In addition to paying interest and dividends, the payment of management fees, service fees and royalties are methods of repatriating profits to the non-resident associates, controllers and owners of Australian entities. In these circumstances, the payments made by the Australian resident to the non-resident associate must reflect the market value of the goods and/or services to the Korean company, that is, all payments must be calculated with reference to arm's length market rates. Where the Korean Tax Office takes the view that the Korean company has paid an excessive amount for the goods and/or services, the Korean Tax Office can disallow the deduction claimed by the Korean company, and substitute an alternative price. Other transactions between Korean taxable entities (or branches), and their related foreign entities or head offices are also subject to the transfer pricing rules. Where an Korean branch of a foreign company remits profits to its parent by way of management fees or service fees, the profits are subject to 5-15% of branch profits tax depending on foreign countries.
Grants and Incentives
General Instruction
Tax incentives are provided under the special tax treatment control law (STTCL). There are a number of tax incentives in Korea related to a small and medium enterprise's business performance, international capital movement, investment promotion, business restructuring, public business promotion and foreigners' investment etc.
Tax Support
> Tax Support for Foreign-Invested Companies
According to the Tax Exemptions and Exceptions Act, corporate and income tax on business income, dividends income, technology introduction considerations, earned income, etc. have been reduced. Acquisition tax, registration tax, and property tax have been reduced for properties that have been acquired or held.
Corporate Tax Reduction
Reduction in corporate tax for foreign-invested companies applies to income from businesses qualifying for reductions under the Tax Exemptions and Exceptions Act. However, in the case that a Korean citizen (corporation) directly or indirectly holds 10% or more of the voting shares of a foreign corporation or foreign business that has invested in a business subject to tax reduction, the portion of the investment proportionate to the ratio of the said held shares will not be subject to tax reduction. That is to say, the tax reduction shall not apply to domestic round trips of domestic companies that have advanced overseas. The initial day of reckoning tax reductions is, whichever is sooner between, the tax year in which the first income is created, or the tax year in which the 5th year anniversary of the date of business commencement falls. In capital increases, the date marking the registration of capital increase shall be considered the date of commencing business in applying this regulation. For foreign acquisition of shares through capitalization of reserves, revaluation reserve, etc. the period and rate of reduction shall be determined by cases of reductions for shares, etc. that are the basis of such occurrence. If an application for tax reduction is made after increasing the capital less than 5 years after the decrease in paid-in capital, the reduction shall be determined only for the foreign investment ratio of the portion that is purely increased from before the capital decrease. However, in the case that a purely domestic company receives an investment from a foreigner through a capital increase and becomes a foreign-invested company shall be considered as a new foreign investment, and not as a case of capital increase as described above
Local Tax (acquisition/registration/property tax) Reduction
Property acquired or held by a foreign-invested company to do business subject to reduction shall receive either a 100% or 50% reduction in acquisition, registration, and property taxes, or the items will be deducted from the standard of assessment. The amount of foreign investment ratio (for tax amount subject to reduction) multiplied by the calculated tax amount shall be deducted 100% from acquisition, registration, and property taxes for 3-5 years following the commencement of business, and 50% for 2 ears afterwards on properties that have been acquired following the commencement of business operations. However, acquisition, registration, and property taxes that have been already paid on properties that have been acquired following the commencement of business operations, but prior to becoming the subject of tax reduction, may not be refunded. However, acquisition, registration, and property taxes on properties that have been acquired prior to the starting date of business shall be subject to 100% reduction on the tax reduction amount for properties that have been acquired following the date of the tax reduction decision. Property tax shall be subject to 100% reduction of the tax reduction amount for 3-5 years following the acquisition of the property, and 50% of the tax reduction amount for the next 2 years. According to the regulations, the local tax reduction period may be extended up to 15 years, or the reduction or deduction rate could be increased.
Tax Support for Dividends
Dividends received by foreign investors from foreign-invested corporations operating tax reduction businesses are subject to tax reductions in the same rate as the portion of the amount of income of the tax reduction business, based on the dividend income during the reduction period.
Cash Grant
For foreign investments that meet certain requirements, the government and the local government shall provide cash grant for funds required to build new factories. In doing so, various aspects shall be considered regarding the foreign investment, such as whether or not they come with high technologies, effects of investment's technology transfer, the number of jobs created, redundancy with internal investments, adequacy of location, etc.
> Eligibility and Usage of Cash Grant
Eligibility
To become eligible for cash grant, the foreign investment ratio shall be over 30% and meet the following requirements: _ 10 million USD and over of foreign investment in industry support services, businesses with high technologies, or parts, material manufacturing Greenfield investment (newly built/expanded factory facilities); _ Newly built/expanded R&D facilities in fields related to industry support services or hi-tech businesses, or research facilities of non-profit corporations invested by foreigners (10 or more full-time hired research personnel); _ For cases when the investment amount, etc. do not meet the requirements, but has a profound impact on the domestic economy, the Foreign Investment Committee shall deliberate on the matter and determine whether the case is eligible for cash grant; - Establishing regional headquarters of multi-national companies (multi-national companies with business presence in 3 or more countries, and controlling regions of 2 or more countries); - Contributing to regional economic development as a regional strategic industry - Providing items or services not produced domestically, or which can improve domestic industry's competitiveness through introduction of advanced technologies.
Grant Rate
Through negotiations, the cash grant ratio shall be determined at 5% and higher of the FDI, with the upper limit determined by a closed formula. As for an R&D center, FDI and R&D funds from overseas that are used for stipulated purposes shall be included in the funds to be calculated (except for funds raised domestically).
Legal Usage
Foreign-invested companies may use cash grant only for the following purposes:
_ Funds to support employment and training;
_ Land purchase lease;
_ Construction costs;
_ Foundation facilities installation cost;
_ Capital goods/research equipment purchasing costs;
_ In such cases, the purchasing amount of leased land for foreign-invested companies shall be included in the cash grant limit. However, receiving cash grant shall nullify the eligibility to be provided with leased land, or support for difference in sales price through the existing location support policy (within 50% of foreign invested amount)
> Cash Grant Post-Management
Applicants' Obligations
The applicant shall, directly or indirectly, manage foreign-invested companies and faithfully carry out the obligations of the cash grant contract, as well as the investment expenditure plan. The applicant shall enter into insurances, or take other similar measures to make it possible to recover and replace, to a satisfactory level, all assets (including those under construction) such as building, facilities & equipment, etc. Contracts for acquiring assets that receive cash grants shall be concluded in a way that utilizes the cash grant fund in the most efficient way through public tenders, official appraisals, request for 2 or more estimate, etc. Prior written consent of the Ministry of Knowledge Economy shall be secured to use the cash supported assets for purposes other than the stated business, or to transfer, exchange, loan, or provide as collateral. Also, the cash grant shall not be dealt out as dividends or royalties. The concerned foreign-invested companies may not give security for any liabilities than for business purposes. During the contract period, the applicant shall provide enough information to check on the performance of the contract and submit every year to the Ministry of Knowledge Economy a statement of accounts audited externally.
Intellectual Property Rights
Patents
Patent rights go through a variety of examination procedures to be registered. The first step is to submit an application for patents under the Patent Law set by the commissioner of the Korea Intellectual Property Office (KIPO). The commissioner of KIPO must publicize the application in an official patent report 18 months following the patent application date, or prior to that when requested by the applicant. When the application is publicized, the applicant may exercise the rights valid for patents such as warnings to third parties, claims for compensation, etc. However, the rights to claim compensation may only be exercised after the patent is registered, and shall be claimed within 3 years of the registration. The applicant shall request examination within 5 years of submitting the application. If not, the application shall be considered void.
Utility Model Rights
Utility model rights apply only to those whose patent application was filed prior to September 30, 2006. Applications placed after October 1, 2006 shall apply equally as patents. After the KIPO commissioner completes the examination of methods and basic requirements, the registration creation is carried out and the registration notification is made on a utility model official report. The commissioner then provides the applied documents and their annexed articles for public viewing for 3 months following the registration notification. Legal protection is provided to utility models for 10 years after the registration creation. And with the pre-registration non-examination policy, the registration certificate can be attained through the method and basic requirement examinations 3-6 months after the application is filed.
Trademarks
Trademarks are largely divided into trademarks, service marks, collective marks, business emblems, and are protected by the Trademarks Law. In order to be protected by the Trademarks Law in Korea, the trademark has to be registered at KIPO. The Trademarks Law prevents registration of trademarks identical, or similar to unregistered prominent trademarks. However, Trademarks Law protection does not extend to others using identical or similar trademarks, as such protection may only be provided by the Unfair Competition Prevention Act. The trademark is valid for 10 years from the registration creation date of the trademark. The validity can be extended by 10 years through validity renewal registration application, etc. and is practically semi-permanent.
Design
Designs are easy to copy, subject to trends, and thus, are subject to particular policies that differ from other industrial property rights laws. For example, the 'non-examination registration policy (when stipulated as articles under the Design Law) applies to items that are easy to copy and are very trendy, while the 'similar design policy' can register a modified version of a basic design as a similar design. The 'one-set item design policy' makes it possible to register a single design for multiple items combined as a single set, while the 'secret design policy' allows the design to be kept secret and not publicized for 3 years after the creation of registration for design rights have been carried out, upon request from the applier. Design rights registered are protected for 15 years from the creation of the registration.
