Press Release

2015TAX REVISION BILL

2015 T

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Background

The Korean economy has posted less than 1 percent growth for five quarters in a row with slowing down exports and the recent outbreak of MERS, which dampened recovering private consumption.

Furthermore, youth employment is expected to be negatively affected by the new mandatory retirement system, which raises the retirement age.

Against this backdrop, the government announced the 2015 tax revision bill that focuses on stimulating the economy to increase youth employment and promote consumption, supporting the working class and pursuing fair taxation.

1. Stimulating the Economy

Increase Youth Employment

- Introduce tax credits for the number of young permanent employees added: 5 million won per employee for 3 years starting in 2015

- Small enterprise tax support¹ to be given according to the amount of sales instead of the number of employees in order to encourage small enterprises to continue to add jobs

- Increase the tax deduction for wage increase² from 100 percent to 150 percent for young permanent employees

- Expand the tax credit for corporate education contributions (2-25%) to tech high schools, which are currently applied to contributions made to universities and vocational high schools for providing training designed to meet industrial demand

- Expand the gift tax deferral for startups to those expanding businesses, and expand the tax deferral from 3 billion won to 5 billion won for startups that create 5 or more new jobs

- Tax credits for SME startups (a 50% corporate or income tax reduction for 5 years) to be applied to electronic security service businesses

- SME startups to receive tax credits for their R&D investment at anytime for the next 10 years, an increase from 5 years

1 Corporate or income tax reduction of 10-30 percent

2 Tax Package to Strengthen the Link between Corporate Earnings and Household Income:

Businesses choose between either A or B

A: [Income x 80% - (investment + wage increases + dividends + etc.)] x 10%

B: [Income x 30% - (wage increase + dividends + etc.)] x 10%

Embargo: Release Date: August 6, 2015

Contact Information: Cho Yong-lae (044-215-4111/ Tax Policy Division)

Press Release

- Revise the foreign investment tax reduction to promote job creation by companies with foreign investment: taking into account 40-50 percent of foreign investment made and 30-40 percent of jobs created when calculating the tax reduction instead of 50-70 percent of foreign investment made and 20 percent of jobs created

Promote Private Consumption

- Temporarily (1 year) raise the income tax deduction rate from 30 to 50 percent for an increase in spending if it is paid in cash or with debit cards

- Abolish the individual consumption tax on luxury consumer electronics, perfumes and royal jelly - Items worth 5 million won or more to be subject to individual consumption taxes, an increase from 2 million won

- Temporarily (1 year) refund VATs on cosmetic plastic surgery paid by foreign tourists

- Foreign tourists not to be required to pay VATs if they purchase inexpensive items³, instead of being refunded later

- Corporations to receive tax deductions for cultural activities for the amount equivalent to 20 percent of corporate business entertainment costs

- VATs to be exempt on creative art performance tickets and education services provided by art, history or science museums

- Raise the customs duty free ceiling from US $100 to US $150

- Customs duties paid for online purchases to be refunded within 6 months after the refund is made

Boost Exports and Investment

- Allow SME exporters to defer their import VAT payments until the time of reporting to the tax authorities

- Exporters to get customs refunds for 3 years, instead of 2 year

- Introduce a foreign portfolio investment fund which is not subject to capital gains taxes on foreign stock transactions, stock price evaluation and foreign exchange movements⁴

- Introduce tax support⁵ for investing in venture companies through investment in kind, such as by providing intellectual properties, patent rights among others

- Income tax deductions for angel investment⁶ to be expanded to investment in companies that are younger than 3 years and invest 30 million won or more a year in R&D (20 million won or more for knowledge intensive services)

- Extend the tax credits aimed at stimulating SOC investment, promoting facilities investment and R&D investment, and supporting SMEs and employee welfare, which will otherwise be sunset at the end of 2015

Support Corporate Restructuring

- Capital gains taxes on stock swaps between corporations to be deferred until the sales of those stocks, and stock transaction taxes to be exempt

- Capital gains tax deferral given to asset sales due to mergers⁷ to be expanded to all industries in addition to shipbuilding, construction and pharmaceutical industries

- Debt in subsidiaries, if it is paid or taken over by parent companies, to be included in costs incurred in parent companies

3 Items to be decided taking into consideration sales levels

4 The fund invests more than 60% of its capital in foreign shares, and individuals can open an account until the end of 2017 with a maximum investment of 30 million won

5 Defer taxes until the sales of stocks acquired and impose capital gains taxes

6 30-100% of the investment is tax-deductible

7 3 year grace period followed by 3 year installment plan

- Companies to receive tax deferral for gains from restructuring processes, such as asset sales, shareholder contribution and debt relief

- Ease requirements for the high-tech SME M&A support⁸ and extend it until the end of 2018 - Ease requirements for the SME business restructuring support⁹, and extend it until the end of 2018 - Extend the tax supports until the end of 2018, which will otherwise be sunset in 2015, such as capital gains tax deferral for stock swaps, stock takeovers, asset sales and investment in kind, as well as tax exemption for debt takeovers

2. Supporting the Working Class

Asset Building and Housing Support

- Give tax exemptions and reductions on gains from Individual Savings Accounts (ISA): gains of up to 2 million won to be tax-exempt and a 9 percent tax rate to be applied to gains exceeding 2 million won at the point of redemption¹⁰

- Mutual fund capital gains from stock transactions and stock price evaluation to be taxed at the point of redemption

- Increase tax support for rental property businesses: a 30 percent income or corporate tax reduction for staying in the business for more than 4 years and a 75 percent reduction for renting small sized housing for more than 8 years

- Corporate taxes to be exempt on capital gains from non business real estate sales if the properties are sold to large-sized rental property businesses that rent more than 100 housing units, and

individuals to receive a 10% capital gains tax reduction if they sell their land to large-sized rental property businesses

SME and Venture Employee Support

- Introduce a 50 percent income tax reduction for long-term SME employee rewards¹¹

- SME employees to receive an income tax exemption for long-term ownership¹² of company shares - Venture employees to pay taxes on gains from their employee stock options with a 5 year

installment plan, an extension from 3 years

- SMEs that create jobs to receive tax credits for social security contribution costs incurred due to new employment, and the SME tax support¹³ for maintaining employment through the job sharing system to be extended until the end of 2018

- Welfare contributions made to outsourced companies to be counted as costs

8 10% of the technology value assessed to be corporate tax-deductible, and the tax deduction will be expanded to companies paying 130% or more of the net asset value for the M&A, or taking over more than 30% of shares

9 50% income or corporate tax reduction for new businesses for 4 years, and the tax reduction will be expanded to companies where new businesses account for 50% or more of total revenues

10 Individuals without any capital gains will be eligible for ISA, and will deposit up to 20 million won a year with a minimum deposit period of 5 years, but a 3 year minimum deposit period will be applied to employees earning less than 25 million won a year or small business owners earning 16 million won or less

11 Talented SME employees who work for the company for more than 5 years receive the financial rewards contributed by both the company and employees

12 More than 6 years

13 50% of wage cuts to be tax-deductible for both employees and SMEs

- Introduce extra tax credits¹⁴ for permanent employees transferred from temporary positions to the Earned Income Boosting Tax Code, which gives tax credits on the portion of permanent employee wages increased

- SMEs to receive tax credits of 2 million won per employee if they transfer the employee from temporary positions to permanent positions by the end of 2016

Support for the Self-employed, Farmers and Fishermen

- Restaurant businesses to receive a 1 year extension of the deductible VAT on the purchases of agricultural and fishery products until the end of 2016

- Business owners to receive tax credits for their healthcare and education expenses until the end of 2018 if they earn more than 90 percent of the last 3 year average

- Raise the gift tax exemption ceiling for farmers and fishermen from 0.5 billion won to 1.5 billion won

- The special gift tax exemption for farmland to be applied to a barn land inheritance, which gives a maximum of 100 million won tax exemption over 5 years

3. Fair Taxation

Increase Fairness

- Tighten regulations regarding ‘cars for business use’, of which the costs are tax-deductible - Private enterprises to be subject to capital gains taxes on the sales of ‘cars for business use’

- Increase capital gains taxes on stock transactions: Large shareholders of KOSPI listed companies who own more than 1 percent of the company shares or 2.5 billion won worth of shares to be subject to capital gains taxes, and for KOSDAQ listed companies, more than 2 percent or 2 billion won worth of shares, with a single capital gains tax rate of 20 percent

- Religious groups to be required to choose either income tax withholding or income tax filing - Limit customs refunds to imports used to make export products, and impose a 2.5 percent additional tax a year on the amount fraudulently refunded

Reform Tax Support

- Increase taxes on prize money earned from gambling games, including horseracing betting or slot machines

- Increase individual consumption taxes on admissions to horseracing, cycle racing and motorboat racing games

- Lower facilities investment tax deduction rates as the tax deduction does not boost employment - Provide a single 100 million won capital gains tax reduction a year for real estate sales to which special tax reduction is applied, such as the sales of farm land owned by farmers or the sales of land to be used for public services

- Lower capital gains tax reduction rates on compensation of land taken by eminent domain as the compensation is provided according to the market value

- Private businesses earning more than 1 billion won a year not to receive the 1 percent revenue tax credit

- Lift tax exemptions on cooperatives’ dividend income, and apply low tax rates, instead - Lift or restructure tax credits that have achieved goals or proved to be ineffective

Increase Transparency

14 10% for SMEs and medium-sized leading corporations, 5% for large corporations

- Add scrap iron to materials subject to withholding VAT

- Add 5 businesses, retailers and opticians’ among others, to the list of businesses that are required to issue cash receipts

Regulate Overseas Tax Evasion

- Tighten the residency requirement for being exempt from reporting overseas financial accounts to 183 days per 2 years

- Multinational companies to be required to submit extra documents on their international trade, which will prevent tax evasion through insider trading

- Earned income taxes to be withheld from high income foreign employee wages

Other revisions

- Put a cap on tax deductions for deficits carried forward at 80 percent of earnings companies have for the year

- The capital gains tax credit of up to 30 percent per 10 years given to the land with long-term ownership to be expanded to the sales of land used for non-business purposes

- Tax rates for bitumen to be revised according to energy producing capacities - Extend the Transportation, Energy and Environment Tax until the end of 2018

- Clearly define the gift taxes to which a negative approach is applied, and set down requirements for individual cases

- Earnings from business opportunities offered by affiliates to be regarded as gifts and subject to gift taxes

- Administrative personnel to be excluded from the R&D tax credit

- Tighten tax credit requirements for Korean investment in foreign companies from 10 percent shareholding to 5 percent or influential voting rights if the investment is made back door, such as purchasing the shares of foreign parent companies whose subsidiaries are in Korea

- Non listed stock trading to be VAT-exempt, in addition to listed stock trading

- Market makers to be exempt from stock transaction taxes, which will stimulate the stock market

4. Expected Revenue

The government expects to earn a total of 1,089.2 billion won of tax revenue due to these revisions.

Tax Revenue Increase

(y-o-y, billion won)

Total 2016 2017 2018 2019 2020 and beyond

Total 1,089.2 556.1 835.3 -3.5 -154.7 -144.0

Income tax 378.6 238.6 121.1 190.4 -80.5 -91.0

Corporate tax 239.8 35.7 529.2 -197.9 -74.2 -53.0

VAT 313.5 122.7 186.8 4.0 - -

Others 157.3 159.1 -1.8 0 0 0

Tax Payer Burden Increase

(billion won)

Working Class/SMEs High Income Earners/Large Conglomerates Others Total

-152.5 1,052.9 188.8 1,089.2