Establishment of Special Provisions for Bad Debt Allowance Deduction on Loans to Overseas Construction Subsidiaries
The government has raised the technology value amount, which serves as the basis for tax credits in technology innovation-type mergers and acquisitions (M&A). The non-taxable limit for employee invention compensation has been increased from 5 million KRW to 7 million KRW per year, and successors who inherit family businesses can receive special gift tax exemptions for business succession if they change their business type only within the major classification of the standard industrial classification.
On the 23rd, the Ministry of Economy and Finance announced a "Follow-up Enforcement Decree Amendment for the Tax Law Revision" centered on these contents.
Tax credits for technology innovation-type M&A will be expanded. Through the tax law revision last July, the government decided to provide a tax credit of 10% of the technology value amount when a domestic corporation merges with or acquires more than 50% of the shares of a technology innovation-type SME. In the enforcement decree amendment, the "technology value amount," which is the basis for this tax credit, has been raised. Previously, the technology value amount was considered as the larger of ▲the total appraisal value of patents, etc., or ▲the transfer price minus (130% of the fair market value of net assets of the merged/acquired company). In the amendment, the 130% factor has been changed to 120%.
Post-management requirements to receive family business inheritance deductions and special gift tax exemptions for business succession have also been relaxed. Previously, the scope of business type changes for successors was limited to the medium classification within the standard industrial classification, but this amendment relaxes it to the major classification. For example, previously, changing the business type from food manufacturing to beverage manufacturing, both under the major classification "Manufacturing," was not eligible for the special exemption, but now it is allowed.
To support overseas orders of domestic companies, a special provision for bad debt allowance deduction on loans to overseas construction subsidiaries has been newly established. Overseas construction subsidiaries are local corporations in which the domestic construction parent company holds more than 90% of the equity. If it is practically difficult to recover loans paid by the domestic construction parent company to the overseas construction subsidiary, the loan can be reserved as a bad debt allowance, and up to 10% of the year-end loan receivable balance can be recognized as deductible expenses annually.
The scope of receivables eligible for this special provision includes ▲loans and their interest ▲receivables arising from wages paid to employees dispatched by the domestic construction parent company to the overseas construction subsidiary, etc. The conditions for recognizing difficulty in recovery include ▲continuous capital erosion for the past 10 years ▲confirmation of uncollectibility from overseas debt collection agencies, among others.
The scope of recognizing labor costs for employees dispatched to overseas subsidiaries as deductible expenses has also been expanded. Previously, this applied only to small and medium-sized enterprises, but after the amendment, any domestic corporation, regardless of company size, can recognize wages paid to employees dispatched to overseas subsidiaries wholly owned by the domestic parent company as deductible expenses. Additionally, if the domestic corporation withholds and pays the income tax of employees dispatched to overseas local corporations, the labor costs will also be recognized as deductible expenses.
Furthermore, previously, Controlled Foreign Corporation (CFC) taxation exemptions were applied only to companies where interest and dividend income from overseas subsidiaries accounted for 90% or more of the holding company's total income. In this amendment, interest from deposits and savings will also be included in the calculation. The non-taxable limit for employee invention compensation has been raised from 5 million KRW to 7 million KRW per year, but to prevent tax avoidance, controlling shareholders and related parties are excluded from the non-taxable scope. Also, tax credits will be applied for taxes that Russia imposed exceeding the limited tax rate on our companies last year in violation of the tax treaty.
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