Korean Tax Newsletter (July, 2006)
Revisions to Tax Laws
Proposed revision to the Presidential Decree of Corporate Income Tax Law (“CITL”)
On July 6, 2006, the Ministry of Finance and Economy (“MOFE”) announced the proposed revisions to the Presidential Decree of CITL including the following:
- Withholding tax on the borrowing/lending of bonds
The current law requires a seller of bonds to withhold tax on the interest accrued for the period that the seller held the bonds with the exception of repos, i.e., repos are not subject to a withholding tax on the accrued interest. The exception is proposed to be extended to bond lending/borrowing transactions and the lender of the bond would not be required to withhold tax on interest income accrued, but is deemed to have hold the bonds until the maturity.
Proposed revision to the Commercial Code
On July 4, 2006, the Ministry of Justice announced its plan to revise the Commercial Code. The followings are excerpts from the proposed revisions, which may be of interest to foreign investors:
– The minimum capital of 50 million won for Chusik Hoesa is to be abolished.
– Type of shares that can be issued by a company is to be liberalized, for example, non-voting shares, restricted shares, etc. Also, company can choose to issue shares with no par value or with par value, but cannot mix them.
– Limit on the amount of bonds that can be issued by a corporation (currently up to 4 times of net asset amount on the balance sheet) would be abolished. Also, the types of bonds that can be issued are to be liberalized. (Currently, only the type of bonds listed in the Commercial Code, such as convertible bonds or bonds with warrants, can be issued.)
– Legal reserve in excess of 150% of capital amount can be used for purposes other than capital conservation (in case company is in loss situation) if such other use is resolved by shareholders’ meeting.
– Accounting rules specified in the Commercial Code would be simplified to minimize the difference between GAAP and accounting principle under the Commercial Code, and defer the specific accounting treatments to the GAAP.
– Under the current law, declaration of dividends can be resolved only at the shareholder’s meeting. The proposed revision allows the declaration of dividends to be resolved by a board of directors also once the company allows the board to resolve such declaration of dividends in the company’s Articles of Incorporation.
– Dividends in kind would be allowed at shareholders’ option. Under the current law, dividends can be paid with cash only. (In case of year-end dividend, stock dividend is allowed.)
– Major shareholder (owning 95% or more interest in a company) would be allowed to acquire minority shares at a fair market value and minority shareholders would be allowed to request the major shareholder to purchase the minority interest.
– New types of entities are to be introduced, mainly, a limited partnership (LP) and a limited liability company (LLC). LP would require partners with unlimited liability and with limited liability, unlike Johap. LLC would be more close to Johap, but with limited liability for small sized companies.
The second protocol to Tax Convention with the People’s Republic of China (“China”)
The second protocol of Tax Convention with China, signed on March 23, 2006, became effective as of July 4, 2006. The main contents of the revised protocol are summarized below:
– Limitation on benefits (“LOB”): Treaty benefits are available to those who are beneficial owners of income derived
– Taxes covered: The Agricultural and fishery tax is included in taxes to which the convention applies in Korea in addition to the income tax and resident surtax.
– Indirect foreign tax credit: A Korean company who owns 10% or more of a China company and receives dividend from China can claim credits for corporate income tax paid by the China company in relation to profits out of which such dividend is paid.
– Anti-avoidance rule: Tax sparing credit is not available to residents who enter into any agreement for the purpose of taking advantage of the benefit.
Recent Tax Ruling and Cases
Bonus payment with treasury stock (Seomyun2team-1147, 06.19.2006)
Where a company pays incentive bonus to employees with treasury stock of the company, fair market value as of the bonus payment date (i.e. final market price at the Stock Exchange, in case of listed stock) is the value for the company to record the payment as salary cost. The company would realize gain for the difference between book value and the market value. Such FMV is the tax base for individual income tax purposes as well.
Import of goods subject to Value Added Tax (“VAT”) (Seomyun3team-1139, 06.19.2006)
A domestic company X orders products to a foreign company Y which has no business place in Korea. In turn, Y enters into a contract with another domestic company Z where Z manufactures and delivers the products to X directly. In this case, the consideration received by Z from Y in foreign currency is eligible for zero-rate VAT if the products are used for VAT taxable business of X. And the delivery of products to X is not classified as import of goods subject to input VAT.
Penalty tax imposed on wrongly issued invoices (Seomyun3team-1143, 06.19.2006)
When a company provides goods eligible for zero-rate VAT but issues general VAT invoices by mistake, penalty tax on mis-issuance of VAT invoices (1% of supply price) is not imposed, but penalty is imposed on the omission of zero-rate VAT base (1% of the VAT base).
Korean source earned income (Seomyun2team-1200, 06.23.2006)
Where a domestic company hires a non-resident employee, has the employee work in Japan, but paid by the domestic company, the labor income earned by the employee is not considered as Korean source income subject to individual income tax in Korea.