KOREA - Stock Option Expense Deduction - 31 Mar 2009

Global Employer Services

Corporate Tax Deduction for Employee Stock Options

Background

On March 30, 2009, the
Ministry of Strategy and Finance (“MOSF”) released the amended
Ministerial Ordinance prescribing detailed conditions for claiming a
corporate tax deduction for employee stock option costs.

Requirements for Tax Deduction

All of the following
conditions should be met in order for a Korean subsidiary to claim corporate
tax deduction of employee stock option cost, which is usually the difference
between the fair market value of the shares and the exercise price:

·        
the parent company should
be listed on a foreign public stock market;

·        
the parent company should
own, directly or indirectly, at least 90% of voting shares of the Korean
subsidiary;

·        
the stock options should be
similar in nature to stock options prescribed under the Korean Commercial
Code (“KCC”);

·        
The number of stock options
granted should be less than 10% of total shares issued and outstanding; and

·        
a written recharge
agreement for the spread should be in place before actual recharge is made.

Revised Addendum to Presidential Decree of the Corporate
Income Tax Law

The addendum to the Presidential
Decree of the Corporate Income Tax Law (“PD-CITL”) regarding the
effective date for deduction of employee stock option costs was revised
effective April 21, 2009. According to the revised addendum, a corporate tax
deduction is only applicable for employee stock options granted after
February 4, 2009. 

The only corporate tax
deduction for stock options granted before the effective date of the revised
PD-CITL allowed are the deductions that were already allowed under the Tax
Incentives Limitations Law (“TILL”).  The TILL allows
corporate tax deduction for certain stock options granted by Korean entities
specifically related to certain venture capital start-up companies.

Application to other types of awards

Based upon informal
inquiries with the tax authorities it is unlikely that a deduction would be
allowed for equity other than stock options.  In order to be certain of
whether other types of equity compensation would qualify for corporate income
tax deduction, it would be necessary to request a written private tax ruling
from the National Tax Service.

Action

Companies should:

·        
Consider implementing a
recharge agreement for their stock options which meet the conditions
prescribed in the KCC.

People to Contact

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