I. Introduction
South Korea's corporate income tax laws are an essential part of the country's legal framework for regulating the financial activities of domestic corporations. These laws provide guidance on issues such as the taxation of dividends and surplus earnings received by domestic corporations, as well as the calculation of equity investment ratios and deductible interest for these transactions.
Two of the most important laws in this area are Article 18-2 and Article 17-2 of South Korea's Corporate Income Tax Act. In this article, we will provide an overview of these laws, including definitions, calculations, and practical applications.
II. Article 18-2: Non-Taxable Income for Dividends and Surplus Earnings Received by Domestic Corporations
Article 18-2 of South Korea's Corporate Income Tax Act outlines the circumstances under which dividends and surplus earnings received by domestic corporations are not subject to taxation. The following is a detailed explanation of the key concepts and provisions of this law:
Definition of Terms Used in Article 18-2
- "Domestic corporation": a company that is incorporated under South Korean law
- "Investee corporation": a domestic corporation that has received investment from another domestic corporation
- "Income dividend": a payment made by an investee corporation to a domestic corporation in proportion to the latter's equity investment in the former
- "Surplus earnings dividend": a payment made by an investee corporation to a domestic corporation from its surplus earnings, in proportion to the latter's equity investment in the former
Calculation of the Amount of Income Not Subject to Taxation Under Article 18-2
To calculate the amount of income not subject to taxation under Article 18-2, the following formula is used:
| Non-taxable income = Income dividend + Surplus earnings dividend - Deductible interest |
Exceptions to the Non-Taxable Income Rule
There are certain circumstances under which dividends and surplus earnings received by domestic corporations are subject to taxation. These include:
- Dividends paid within three months of the date on which the investee corporation acquired the shares in question
- Dividends received from corporations that are exempt from taxation under South Korean law
- Dividends received from trust assets subject
- Dividends received by a domestic corporation that are subject to tax credits for foreign taxes paid by the investee corporation
- Dividends paid by a domestic corporation that is a public benefit corporation or a social enterprise corporation
- Dividends paid to a domestic corporation that has not met its filing obligations under South Korean law
III. Article 17-2: Method for Calculating Equity Investment Ratios and Deductible Interest for Dividends Received by Domestic Corporations
Article 17-2 of South Korea's Corporate Income Tax Act provides guidance on the calculation of equity investment ratios and deductible interest for the purpose of Article 18-2. The following is a detailed explanation of the key concepts and provisions of this law:
Definition of Terms Used in Article 17-2
- "Investment corporation": a domestic corporation that has made an equity investment in another domestic corporation
- "Investee corporation": a domestic corporation that has received an equity investment from another domestic corporation
- "Equity investment ratio": the percentage of equity investment made by an investment corporation in an investee corporation
- "Deductible interest": the portion of interest paid by an investment corporation on borrowed funds that is deductible for tax purposes
Calculation of Equity Investment Ratios for the Purpose of Article 18-2
To calculate equity investment ratios for the purpose of Article 18-2, the following formula is used:
| Equity investment ratio = Number of shares owned by the investment corporation ÷ Total number of outstanding shares of the investee corporation |
Deductible Interest Calculation Methods for the Purpose of Article 18-2
There are two methods for calculating deductible interest for the purpose of Article 18-2. These are:
- The actual interest amount paid by the investment corporation on borrowed funds
- A prorated amount of the interest paid by the investment corporation on borrowed funds, based on the proportion of the investment corporation's equity investment in the investee corporation to the investment corporation's total assets
IV. Practical Applications of Article 18-2 and Article 17-2
Understanding and complying with Article 18-2 and Article 17-2 is essential for domestic corporations engaged in transactions involving dividends and surplus earnings. Some practical applications of these laws include:
- Calculating the amount of income not subject to taxation for dividends and surplus earnings received from investee corporations
- Ensuring the accuracy of equity investment ratios for the purpose of Article 18-2
- Calculating deductible interest for the purpose of Article 18-2
The deductible rates vary according to the type of investing company, the investee subsidiary, and the proportion of shares held by each party:
| Type of investing Company | Type of subsidiary Company | Proportion of shares of subsidiaries owned by their holding company or corporation | Deductive rate |
| Other than Holding Companies(Genaral Company) | Listed | 100% | 100% |
| 30% or above to below 100% | 90% | ||
| below 30% | 80% | ||
| Non-Listed | 100% | 100% | |
| 50% or above to below 100% | 90% | ||
| Below 50% | 80% |
It is important to note that failure to comply with these laws can result in legal and financial consequences, including penalties and fines. Seeking professional guidance and support is essential for ensuring compliance with South Korea's corporate income tax laws.