I. Grounds for Enactment of the Foreign Investment Promotion Act On Nov. 18th, 1998, the Korean government enacted the Foreign Investment Promotion Act ("FIPA"), which replaces the existing Foreign Investment and Foreign Capital Inducement Act. The FIPA, which basically revises the entire system of foreign investment, was enacted in order to stimulate foreign investment though the following means: loosening regulations on foreign investment, extending tax benefits to certain foreign investments, designating foreign investment zones to attract foreign investment in large volume and supporting foreign-invested corporations which enter such zones. II. System to Support Foreign Investment under the FIPA The major areas of support under the FIPA are: (i) tax exemptions for foreign investment, (ii) greater use of, and derivation of benefit from, national and public properties including the reduction or exemption of leasing costs, and (iii) acknowledgement of special cases with respect to authorizations. Given the volume of changes under the FIPA, this article will seek to examine the numerous tax benefits concerning foreign investment. Legal Scene in next month's issue will provide a detailed analysis on the rest of the benefits associated with foreign investment under the new legislation. A. Tax Reductions or Exemptions 1. Pursuant to the FIPA, reduction or exemption of corporate tax, income tax, acquisitions tax, registration tax, property tax, tariffs, aggregate land tax, special consumption tax and value-added tax will be granted to: (i) service businesses essential for strengthening international competitiveness of domestic industry ("Industrial Support Service Business") and businesses using high-technology ("High Technology Business"); (ii) a business operated by a foreign-invested enterprise that locates in a Foreign Investment Zone (specifically, a foreign-invested enterprise means the establishment of a new factory in the investment zone) or; (iii) businesses, as set forth in the Presidential Decree, eligible for tax reductions or exemptions as incentive for foreign investment that will be used to establish and operate manufacturing facilities (or place of business in case of non-manufacturing businesses), provided that such tax reductions or exemptions for foreign investment shall be granted only if the foreign investors acquire new shares of domestic enterprises. 2. "Industrial Support Service Business" shall mean high value-added service businesses that support industries promoting the development of other industries, such as manufacturing businesses, and that are deemed necessary to strengthen the international competitiveness of domestic industries. Seventy businesses have been designated as such in the FIPA. 3. "High Technology Business" shall mean a business using technology that has not been developed in Korea or otherwise in the initial stages of development and that is deemed necessary to strengthen the international competitiveness of domestic industries. Some 446 businesses have been designated as such in the FIPA. 4. Those technologies to be used by either an Industrial Support Service Business or a High Technology Business shall include (i) technology that has far-reaching economic and technological influence on the national economy and is necessary for the improvement of the industrial structure and strengthening of industrial competitiveness; (ii) technology, the introduction of which into Korea has not exceeded three years from the date of its introduction (which means the date when the report for foreign investment involving such technology was filed or the date when the report of the technology transfer agreement was filed), or a technology, the introduction of which into Korea has exceeded three years, but is superior in terms of economic effect or technological efficiency than technology that has been more recently transferred to Korea; and (iii) technology meeting the above two requirements whose processes are mainly carried out in Korea. B. Others Various types of benefits other than tax reductions or exemptions will be granted to foreign-invested enterprises that move into a Foreign Investment Zone. Notwithstanding the relevant laws and regulations, any national or local governmental entity may lease or sell to foreign investors state or public property owned by them in the form of a private agreement. Both rent reduction or leases at a low prices over a certain period will be available to foreign-invested enterprises. III. Reduction and Exemption of Tax A. Corporate Income Tax A tax reduction or exemption of corporate income tax for a foreign-invested company will only be granted on the income accruing from the operation of a business that qualifies for reduction or exemption as mentioned above (a "Tax Reduction or Exemption Business"). For seven years beginning from the taxable year in which the first taxable income accrues from the Tax Reduction or Exemption Business (if no taxable income accrues from the Tax Reduction or Exemption Business for a period of five years after the commencement of operations, then the fifth year shall be deemed as the first year of the seven-year exemption or reduction period), the amount ("Tax Amount to be Reduced or Exempted") calculated by multiplying the corporate income tax amount on the income generated by the Tax Reduction or Exemption Business (the amount calculated by multiplying the total corporate tax amount of the foreign-invested company by the ratio of the income generated from the operation of the Tax Reduction or Exemption Business to the total income) by the foreign investment ratio shall be exempted, and for three years thereafter, the tax amount equivalent to 50 percent of the Tax Amount to be Reduced or Exempted shall be exempted. B. Income Tax on Dividends Corporate tax or income tax on any dividends accruing on the shares acquired by a foreign investor shall be reduced or exempted based on the ratio of the income generated by the operation of the Tax Reduction or Exemption Business to the total income in each taxable year of the foreign-invested company. For dividends received from a foreign-invested company, the total tax amount on such dividends shall be reduced or exempted during the period that the corporate income tax is exempted as mentioned in "A" above, and such taxes shall be reduced by 50 percent during the period the corporate tax is reduced by 50 percent. C. Local Taxes Acquisition Tax, Registration Tax, Property Tax and Composite Land Tax shall be exempted or reduced as follows, provided, however, that a local government may extend the period of reduction or exemption of local taxes up to 15 years or increase the reduction rate. These taxes shall be reduced or exempted if a foreign-invested company acquires and holds any property for the purpose of carrying on the Tax Reduction or Exemption Business. 1. Acquisition Tax, Registration Tax and Property Tax The amount calculated by multiplying the total tax amount on the property by the foreign investment ratio ("Local Tax Amount to be Reduced or Exempted") shall be exempted for five years beginning on the business commencement date, and the amount equivalent to 50 percent of the Local Tax Amount to be Reduced or Exempted shall be reduced for three years thereafter. 2. Composite Land Tax The amount calculated by multiplying the tax base of the property by the foreign investment ratio ("Amount to be Deducted") shall be deducted from the tax base for five years beginning on the business commencement date, and the amount equivalent to 50 percent of the Amount to be Deducted shall be deducted for three years thereafter. 3. Acquisition of Property before Commencement of Business If a foreign-invested company acquires or holds property that will be used for the Tax Reduction or Exemption Business before commencement of business, the local tax reduction or exemption shall be as follows, provided that the local government may extend the period of the reduction or exemption of the local tax up to 15 years or increase the reduction rate. (a) With respect to the Acquisition Tax and Registration Tax on property acquired after approval of tax reduction or exemption, the Local Tax Amount to be Reduced or Exempted shall be exempted. (b) With respect to the Property Tax, the Local Tax Amount to be Reduced or Exempted shall be exempted for five years after the acquisition date of the property, and an amount equivalent to 50 percent of the Local Tax Amount to be Reduced or Exempted shall be exempted for three years thereafter; and (c) With respect to the Composite Land Tax, the Amount to be Deducted shall be deducted from the tax base for five years after the property acquisition date, and the amount equivalent to 50 percent of the Amount to be Deducted shall be deducted for three years thereafter. D. Customs Duty, Special Consumption Tax and Value Added Tax Where the following capital goods required for the Tax Reduction or Exemption Business are imported pursuant to the Customs Duty Act within three years after the date of foreign investment report (in the case of the import report not being completed within three years due to unavoidable circumstances including delay in approval for factory establishment, a period approved by the Minister of Finance and Economy shall apply), the Customs Duty, Special Consumption Tax and Value Added Tax shall be exempted. 1. Capital goods given by foreign investors to a foreign- invested company as means of foreign or domestic payment; and 2. Capital goods contributed in kind by foreign investors. E. Exemption or Reduction of Tax on Capital Increase If a foreign-invested company increases its capital, II.A to II.D of this article shall apply mutatis mutandis to such capital increase. Tax exemptions or reductions on shares acquired by a foreign investor as a result of a conversion of reserved funds, revaluation reserves or other reserves into share capital shall be in accordance with the tax exemption or reduction for the original shares which were the basis of such acquisition. F. Prior Confirmation of Tax Exemption or Reduction Eligibility The application for tax exemption or reduction shall in principle be submitted prior to or with the submission of the report of foreign investment. A foreigner, foreign investor or a foreign-invested company may, however, apply to the Ministry of Finance and Economy for prior confirmation as to whether the contemplated business will qualify as a Tax Exemption or Reduction Business. To be continued in the next issue For more details, please contact |
