Dividends Income Excluded - Preventing Double Taxation
Let's look at the dividend income exclusion system when calculating Korean corporate tax.
I. Prevention of double taxation of dividend income
A corporation pays corporate tax on operating profit, and pays dividends to shareholders among the net profit after deducting corporate tax from the operating profit.
When paying dividends, dividend income tax (14% national tax + 1.4% local tax = 15.4%) is withheld and the difference is paid to shareholders, so income tax occurs at this time.
In the end, there is a double taxation problem in which corporations pay corporate tax and shareholders pay dividend income tax in the company's profits.
To prevent this, the corporation has an exclusion of income dividend income system, and shareholders (individuals) have a "Gross-up" for dividend income and a "Dividend Tax Credit" system.
This section describes the dividend income double taxation prevention system for corporations.
II. Meaning of Exclusion from gross revenue on dividend income
If a corporate shareholder(A) invests in a domestic corporation(B) and gets dividends received from a domestic corporation(B), it will be double-taxed on dividends while paying corporate tax on the dividend as it was already paid corporate tax while B records net income as a distributable source.
Therefore, double taxation gets adjusted by excluding profits(also deducting expenses) with using exclusion rate of profits set in the coporate tax law.
III. Applicable Scope of Income Dividends
To apply the prevention system, dividend must meet one of these requirements.
1. It is Constructive Dividends or Distributions
2. If it meets any of these following Deemed Dividend descriptions:
1) The sum of money acquired by a domestic corporation which is a stockholder, etc. through the retirement of stocks, reduction of capital, retirement or withdrawal of an employee, or reduction of investment and the value of other assets in excess of the amount necessary to acquire the relevant stocks or investment shares (hereinafter referred to as "stocks, etc.");
2) The value of stocks, etc., that a domestic corporation which is a stockholder, etc. acquires by transferring all or some of corporation's surplus to capital or financing: Provided, That the same shall not apply where any of the following amounts is transferred to capital:
(a) An amount prescribed by Presidential Decree as the capital reserve referred to in Article 459 (1) of the Commercial Act;
(b) The revaluation reserve prescribed in the Assets Revaluation Act (excluding an amount equivalent to any difference in the revaluation of land under Article 13 (1) 1 of the same Act);
3) Where the equity ratio of any domestic corporation which is a stockholder, etc. of a corporation, other than the corporation, increases because such corporation transfers its capital, as prescribed in the items of subparagraph 2 while holding treasury stocks and equity shares, the value of stocks, etc., equivalent to the equity ratio so increased;
4) The amount of money and the value of other assets acquired by a domestic corporation which is a stockholder, etc. of a dissolved corporation (including members of an organization deemed a corporation) through distribution of residual assets of the corporation in excess of the amount necessary for the acquisition of the relevant stocks, etc.;
5) The cost of a merger acquired by a domestic corporation which is a stockholder, etc. of a merged corporation, in excess of the amount necessary for the acquisition of the stocks, etc., of the merged corporation;
6) The costs of a division acquired by a domestic corporation which is a stockholder, etc. of a corporation established through division or the disappearing counterpart corporation to a division and merger, in excess of the amount necessary for the acquisition of the stocks of the divided corporation or disappearing counterpart corporation to a division and merger (limited to stocks reduced by retirement or other means where the divided corporation survives the division).
However, in the following cases, exclusion of income dividends is not applied when:
1) The dividend income accruing upon holding stocks, etc. acquired within three months prior to the base date of dividend distribution;
2) The dividend income to which Article 18-3 applies;
3) The dividend income paid by any corporation which is entitled to income deductions on the dividend payable under Article 51-2. (to clarify, it means [Liquidation specialised company] or [Project financial investment company];
4) The dividend income paid by any corporation (limited to corporation prescribed by Presidential Decree), which is entitled to the non-taxation, exemption, or reduction of corporate tax under this Act(Corporation Tax Law) and the Restriction of Special Taxation Act.
IV. Calculation method of exclusion of dividend income
Amount of devidend Income excluded = (Income Dividend × Exclusion Rate) - Interest payment by debts
1. Determining Exclusion Rate
1) Income exclusion rate - General Corporation(in most cases)
|
Invested Corporation Class
|
Investment Ratio
|
Exclusion Rate
|
|
① Listed-stock Corporations
|
equals to 100%
|
100%
|
| not less than 30% or less than 100% |
50%
|
|
|
less than 30%
|
30%
|
|
|
② Other Corporations
|
100%
|
100%
|
| not less than 50% or less than 100% |
50%
|
|
|
less than 50%
|
30%
|
2) Income exclusion rate - Holding Company(specialised in stock invesings)
|
Invested Corporation Class
|
Investment Ratio
|
Exclusion Rate
|
|
① Listed-stock Corporations
|
not less than 40%
|
100%
|
| not less than 30% or less than 40% |
50%
|
|
|
less than 30%
|
30%
|
|
|
② Other Corporations
|
not less than 80%
|
100%
|
| not less than 50% or less than 80% |
50%
|
|
|
less than 50%
|
30%
|
2. Interest payment by debts
1) Calculating Interest payment by debts - General Corporation
|
Deduction Amount = A × B ÷ C × D
· A : Interest paid on debts of domestic corporation(Investing Company)
· B : ∑ Each day's book value of holded stock of the invested company × Number of holding days
· C : Closed book value of (Investing)company's Total Assets × Number of the year(mostly 365 or 366) · D : Exclusion rate |
2) Calculating Interest payment by debts - Holding Company
|
Deduction Amount = A × B ÷ C × D
· A : Interest paid on debts of domestic corporation(Investing Company)
· B : ∑ Each day's book value of holded stock of the invested company × Number of holding days
· C : [Closed book value of Holding company's Total Assets - Amount lent to subsidiaries at an interest rate higher than the interest rate borrowed by other financial holding companies(if any.)] × Number of the year(mostly 365 or 366) · D : Exclusion rate |
However, interest on debts that meets one of following conditions is excluded the deducting Interest payment by debts:
|
① Unclear to the creditor
② Unclear to the recipient ③ Appropriated for construction funds ④ Not related to business |
any questions, please leave comments below.
If the contents of the comment are written only in English (ASCII), it is considered spam and automatically blocked.