S.Korea To Tax Retained Earnings

July 28, 2014 Taxation in South Korea

SEOUL – Korea will use taxes to encourage companies to spend more on their employees and on new business projects instead of simply stashing their earnings.

While giving a speech at a seminar hosted by the Federation of Korean Industry over the weekend, the Finance Minister of Korea Choi Kyung-hwan announced that the government will soon propose a new tax on retained earnings held by businesses, a measure intended to encourage businesses to use their earnings more effectively.

The tax, which will be formally presented next month, will be charged at a rate of 3 percent on any retained earnings held by a businesses at the end of the year, however, the tax will not be applied if the businesses uses at least 65 percent of its annual net profits on “… investment, higher wages and dividend payments.”

The Finance Minister explained that the proposed rate for the tax is set at 3 percent to reflect a cut in the corporate tax rate instated five years ago by the previous government administration, which reduced the headline rate of corporate income tax from 25 percent to 22 percent.

He added that the previously enacted cut led to a reduction the tax revenues collected from the government, but did not result in an increase in investment in spending by companies, and the new tax is intended to encourage companies to use the saved funds on productive commercial endeavors.

Photo By: Koshy Koshy