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Review on insufficient capital tax system
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2021-04-30
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Review on insufficient capital tax system

Date: April 30, 2021


I. Introduction

This post intends to look into insufficient capital tax system.

 

II. A case study

A corporation with capital amount of 20 billion won and invest all of the capital in its parent company. On August 28th, it will decrease its capital by 13 billion won to 7 billion won.

After the capital decrease, the company intends to borrow some money from its affiliated company when it purchases factory equipment and expands buildings after capital deduction at the end of the year.

 

III. Conclusion of the case study

The intereston the money borrowed for building expansion and factory equipment is regarded as the interest on construction capital and is not the subject to the insufficient capital tax system.

 

Article25 (Method for Calculating Non-Deductible Expenses)

(2)  The scope of interest and discount fees to be aggregated as provided for in paragraph (1) shall include every item as allinterest income generated from the loans under Article 24, the economic substance of which corresponds to interest, such as the amortization of bond discounts and discount charges on accommodation bills, which a domestic corporation must pay to its foreign controlling stockholder: Provided, That the interest on construction capital funds shall be excluded from the scope of interest and discount fees.



IV. Other questions


Q1. When a loan worth of 20 billion won is used as operating costs not construction costs, how much of it is subject to non-deductible expenses?

 

Year of 2020:  0

Year of 2021:  300,00,000 (disposition of income: dividend)

 

[Computation details]

 

2020

Capital

Period

Number of dates

Capital

20,000,000,000

2020-01-01

2020-08-28

240

7,000,000,000

2020-08-29

2020-12-31

125

Loan

20,000,000,000

2020-08-29

2020-12-31

125

 

 


2020

 

Accumulated loan

2,500,000,000,000

Accumulated money invested

5,675,000,000,000

 

 

Accumulated amount of excess

-8,850,000,000,000

Interest on non-deductible expenses

 


2021

Capital

Period

Number of days

Capital

7,000,000,000

 

365

loan

20,000,000,000

 

365



 

 

2021

Accumulated loan

7,300,000,000,000

Accumulated money invested

2,555,000,000,000

 

 

Accumulated amount of excess

2,190,000,000,000

Loan

6,000,000,000

Interest on non-deductible expenses

300,000,000

 



Q2. After make payments of interests,which tax return should be filed by a parent company or an affiliated company?  

 

 

1) Liability for withholding tax

 

The company’swithholding liability is as it follow:

 

1. Apply for the10% limited tax rate

2. Filewithholding tax by the 10th of the next month

3. Submit astatement of interest payment by the February of the next year

 

2) Additional documents for corporate tax filing

- Reconciliation sheet for interests on foreign controlling stakeholders

- Constructive dividends

 

 

 

[Laws and Regulations]

 

Article 131 (Special Cases concerning Timing for Withholding Taxes fromInterest Income and Dividend Income)

 

  

(1)  Where a corporation fails topay dividend or distribution in the course of disposition of profits orearnings until three months pass from the date of determination of suchdisposition, income tax shall be withheld, considering such dividend income hasbeen paid on the date on which three months have elapsed: Provided, That, ifdividend income is not paid by the end of February following the year of thedetermination in accordance with disposition determined between November 1 andDecember 31, income tax shall be withheld, considering the dividend income waspaid on the last day of February following the year in which the date ofdetermination of such disposition arrives.

 

 

(2)  Income tax shall be withheldfrom dividend disposed of pursuant to Article 67 of the Corporate Tax Act,considering the dividend income has been paid on any of the following dates:

 

 

1.  Where the tax base forcorporate tax is determined or reassessed: The date on which a notice ofchanges of income prescribed by Presidential Decree is received;

 

 

2.  Where the tax base forcorporate tax is reported: The date of such report thereof, or report ofreassessment. 

 

 

(3)  It shall be governed byPresidential Decree as to cases where income tax is withheld, considering theincome is paid on the date different from the date of payment of interestincome or dividend income, other than those defined in paragraphs (1) and (2).

 

[This Article Wholly Amended by Act No. 10408, Dec. 27, 2010]

 



 

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