[Yoon Administration Tax Reform] Corporate, Real Estate, and Income Taxes All Cut... Biggest Tax Reduction in 14 Years

[Image source=Yonhap News]

[Asia Economy, Sejong = Kim Hyewon, Sejong = Kwon Haeyoung, Sejong = Son Sunhee] The government will lower the top corporate tax rate from the current 25% to 22% and simplify the tax base brackets from the current four to two or three. For the comprehensive real estate holding tax, the basis for taxation will shift from the number of properties owned to the value of the properties, and the tax rate will be significantly reduced from the current maximum of 6% to a range of 0.5% to 2.7%. To ease the tax burden on low- and middle-income households, the government will raise the lower income brackets, marking the first income tax reform in 15 years.

On July 21, the government announced the "2022 Tax Reform Plan" containing these measures.

Corporate Tax Rate Restored to Five Years Ago... Reduced Tax on Subsidiary Dividends and Abolition of Investment-Promotion Tax

First, the government decided to adjust the corporate tax rate, which is higher than the OECD average, and simplify the complex tax base brackets. The core of this reform is to lower the top rate from 25% to 22% and simplify the tax brackets to two or three stages. The plan is to set two brackets: 20% for taxable income up to 20 billion KRW, and 22% for income exceeding 20 billion KRW. This effectively restores the top corporate tax rate to the level before it was raised to 25% under the Moon Jae-in administration. For small and medium-sized enterprises (SMEs) and mid-sized companies with annual sales less than 300 billion KRW, a special 10% rate will apply to taxable income up to 500 million KRW (currently 200 million KRW), thereby easing their tax burden.

Currently, Korea applies a corporate tax rate of 10% to 25% across four tax brackets. Among OECD member countries, only Costa Rica and Korea have more than four brackets, while 24 countries use a single rate.

Ko Gwanghyo, Director General of the Tax Policy Bureau at the Ministry of Economy and Finance, said, "Most countries have a single corporate tax rate, but Korea has a four-tier progressive system. The lowest tax bracket has been set at 200 million KRW for 14 years, and the top rate is relatively high. The high share of tax revenue from corporate taxes means that the burden is excessive."

With this reform, SMEs with a tax base of 500 million KRW will see their tax burden reduced by 30 million KRW, while large corporations with a tax base of 400 billion KRW will see a reduction of about 3 billion KRW compared to the current system.

The government believes that lowering the top corporate tax rate will benefit shareholders through higher dividends, consumers through lower product and service prices, employees through increased employment and wages, and partner companies through expanded investment.

Reduced Tax Burden on Domestic and Overseas Subsidiary Dividends... Increased Limit on Loss Carryforwards

The government will also ease double taxation on dividends from domestic and overseas subsidiaries to encourage the repatriation and distribution of overseas retained earnings, and will abolish the Investment and Cooperation Promotion Tax, which functions as a regulatory tax. The aim is to facilitate the inflow of overseas retained earnings into Korea and to promote dividend payouts by increasing the exclusion rate for dividend income from taxable income, thereby making more funds available for investment.

The current tax credit method does not fully eliminate double taxation, requiring additional tax payments when repatriating overseas subsidiary dividends, which has been criticized for discouraging the inflow of overseas retained earnings. Of the 38 OECD countries, 32 have adopted the exemption method for overseas dividend income. The government estimates that Korean companies’ overseas retained earnings exceeded 100 trillion KRW at the end of last year, indicating significant potential for repatriation. However, dividends from subsidiaries established in low-tax jurisdictions for tax avoidance purposes will not be eligible for the exclusion.

For domestic subsidiaries, the double taxation adjustment will be rationalized by applying the exclusion rate based on shareholding ratios (less than 30%, 30-50%, over 50%), regardless of corporate form. Starting next year, both general companies and holding companies, whether listed or not, will apply a 100% exclusion rate for shareholdings over 50%, 80% for 30-50%, and 30% for less than 30%. For holding companies, if the exclusion rate is lower than the current rate in any bracket, a two-year grace period will be provided through special provisions.

The limit on loss carryforwards, which allows companies to deduct losses from taxable income in subsequent years, will be raised. While SMEs can already deduct 100% of carryforward losses, the limit for general companies will be increased from the current 60% to 80% starting next year.

The Investment and Cooperation Promotion Tax, introduced to encourage companies to use retained earnings for investment and wage increases, will be abolished when it expires this year due to its limited effectiveness. Instead, other systems such as the Integrated Investment Tax Credit and Earned Income Increase Tax Credit will be used.

The rules for the "attribution of excess profits" tax will be revised to allow calculation of gift income by business segment, so that profits from segments unrelated to excess profit attribution are excluded from gift income. For domestic transactions for export purposes, such transactions will be excluded from taxable transactions regardless of company size.

To enhance the effectiveness of the consolidated tax payment system, the scope of eligible subsidiaries will be expanded from those with 100% parent ownership (full control) to those with at least 90% ownership.

To reduce uncertainty and stabilize employment in the duty-free industry, the duty-free shop license period will be extended from five to ten years, and both large and small companies will be allowed up to two license renewals. If it is difficult to determine the ex-factory price of domestically manufactured goods, an estimated calculation method will be allowed. The exchange rate used for determining the customs value will be changed from the foreign exchange selling rate to the base rate.

Comprehensive Real Estate Holding Tax: Taxation Based on Value, Not Number of Properties... Rate Lowered to 0.5-2.7%

The government will abolish the punitive comprehensive real estate holding tax for multiple home owners and will base the tax on the value of properties rather than the number of properties owned. The tax rate will be reduced from the current maximum of 6% to a range of 0.5% to 2.7%. By eliminating the tax gap based on the number of properties and easing the overall burden, the government aims to normalize the real estate tax system, which had become a "punitive measure." As a result, for example, the property tax for a two-home owner in a regulated area with a combined official property value of 3 billion KRW will drop from 66.64 million KRW in 2021 to 14.63 million KRW next year.

According to the government’s tax reform plan, the following rates will apply: ▲ 0.5% for up to 300 million KRW ▲ 0.7% for 300 million to 600 million KRW ▲ 1.0% for 600 million to 1.2 billion KRW ▲ 1.3% for 1.2 to 2.5 billion KRW ▲ 1.5% for 2.5 to 5 billion KRW ▲ 2.0% for 5 to 9.4 billion KRW ▲ 2.7% for over 9.4 billion KRW. A new bracket for 1.2 to 2.5 billion KRW has been created to rationalize the previously wide 1.2 to 5 billion KRW bracket. For corporations, the comprehensive real estate holding tax rate will be unified at 2.7%, regardless of the number of properties, replacing the current rates of 3.0% for one property and 6.0% for multiple properties. The cap on tax increases will also be unified at 150% for both single and multiple home owners, replacing the current 150% for single and 300% for multiple home owners.

A Ministry of Economy and Finance official explained, "This is to normalize the real estate tax system, which had deviated from its original purpose of managing the real estate market, and to eliminate the tax gap between single and multiple home owners. We will ease the tax rate structure, which had low public acceptance due to excessive burden, to an appropriate level."

Basic Deduction for Comprehensive Real Estate Holding Tax Raised from 600 Million to 900 Million KRW... 1-Home Owners: 1.2 Billion KRW

The basic deduction for the comprehensive real estate holding tax will be raised from the current 600 million KRW to 900 million KRW next year. For single-home households, it will increase from 1.1 billion KRW to 1.2 billion KRW. This reflects the fact that there has been no adjustment to the basic deduction since 2006, the official prices of apartment complexes rose by 63.4% from 2018 to 2022, and the capital gains tax threshold for high-priced homes is 1.2 billion KRW. However, for this year, a special deduction of 300 million KRW will be added to the basic deduction of 1.1 billion KRW for single-home households, effectively raising the threshold to 1.4 billion KRW.

A tax payment deferral system will be introduced for elderly and long-term owners who lack liquidity. If the following conditions are met: ▲ age 60 or older or ownership for more than five years ▲ single-home household ▲ total annual salary of 70 million KRW or less (comprehensive income of 60 million KRW or less) ▲ comprehensive real estate holding tax exceeding 1 million KRW, then payment of the tax can be deferred until inheritance, donation, or sale of the property. In addition, temporary two-home owners, inherited homes, and low-priced homes in rural areas will be excluded from the home count when determining single-home status for tax purposes. The government plans to discuss these measures in the August extraordinary session of the National Assembly.

Additionally, the threshold for taxing rental income from high-priced homes owned by single-home owners will be raised from 900 million KRW to 1.2 billion KRW, in line with the comprehensive real estate holding tax. For small rental housing operators with units under 85 square meters and under 600 million KRW, if annual rent increases are kept within 5%, the income and corporate tax reductions will be extended for three more years.

Property Tax for Two-Home Owners with Combined Official Value of 3 Billion KRW: 66.64 Million KRW to 14.63 Million KRW

According to simulations provided by the Ministry of Economy and Finance, a single-home owner of an apartment with an official value of 2 billion KRW (excluding the 50% elderly and long-term ownership tax credit cap, including the special rural tax) will see their expected property tax drop to 1.48 million KRW next year, about half of this year's 3.38 million KRW. This amount reflects the lower tax rate, higher basic deduction, and an 80% fair market value ratio, making it even lower than the 3.07 million KRW paid in 2020 for the same property. However, this year's expected payment does not reflect the proposed 300 million KRW special deduction or the reduction of the fair market value ratio to 60%, which are still under review.

The higher the property value, the greater the reduction in tax burden. For a single apartment with an official value of 2.5 billion KRW, the comprehensive real estate holding tax will drop from 5.7 million KRW in 2019, 6.17 million KRW in 2021, and 6.74 million KRW in 2022 to 3.3 million KRW next year. For a single-home owner residing in a property valued at 3 billion KRW, the tax will fall from 10.05 million KRW in 2021 and 10.82 million KRW in 2022 to 5.56 million KRW next year, about half. The 2020 tax was 8.83 million KRW.

If the government's proposed 300 million KRW special deduction and 60% fair market value ratio are implemented this year, a single-home owner of a 84.59 square meter unit at Maporaemian Prugio in Ahyeon-dong, Mapo-gu, Seoul, will not have to pay any comprehensive real estate holding tax. Although the official value of the unit is 1.382 billion KRW, making it subject to the tax, applying the special deduction reduces the taxable value to 1.082 billion KRW, exempting it from the tax.

The tax burden for multiple home owners in regulated areas will also decrease significantly. For two-home owners with a combined official value of 3 billion KRW, the property tax will drop from 29.87 million KRW in 2020 to 66.64 million KRW in 2021, then plummet to 14.63 million KRW next year, a 355% decrease. For two-home owners with a combined value of 2 billion KRW, the tax will drop from 12.98 million KRW in 2020, to 28.28 million KRW in 2021, 31.14 million KRW in 2022, and down to 5.53 million KRW next year. This is because the abolition of the punitive tax rate for multiple home owners reduces the comprehensive real estate holding tax rate to 0.6-2.7%, about half the current rate. Previously, multiple home owners (two or more homes in regulated areas, or three or more homes) were taxed at a punitive rate of 1.2-6.0%, higher than the single-home rate of 0.6-3.0%.

Park Wongap, Chief Real Estate Expert at KB Kookmin Bank, commented, "Multiple home owners in non-metropolitan areas, where property prices are lower, will benefit the most. Multiple home owners in Gangnam and the Mayongseong area will also see tax reductions, though not as much as in the provinces."

First Income Tax Reform in 15 Years... Maximum 540,000 KRW Reduction in Employee Tax Burden

The government will implement the first income tax reform in 15 years. The current income tax system has eight tax brackets; the lower two brackets will be raised from 12 million KRW to 14 million KRW, and from 46 million KRW to 50 million KRW, respectively. In other words, the tax burden will be reduced for those earning up to 50 million KRW. This applies not only to wage earners but also to those with comprehensive or capital gains income.

For example, a wage earner with an annual salary of 78 million KRW (tax base of 50 million KRW) will see their income tax drop from 5.3 million KRW to 4.76 million KRW, a reduction of 540,000 KRW. An employee with a total salary of 30 million KRW (tax base of 14 million KRW) will see their tax fall from 300,000 KRW to 220,000 KRW, a reduction of 80,000 KRW. These are based on average tax bases by salary and actual tax amounts may vary depending on the number of dependents and the level of income and tax deductions.

However, there are concerns that this income tax reform will further increase the already high proportion of tax-exempt individuals. As of 2020, about 37.2% of wage earners paid no income tax, and this proportion is expected to rise. Ko explained, "The proportion of tax-exempt individuals may increase by about 1%, but this will be temporary. The proportion has been declining by about 2% annually, so it will continue to decrease in the medium to long term."

For high-income earners with total annual salaries exceeding 120 million KRW, the maximum earned income tax credit will be reduced from 500,000 KRW to 200,000 KRW.

To reflect the increased cost of dining out due to rising inflation, the non-taxable limit for meal allowances will be raised from 100,000 KRW to 200,000 KRW. For an employee with an annual salary of 80 million KRW, the average tax reduction from this increase is estimated at about 290,000 KRW. Including the income tax cut, the total tax burden reduction per person could reach up to 800,000 KRW.

First Yoon Administration Economic Team’s Tax Reform Keywords: "Boosting Economic Vitality" + "Stabilizing Livelihoods"... Unavoidable Debate over Tax Cuts for the Wealthy

Choo Kyungho, Deputy Prime Minister and Minister of Economy and Finance, convened the Tax System Development Committee on this day and said, "We focused on rationalizing the tax burden on the public, who are struggling with high inflation. Through this income tax reform, we expect the per-person income tax burden to be reduced by up to 800,000 KRW."

The first economic team of the Yoon Suk-yeol administration proposed two main pillars for this year’s tax reform: "boosting economic vitality" and "stabilizing livelihoods."

Deputy Prime Minister Choo emphasized, "Through structural reforms of the tax system that align with tax principles and global standards, we will rationalize the level of public tax burden and lay the foundation for overcoming crises and upgrading the growth trajectory. We aim to establish a virtuous cycle between growth and tax revenue."

To support job creation and investment by companies, the government will unify five separate employment support systems into an integrated employment tax credit and remove the time limit on the special single tax rate for foreign workers, thereby strengthening incentives for attracting foreign talent. Tax support for investments in national strategic technology facilities such as semiconductors will be greatly expanded, and requirements for new or expanded domestic business sites for returning overseas companies will be relaxed. In addition, Deputy Prime Minister Choo added, "We will significantly raise the non-taxable limit for venture company stock options from the current 50 million KRW to 200 million KRW to help venture companies secure top talent."

Succession-related difficulties for family businesses will also be eased. Deputy Prime Minister Choo said, "We will greatly expand the scope and limit of the family business inheritance deduction, and for SMEs, we will introduce a system to defer inheritance and gift taxes upon succession, allowing long-term management without tax burden until the deferred date."

To ease the cost of living for low- and middle-income households, he said, "We will raise the tax credit rate for monthly rent, strengthen education support with a tax credit for college entrance exam fees, and increase the income deduction rate for public transportation use in the second half of this year to reduce the burden of transportation costs." He added, "To strengthen old-age income security, we will raise the annual contribution limit for pension and retirement pension tax credits by 2 million KRW and significantly reduce the burden of retirement income tax."

In addition, the government will raise the duty-free allowance for travelers returning from overseas from the current $600 to $800 per person and increase the threshold for exempting SMEs from interim tax payments from 300,000 KRW to 500,000 KRW to facilitate tax compliance.

Deputy Prime Minister Choo concluded, "This tax reform plan is expected to reduce national tax revenue by about 13.1 trillion KRW, which is about 3% of total national tax revenue and within the typical annual increase of 5% in national tax revenue." This is the largest tax revenue reduction in 14 years, since the first year of the Lee Myung-bak administration in 2008.