SOUTH KOREA Trends and Developments Contributed by: Kyu Dong Kim and Yong Whan Choi, Yulchon LLC
tax rates exceed the 15% minimum and may support the view that the “Qualified Domestic Tax System” con - dition could be met, the “Qualified Worldwide Tax Sys - tem” requirement is conceptually different. It concerns how comprehensively foreign profits are taxed at the parent-jurisdiction level. In that context, elements such as substantive activity exceptions in controlled foreign company (CFC) rules may attract closer scrutiny, as they may be viewed as limiting the degree of “com - prehensiveness” that the SbS framework appears to ensure. Whether Korea would consider refinements to these rules for SbS purposes remains a policy variable that both inbound and outbound groups should moni - tor closely, particularly where the location of the UPE could become determinative of IIR/UTPR exposure across multiple jurisdictions. Separately from the SbS Safe Harbour, the SbS Pack - age also includes a safe harbour for certain “Sub - stance-based Tax Incentives” (SBTIs). This element may be important for Korean operations because Korea relies on targeted tax credits and allowances to encourage capital investment, strategic industry development and R&D activity. The SBTI concept is designed to cover incentives linked to production or expenditure, rather than relief that is purely profit- based. Examples include production tax credits avail - able under the United States’ Inflation Reduction Act and certain Korean investment tax credits. Mechanically, the SBTI Safe Harbour is aimed at elimi - nating the incremental top-up tax that is attributable to the incentive. In simplified terms, it compares (i) the top-up tax calculated without the SBTI treatment and (ii) the top-up tax calculated with the SBTI treatment, and treats the incremental difference as zero. The SBTI treatment operates through an upward adjust - ment to adjusted covered taxes (ie, the numerator), rather than through a reduction or a denominator-side adjustment. Even with this relatively favourable design,
however, the benefit is not unlimited. The package contemplates a cap linked to a percentage of eligible payroll costs and eligible tangible assets, conceptu - ally mirroring the substance-based income exclusion rule. Therefore, MNE groups should not assume that all incentive-driven top-up tax will be eliminated; while the benefit can be meaningful, it will remain bounded by the entity’s real economic substance. Korea already maintains a range of expenditure-linked incentives, most notably the investment tax credits and R&D-related tax credits, which are designed to reward real-economy activity rather than reduce tax on residual profits. In addition, policy discussions suggesting that the Korean Ministry of Economy and Finance may actively consider introducing Korea-style production-based tax credits for strategic industries indicate that additional incentives could, over time, be assessed through the OECD’s SBTI lens. Where a Korean tax credit is structured to meet the SBTI criteria, Korea’s Global Minimum Tax and/or QDMTT calculations may ultimately incorporate the safe har - bour’s special treatment. This SBTI framework can also be relevant for Korean- headquartered groups with foreign subsidiaries. For example, where a foreign subsidiary is located in a jurisdiction that has not introduced a QDMTT but provides significant tax incentives such that the sub - sidiary’s effective tax rate falls below 15%, the default outcome under the Pillar Two ordering rules would generally be top-up taxation at the level of the Korean parent under the IIR. If, however, the relevant incentive can be characterised as an SBTI and the safe harbour treatment is available, the incremental IIR top-up tax attributable to that incentive may be reduced. This could potentially change both the cash-tax outcome and the way MNE groups approach the design and substantiation of incentives in their Pillar Two govern - ance frameworks.
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