Technical Update from Korea: new thin cap rules

TP Week correspondent DJ Yeo of Kim & Chang reports on changes to Korea’s thin capitalisation rules

The Ministry of Finance and Economy has proposed changing certain thin capitalisation related regulations. The changes are expected to be enacted by tomorrow (December 28 2007) and be effective and applicable to taxable years beginning on or after January 1 2008.

First, the proposal would remove the current beneficial debt to equity ratio of 6 to 1 applicable to companies engaged in a financial business (for example, banks, ABS SPCs), making such companies subject to the same debt to equity ratio of 3 to 1 as all other businesses.

Second, in computing the debt to equity ratio, equity will be measured by the accumulated daily balance of net equity. Currently, equity has been measured by the year-end balance of the equity; thus, it has been possible to avoid thin capitalisation implications by injecting an additional amount of capital before year end.

More details next week.