Korean Tax Newsletter (March, 2008)
Revisions to Tax Laws
Presidential Decree of Tax Incentive Limitation Law("TILL")
- Temporary Investment Tax Credit ("TITC")
With the revision, the period eligible for TITC at 7% of domestic investments (including investment in Gaesung) is extended to fiscal year 2008. Companies can claim the TITC on investments made on or after January 1, 2008, as well as those commenced on or after July 1, 2000 and still in progress as of January 1, 2008.
Presidential Decree of Comprehensive Real Estate Tax Law ("CRETL")
- Tax exemption on residential houses leased by REITs, etc.
Under the current CRETL, in principle, the residential house would be subject to comprehensive real estate tax ("CRET") at progressive tax rates. With the revision, in case where Real Estate Investment Trusts ("REITs") under the Real Estate Investment Company Law ("REICL"), or Real Estate Trust ("RET") and Real Estate Company ("REC") under the Indirect Investment Assets Management Business Act ("IIAMBA") own and lease five or more of residential houses which meet all the following requirements, the residential houses are exempt from CRET. The revision was effective from January 1, 2008.
- The exclusive use area of residential houses should not exceed 149m2
- Government published standard value of the residential house in 2008 should be not more than KRW 600 million;
- Residential houses should be used for lease for at least 10 years;
- Residential houses are located outside the Seoul Metropolitan Area; and
- Residential houses are acquired and leased during the period from January 1, 2008 to December 31, 2008.
Developments at Tax Authorities
Consolidated tax return
Currently, each company which is a legally separate entity files a corporate tax return on a standalone basis ("separate tax return filing system"). The Ministry of Strategy and Finance ("MOSF") indicated that it is currently under consideration to introduce a consolidated tax return filing system, under which economically consolidated affiliates can file a tax return on a consolidated basis.
Decrease in corporate income tax rate
On March 10, 2008, the MOSF announced its plan to gradually lower the corporate income tax rates as follows:
|Tax Base||Tax Rate||Tax Base||Tax Rate|
|Above 100 million won||25%||Above 200 million won||22%||20%|
|100 million won or below||13%||200 million won or below||11%||10%|
According to the current plan of the MOSF, the Corporate Income Tax Law ("CITL") is expected to be revised in June this year.
Decrease in minimum tax for Small and Medium-sized Companies ("SMCs")
The MOSF announced its plan to lower the minimum tax applied to SMCs from the current rate of 10% to 8% from FY 2008. According to the current plan of the MOSF, the Tax Incentive Limitation Law ("TILL") is expected to be revised in June this year.
Recent Tax Rulings and Cases
Capital gains surtax on residential houses ( Seomyun2team-108, 2008.01.17)
Under the CITL, if a company sells residential houses, it should be subject to the capital gains surtax in addition to the normal corporate income tax. However, under Article 92-2 of the Presidential Decree of the CITL, if a company leases residential houses to its employees who are not shareholders of the company for 10 years or more ("10-year period condition"), the capital gains from the sale of the residential houses are not subject to capital gains surtax.
According to the ruling, in case where a surviving company acquires residential houses which had been leased to employees of the merged company through a merger and leases the residential houses to its employees of the surviving company, the initial date for the 10-year period condition is counted from the day when the surviving company acquires residential houses from the merged company through the merger.
Capital gains earned by foreign companies ( Jaekookjo-770, 2007.12.26)
In case where a foreign company without a Permanent Establishment ("PE") in Korea converts its shares in a Korean company into Depositary Receipts ("DR") through the Korea Securities Depository and continues to hold the DR, the capital gains accrued through the conversion are not subject to capital gains tax in Korea.