and 38 million KRW for dual-earner households. Considering the minimum wage increase and the rise in median income standards, the income limits per household type will be raised. Approximately 300,000 households will receive additional benefits. Additionally, to provide early payment for low-income wage earners, the semi-annual earned income tax credit settlement period will be shortened from September to June.

A separate taxation system for interest income on government bonds for individual investors will also be introduced. A special case will be established to apply a 9% separate taxation on interest income when government bonds for individual investors are held to maturity, providing tax benefits. This is intended to support asset formation for general households and simultaneously expand the demand base for the government bond market, enabling stable government bond issuance.

Value-added tax (VAT) will be exempted on housekeeping service outsourcing provided by government-certified housekeeping service providers. This includes household cleaning, laundry, kitchen work, and protection and childcare of household members. The purpose is to reduce household housekeeping cost burdens in response to low birth rates and aging. Currently, VAT is imposed on labor supply for cleaning services, security, and other dispatch services.

Youth Hope Savings Interest Income Tax Exemption... Monthly Submission of Simplified Payment Statements for National Employment Insurance

Support for youth asset formation and housing will also be strengthened. A new income deduction for youth long-term funds will be introduced. Youth with total annual income of 50 million KRW or less can receive a 40% income deduction on fund contributions during year-end tax settlement. The annual payment limit is 6 million KRW, and the investment period is 3 to 5 years. However, if total annual income exceeds 80 million KRW or comprehensive income exceeds 60 million KRW during the subscription period, the relevant tax period will be excluded from the income deduction.

An interest income tax exemption for Youth Hope Savings will also be introduced. It has a 2-year maturity with a maximum annual deposit of 6 million KRW, providing a savings incentive of 2% in the first year and 4% in the second year. Saving 12 million KRW will yield 360,000 KRW in incentives, separate from bank interest. The income tax reduction on Youth Employment Tomorrow Savings recipients will also be expanded from 50% to 90%.

To ease rent burdens on small business owners, the tax credit support for good landlords will include small business owners who have closed their businesses, and the application period will be extended until June 2022. Additionally, the donation tax credit rate for donations made this year will be raised by 5 percentage points from the current 15-30% to 20-35%.

Meanwhile, efforts will be intensified to expand income information infrastructure for the implementation of the national employment insurance system. The submission frequency of simplified payment statements for regular wage income will be shortened from semi-annual to monthly. The submission frequency for simplified payment statements for other income such as freelancers will also be shortened from once a year to monthly.

The penalty tax burden due to increased obligations will also be eased. The penalty rate for non-compliance in submitting simplified payment statements for other income will be set at 0.25%, lower than the 1% penalty rate for payment statements. Furthermore, small businesses with 20 or fewer regular employees that submit simplified payment statements monthly will be exempt from penalty taxes for one year even if they submit semi-annually. The mandatory issuance of cash receipts will be expanded to more business types to establish an income tracking system. This includes appliance repair services, retail of gaming equipment, and gas station operations for transportation equipment.

This tax reform proposal will be submitted to the National Assembly on September 3, along with the 2022 government budget, after public notice and Cabinet approval.