Korean Tax Newsletter (February, 2008)
Revisions to Tax Laws
Securities Transaction Tax Law
- Tax Base of Securities Transaction Tax ("STT")
Prior to the revision, there has not been any clear provision for adjustment of the STT base for the transfer of Korean company shares made between a Korean resident and its foreign related party or between foreign related parties. The tax ruling (Jaesobi-69, February 20, 2007), however, provided that, if the actual sales price for Korean company shares transferred between foreign related parties is lower than the tax value under the Inheritance and Gift Tax Law ("IGTL value"), the IGTL value would be the STT base.
With the revision, in case where Korean company shares are transferred between a Korean resident and its foreign related party or between foreign related parties and the actual sales price is lower than the 'arm's length price' under the International Tax Coordination Law ("ITCL"), the arm's length price under the ITCL should be the STT base.
Developments at Tax Authorities
Meeting with the American Chamber of Commerce in Korea ("AMCHAM")
The National Tax Service ("NTS") held a meeting with AMCHAM on January 24, 2008. During the meeting, the NTS indicated that it is under consideration to introduce the "advance ruling system" in which a taxpayer can request to the NTS in advance a private tax ruling under the specific factual circumstances. If a taxpayer receives the advance ruling from the NTS, it will be binding only on the taxpayer who requested it under the same specific factual circumstances.
The Tax Tribunal
The National Tax Tribunal ("NTT") organized under the Ministry of Finance and Economy ("MOFE") and Local Tax Review Committee ("LTRC") under the Ministry of Government Administration and Home Affairs ("MOGAHA") will be merged into the Tax Tribunal under the Office of the Prime Minister. Accordingly, the new Tax Tribunal will handle appeals for local tax as well as the appeal for national tax including customs duty. The cases which are currently pending at NTT and LTRC will be handed over to the Tax Tribunal.
Recent Tax Rulings and Cases
Signing Bonus paid to employees ( Seomyun2team-125, 2008.01.17)
There are cases where companies pay "signing bonuses" to their employees entering into employment agreements under the condition that the employees must repay a portion of the bonus if they do not work for the companies for a certain required period they had agreed upon. According to the previous ruling (Seomyun1team-462, 2006.03.29.), the signing bonus amount exceeding the employee's monthly salary was deemed as a non-business related loan. Under this ruling, the tax authority has changed its position that the signing bonus would not be deemed as a non-business related loan for tax purposes.
Conditions for deferral of tax on merger valuation gains ( Seomyun2team-216, 2008.01.31)
Under the Corporate Income Tax Law, the corporate income tax on merger valuation gains derived by the upward valuation of tangible fixed assets transferred from the merged company can be deferred until they are depreciated or otherwise disposed of if certain conditions are met. The condition for the deferral of merger valuation gains, among others, is that both the surviving company and the merged company are required to have operated business continuously over one year or more as at the merger registration date ("business purpose merger condition").
According to this ruling, in case where the merged company ("AA") has actually carried on R&D business with its R&D personnel as specified in its corporate registry continuously for one year or longer until the merger registration date without any suspension of its business, the merged company can meet the above "business purpose merger condition" even if AA does not have any sales revenue from the R&D business.