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Korean Tax Newsletter (September, 2006)


Revisions to Tax Laws

Revision to the Local Tax Law (“LTL”)

On September 1, 2006, the Ministry of Government Administration and Home Affairs (“MOGAHA”) announced revisions to the LTL including the following:

  • Reduction of acquisition tax rate and registration tax rate
    With the revision, the acquisition tax rate and the registration tax rate on a residential house acquired with consideration are reduced by 50% (i.e., 1% of acquisition price). Prior to the revision, only transactions between individuals were eligible for such reduction (in case of the acquisition tax, 25%). This revision is effective for the residential house acquired and registered from September 1, 2006 to December 31, 2009.

Proposed revision to the LTL

On September 1, 2006, the MOGAHA announced proposed revisions to the LTL as below:

  • Amended return period for resident surtax
    Under the current law, a taxpayer can file an amended return for resident surtax only within 60 days from the original filing and payment date. Under the proposed revision, the amended return for the resident surtax can be filed prior to tax assessment by the tax authorities. Furthermore, the tax authorities would guide taxpayers to file an amended return in advance before making tax assessments.

Tax Treaty with the Republic of Croatia

The tax treaty between Korea and the Republic of Croatia, signed on November 13, 2002, became effective as of September 15, 2006. The main contents of the convention are summarized below:

  • Withholding tax rate for passive income are:
    -Dividend : 5% or 10%
    -Interest : 5%
    -Royalty: 0%
  • Capital gains:
    -Capital gains are generally taxable in the resident country of the person who derived the capital gains.
    -However, gains derived by a resident of Croatia from alienation of immovable property situated in Korea may be taxed in Korea, or vice versa.
  • Other income: Income derived by a resident of Korea not dealt with separately in the treaty is taxable only in Korea, or vice versa.

Development at Tax Authorities

Disclosure of plans for tax audit

The National Tax Service (“NTS”) disclosed the “Plans for Tax Audit” to the public on August 24, 2006. Main contents of the Plans are summarized below:

  • The number of target companies for tax audit would decrease by 23% over the next 2 years and regular tax audit on a company which has not been subject to tax audit for a long time or is selected on a random sampling basis would be mainly reduced.
  • The ratio of the tax audit on small and medium sized companies with sales volume of less than 30 billion won over the entire tax audit would be reduced to 1.4% this year from 1.7% in 2005.
  • Duration of the tax audit will be shortened to 10~60 days from current 15~70 days.

OECD Forum on Tax Administration

Commissioners of tax authorities of Organization for Economic Cooperation and Development (OECD) countries participated in the Forum on Tax Administration in Seoul on September 14 and 15, 2006. The heads of revenue bodies and senior economy officials from the OECD member countries have adopted the “Seoul Declaration’’ at the Forum as below:

  • Make organizational developments and reforms for more effective tax administration
  • Strengthen the law enforcement process (i.e., civil and criminal actions) for the non-compliance
  • Operate dedicated international organization to deal with the international non-compliance
  • Examine the role of accounting firms/law firms/financial institutions which promote unacceptable tax minimization arrangements

Recent Tax Ruling and Cases

Withholding tax liability (Daebub2006du3803, August 25, 2006)

Where a secondary adjustment for deemed income is made by the tax authorities, a company should withhold income tax on the deemed income at the time when the company receives the “notice for change of income” of the deemed income recipient from the tax authorities. Therefore, the Supreme Court ruled that, although the tax authorities made the secondary adjustment for deemed income, the company is not liable for withholding income tax without the “notice for change of income”.

Foreign tax credit (Seomyun2team-1459, July 31, 2006)

Where a Taiwan branch of a domestic company is regarded as a permanent establishment (“PE”) of the domestic company and income tax is imposed on the branch by the Taiwanese tax authorities (even though the branch is not treated as the PE of the domestic company from the perspective of the Korean tax law), the Taiwanese income tax paid by the branch would not qualify for foreign tax credit of the domestic company in Korea. Note that there is no tax treaty between Korea and Taiwan.

Deduction of interim settlement of severance pay (Seomyun2team-1372, July 20, 2006)

Where a company pays interim settlement of severance pay in installment, not in lump sum due to financial difficulty of the company, according to the mutual agreement between labors and management, the interim settlement of severance pay is deductible in the year when the first installment is paid.


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