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Korean Tax Newsletter (October, 2009)


Proposed Revisions to Tax Laws

The proposed "Revisions to the Tax Laws in 2009", which were announced on 25 August 2009 and covered in our August newsletter, have been further revised and refined.

Securities Transaction Tax Law

Beneficiary certificates of Exchange Traded Funds ("ETF")

As mentioned in August, the securities transaction tax is proposed to be levied at a rate of 0.1% on transfers of beneficiary certificates of ETFs that are listed and traded on the Korea Exchange ("KRX"). Under the amended version of the proposal, this change is intended to take effect as from 1 January 2012.

Tax Incentive Limitation Law ("TILL")

Exemption on acquisition tax and registration tax for ABS SPC, REITs, RET, REC, etc.

Under the current TILL, real property purchased by Asset Backed Securitization ("ABS"), Special Purpose Companies ("SPC"), Real Estate Investment Trusts ("REITs") and collective investment vehicles (e.g. Real Estate Trusts("RET"), Real Estate Companies("REC"), etc.) before 31 December 2009 are 50% exempt from acquisition tax and registration tax. Further, the higher (i.e. three times higher) registration tax rate is not applied even if the property purchased is located in the Seoul Metropolitan Area. The proposed measures would extend the sunset clause of this exemption up to 31 December 2012, but the exemption rate for REITs and collective investment vehicles (RETs or RECs) would be reduced from 50% to 30%.

Exemption on acquisition tax and registration tax for Project Financing Vehicle ("PFV")

Under current law, acquisition tax and registration tax levied on real property purchased by certain PFVs that meet all the requirements stipulated in Article 51-1 of the Corporate Income Tax Law ("CITL") are reduced by 50% and the higher (i.e. three times higher) registration tax rate does not apply even if the property is located in the Seoul Metropolitan Area. The proposal introduces a sunset clause for this exemption that will allow PFVs to enjoy the benefit until 31 December 2012.

Self-billing Value Added Tax ("VAT") invoices issued by purchaser

Under the current TILL, a purchaser of goods or services may issue a self-billing VAT invoice by complying with the procedures and conditions in the Presidential Decrees ("PD") of the TILL, if the supplier does not issue a VAT invoice for the goods or services provided. The proposal will ease the procedures and requirements for the issuance of a self-billing VAT invoice as follows:

  Current Proposed Revision
Due date for submission of transaction confirmation application to the tax office Within 15 days from transaction date Within three months from transaction date
Limit on invoice amount KRW 100,000 - KRW 5 million Above KRW 100,000 (the upper limit of KRW 5 million would be abolished)
Number of self-billing VAT invoices issued per month No more than two self-billing VAT invoices may be issued per month No limit

Proposed Revisions to Other Laws

PD for Small- and Medium-Sized Companies Law ("SMCL")

Scope of Small- and Medium-Sized Companies ("SMC's")

On 17 September 2009, the Small- and Medium-Sized Business Administration announced proposed revisions to the PD of the SMCL. Currently, where a company whose total assets exceed KRW 500 billion holds directly or indirectly at least 30% of the shares of a domestic company, the domestic company would be disqualified as an SMC (under the "ownership and management independence test"). Under the proposal, where a large company whose total assets exceed KRW 500 billion maintains directly or indirectly at least a 30% shareholding in a domestic company and, at the same time, is a majority shareholder of the domestic company, the domestic company would not be qualified as an SMC. In other words, if a large company is not the majority shareholder of the domestic company, the domestic company can maintain SMC status under the proposal.

Further, where certain financial companies described by the PD of the SMCL (such as new technology finance companies under the Credit Finance Law, etc.) own a domestic company, the ownership and management independence test can be waived.

Finally, an SMC is given an option to choose either the foreign exchange rate as of the previous year end or the average foreign exchange rate of the previous year for the conversion of total assets denominated in a foreign currency into Korean Won.

Foreign Investment Promotion Act ("FIPA")

Scope of Foreign Investment

According to the proposed amendment announced on 21 October 2009, if a foreign-invested company converts its earned surplus reserve (i.e. this legal reserve is required for an amount equal to 10% of cash dividends up to 50% of paid-in-capital) into share capital according to article 461 of the Commercial Code, that conversion would fall within the scope of foreign investment as defined in the FIPA. This proposal will take effect for foreign investments made through such conversions on or after the revised FIPA enforcement date.

Foreign Investment Zone for foreign-invested company operating service business

Under the current FIPA, a manufacturing complex can be appointed as a foreign investment zone, in which foreign-invested companies can enjoy certain tax benefits such as an exemption from corporate income tax and local taxes, etc. Under the proposed changes, it will be possible for an area in which a foreign-invested company carries out certain service business may be designated as a foreign investment zone, which is not a manufacturing complex, provided the amount of space used by foreign-invested company is more than certain percentage. Details on qualifying service business and areas have not yet been announced.

PD of Act on External Audit of Chusik Hoesa ("AEACH")

Scope of companies subject to mandatory external audit

Current law mandates a statutory audit by an external auditor for any company whose total assets at the end of the previous fiscal year are at least KRW 10 billion or if the company is listed on the KRX. However, the AEACH, which was revised on 2 March 2009, provides that the company's total liabilities or the number of the employees, as well as its total assets should be taken into account in determining whether a company is subject to a mandatory external audit. The proposed revision of the PD of AEACH prescribes detailed criteria for companies subject to a mandatory external audit. The following companies will be added to the list of companies for which an external audit is mandatory:

  • A Chusik Hoesa ("CH" or stock company) whose total liabilities as of the previous fiscal year end are at least KRW 10 billion and whose total assets as of the previous fiscal year end are at least KRW 7 billion;
  • A CH that has at least 300 regular employees (excluding daily and dispached workers) as of the previous fiscal year end; and
  • A CH whose annual sales in the previous fiscal year is KRW 20 billion or more.

PD of Capital Market and Finance Investment Business Law ("CMFIBL")

Introduction of Special Purpose Acquisition Company ("SPAC")

According to the proposal, if a SPAC, i.e. a CH that is established for the sole purpose of investing in another domestic company ("target") through an initial public offering ("IPO") and listing its shares on the KRX, and that is merged into the target after acquiring shares in the target, satisfies all of the following conditions, the regulations relating to collective investment businesses under the CMFIBL (e.g. approval/registration requirement for the establishment or limitation on the method of asset management) would be waived:

  • The SPAC deposits or consigns funds raised by IPO to a securities finance corporation;
  • The SPAC does not withdraw or provide a guarantee of funds before being merged into the target;
  • At least one founder of the SPAC is a financial investment company that meets certain requirements set by the Financial Services Commision; and
  • The SPAC meets requirements to be provided by the Financial Services Commision with respect to the protection of investors.

Relief of management control on private equity funds

Under the proposal, a domestic private equity fund will be allowed to invest in foreign companies that invest 50% or more of their assets in other domestic companies ("target companies") if the target company falls within the definition of certain troubled entities (e.g. a company under restructuring or insolvency proceedings). If the private equity fund invests in a target company through a domestic SPC, the SPC will be able to extend a loan up to 300% of its net assets (currently, 200%). A domestic private equity fund also will be allowed to invest directly in social infrastructure within 50% of its net asset amount.

Developments at Tax Authorities

Plan for tax audit

On 24 September 2009, the National Tax Service announced the "Plan for Tax Audits," the main features of which are as follows:

- Criteria for selection of a tax audit target company

  Large companies
(Sales revenue of KRW 500 billion or more)
Medium-size companies
(Sales revenue of KRW 5 billion or more)
Small companies
(Sales revenue of less than KRW 5 billion)
- Results of analysis of the extent of tax filing compliance
- Company that has not been audited by the tax authorities for a long time
- Results of analysis of the extent of tax filing compliance
- Company that has not been audited by the tax authorities for a long time
- Results of analysis of the extent of tax filing compliance
- Selection on a random basis
- Every 4 years - Results of analysis of the extent of tax filing compliance - Results of analysis of the extent of tax filing compliance
- Partial selection on a random basis

According to the Plan, the following companies would be excluded as tax audit targets for FY 2009:

  • A company that has submitted a Plan for Job Creation to the district tax office;
  • An SMC that, during FY 2009, has received a subsidy for sustaining employment from the Ministry of Labor;
  • An SMC that has won first prize for the cooperation of labor and management;
  • A small company that has met all of its tax compliance obligations and is not suspected of tax evasion (except for companies operating a rental business, saloon business or gaming business for adults, etc.).

In addition, a company that operates business selected as the 17 New Growth Engine Industries, such as LED, bio medicine, green finance, etc. is excluded from being a tax audit target company for three years after the year in which it starts to generate taxable income.

Recent Tax Rulings and Cases

Valuation of shares in unlisted company (Supreme Court 2009du2788, 2009.05.14)

The Supreme Court recently held that assets/liabilities recorded due to valuation gains and losses from derivatives should be excluded from net tax asset value in calculating the value of shares of an unlisted company under the share valuation formula in the Inheritance and Gift Tax Law, because such assets/liabilities resulting from derivative valuation gains/losses are not regarded as fixed assets/liabilities as of the valuation date.

If you have any questions concerning the items in this month’s newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals:

Seung Chan Park
+82 (2) 6676-2422
Young Pil Kim
+82 (2) 6676-2432
Seong Ran Hong
+82 (2) 6676-2442


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