Suppose a factory is being courted. A local government offers to cut taxes, and the investor factors that condition into its cost estimates. But while it takes five years to buy the land and build the plant, the tax break itself expires after three. No promise has been broken. The program's shelf life was simply shorter than the time the project required.
This is what is now happening in foreign investment projects. Investments ranging from hundreds of billions of won to more than a trillion won take years to move from initial review through the establishment of a Korean corporation, negotiations with local governments and public agencies, land acquisition, permits, design and construction, before operations can begin. Investors weigh the taxes and costs that will apply over that long stretch to judge whether a project pencils out. But when the tax benefits expire while the project is still in preparation, the premise of those calculations shifts.
South Korea has already scaled back much of what it offers foreign investors. The program that reduced corporate and income taxes for qualifying foreign-invested companies was abolished at the end of 2018. The main tax benefits now specific to foreign investment amount to exemptions from customs duties, individual consumption tax and value-added tax on imported machinery and equipment, along with reductions in acquisition tax and property tax on real estate used for the business. Cash grants and rent reductions on state- or publicly owned land also exist, but these are selective forms of support screened separately against investment size and eligibility requirements.
Even the local tax reduction that remains is currently past its application deadline. Article 78-3 of the Restriction of Special Local Taxation Act provides that foreign-invested companies meeting certain requirements may receive reductions in acquisition tax and property tax on real estate used directly for their business. To claim the reduction, however, a company must file a tax reduction application — and that filing window closed at the end of last year.
The application must be submitted to the Ministry of Economy and Finance not after the real estate is acquired but by the year the business begins operating. For an investment that has yet to reach the operating stage, the door to the program closed before the moment for filing even arrived. The amendment to the Restriction of Special Local Taxation Act that the government put out for public notice on the 27th of last month contains no provision extending the deadline.
That stands out when set against other provisions in the same amendment. Citing balanced regional growth and stronger investment, the government decided to extend through the end of 2029 — and broaden — local tax breaks for companies that return home after operating abroad, as well as breaks for companies investing in opportunity development zones. Given that foreign investment likewise brings new capital into the country and creates jobs, it is worth asking how fundamentally different it is from these cases.
This is not a call for deeper tax cuts. The reduction under Article 78-3 is not available to every foreign investment. Only investments that meet the sectors and scale requirements set by law, file a tax reduction application and receive a reduction decision qualify. If the requirements are not maintained afterward, the reduced taxes must be paid back. The point is less about creating a new program than about aligning the timetable of an existing, selective one with the timetable on which investments actually proceed.
The problem is sharper in culture, tourism and leisure facilities, and in large-scale development projects. Where the structure involves leasing land owned by the state or a local government for a long term and constructing a building on it, no land is purchased, so no acquisition tax arises on the land. What remains is the acquisition tax levied on the completed building and the property tax due each year. Those two taxes account for most of the local tax burden. If the support program expires while negotiations and permitting drag on for years, the project costs originally calculated inevitably change.
A missed deadline does not extinguish the possibility of a reduction altogether. Article 78-3, paragraph 5 provides that if a company files a tax reduction application after the deadline and receives a reduction decision, the benefit applies only to the remaining reduction period following the date of that decision. Taxes already paid before the decision are not refunded.
In the end, the size of the benefit a company actually receives depends on when it files and when the reduction decision comes. For an investor, that adds one more variable that makes it difficult to calculate costs accurately in advance.
What determines whether investment courtship succeeds is not only the size of a tax break. Just as important is whether a company can predict how the rules it examined when making its investment decision will operate through the stage of actual execution. With the corporate tax reduction gone and few support measures applying specifically to foreign investment, there is a case for at least setting out clearly the purpose and duration of the programs that remain.
Comments on the amendment are due by September 23. This process is an occasion to consider extending the application period under Article 78-3 through the end of 2029, as with the other investment incentives. Beyond that, it is time to reconsider whether foreign investment incentives should be treated as a bundle of individual reductions renewed every few years, or as part of an investment promotion policy that unfolds over a long horizon.
Foreign investors are not looking only for the country with the lowest taxes. They look for one where the rules they checked while drawing up an investment plan operate consistently until the project becomes reality. Matching a program's duration to a project's timetable generally costs less than creating a new benefit.
