The

Ministry of Strategy and Finance announced its proposed tax law amendments for

2018 on August 2, 2017. This tax alert highlights the proposed change to the

capital gains exemption currently available to foreign investors engaged in

on-the-market transactions.

In general, capital gains earned by foreign investors upon the

transfer of shares are generally subject to withholding tax at a rate equal to

the lesser of 11% of the gross proceeds realized or 22% of the net realized

gain, unless exempted by relevant tax laws or an applicable tax treaty which

Korea has entered into with the foreign investors’ country of tax residence.

Under current provisions of the Korean tax law, a foreign

investor that transfers shares through the Korean Stock Exchange are not

subject to withholding tax on realized capital gains to the extent that the

foreign investor has no permanent establishment in Korea through which the

capital gains are derived and does not own 25% or more of the total issued and

outstanding shares of the Korean company at any time during the calendar year

in which the sale occurs and during the five calendar years prior to the

calendar year in which the sale occurs.

This so-called 25% rule is applied as a threshold to impose

capital gains taxation only on the transfer of shares by foreign investors that

are majority shareholders in the Korean company. The proposed amendment reduces

the threshold from 25% to 5%, such that any foreign investor with 5% or more

ownership of the total issued and outstanding shares of a Korean company may be

subject to capital gains taxation on the transfer of shares in such Korean

company. The proposal indicates that all investments held prior to the

implementation of the amended provision will be subject to the current 25% rule

until December 31, 2018. The proposed amendments would otherwise apply to all

other share transfers from January 1, 2018 onwards.

The

proposal is aimed at increasing taxation on Korean-sourced income incurred by

non-residents and foreign companies. If approved by the National Assembly and

enacted, this amendment is expected to have a significant impact on the tax

exposure for foreign entities making investments in Korean companies going

forward.