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Korean Tax Newsletter (October, 2007)


Proposed Revisions to Tax Laws

Our September 2007 newsletter introduced major proposed revisions under the title of "Revisions to Tax Laws in 2007". In this month's edition, we will additionally cover the proposed revisions to the Corporate Income Tax Law ("CITL") and the Individual Income Tax Law ("IITL") that were not introduced previously.

(Note) The proposed revisions have not passed a resolution of the National Assembly and therefore, those introduced through this newsletter may be amended or repealed during the legislation process.

Corporate Income Tax Law

- Dividend Received Deduction ("DRD") for non-profit companies

Currently, domestic companies including non-profit companies can claim the DRD. With the revision however, non-profit domestic companies will not be eligible for the DRD.

- Scope of Korean-source income subject to capital gains tax

In principle, capital gains earned by foreign companies from a transfer of their shares in Korean companies are Korean-source income subject to capital gains tax in Korea, unless the capital gains tax is exempt under relevant tax treaties. The proposed revision to the CITL includes capital gains derived from a transfer of Depository Receipt in the scope of Korean-source income subject to capital gains tax in Korea.

Individual Income Tax Law

- Change of year-end payroll tax settlement date

Under the IITL, employers paying salary to their employees are withholding agents who are required to conduct the year-end payroll tax settlement when they pay salary in January of the following year to employees. According to the proposed revision, the time of the required year-end payroll tax settlement will be extended until the salary for February of the following year is paid.

Developments at Tax Authorities

Agreement between Korea and Azerbaijan for a new tax treaty

On August 17, 2007, the Ministry of Finance and Economy ("MOFE") announced that the tax treaty between Korea and Azerbaijan was agreed upon between the two countries through a working level meeting. The main contents of the agreed tax treaty are as follows:

- Permanent Establishment ("PE") for a construction site, etc.:

A construction site constitutes a PE only if it lasts twelve months or more.

- Capital gains tax on a transfer of shares:

Imposed in the resident country of the seller only; however, capital gains derived from shares of a company whose assets mainly consist of real estates may also be taxed in the source country of the income.

- Withholding tax rates for passive income:

  • Dividend: 7%
  • Interest: 10%
  • Royalties: 5% or 10%

- Limitation on benefits:

The treaty will have a provision for limitation on benefits to prevent treaty shopping.
The agreed tax treaty will be in force after being signed and completing the ratification procedures of the National Assembly.

Interest rate applied to VAT base of Lease Deposit (Notice by the National Tax Service No. 2007-31, 2007.09.28)

The National Tax Service ("NTS") announced that in case where a supplier of real estate leasing service receives a deposit from a lessee, the interest rate applied in calculating the VAT base has increased from 4.2% to 5.0%. This revised interest rate was applied from September 28, 2007.

Recent Tax Rulings and Cases

Penalty tax imposed on comprehensive business transferee (Seomyun3team-2467, 2007. 09. 03)

In case of a comprehensive business transfer, which is not regarded as a supply of goods under the Article 17 of the Presidential Decree of the Value Added Tax Law, if the transferee receives a VAT invoice from the transferor and submits the summary schedule of VAT invoices to the tax office, a penalty tax for the summary schedule of VAT invoices would not be imposed. On the other hand, penalty taxes for under-reported VAT base and under-payment of VAT would be imposed.

Thin capitalization rule (Jaekookjo-446, 2007.07.24)

If a company borrows a loan from a Foreign Controlling Shareholder ("FCS") or a third party with a guarantee from the FCS, and such borrowing exceeds 300% of the FCS' equity (or paid-in capital if it is greater than the equity), interest expense on the borrowing exceeding 300% of the FCS' equity in the borrower's company will not be deductible. According to the Article 25(3) of the Presidential Decree of the International Tax Coordination Law, the equity should be the amount of equity as of the fiscal year-end. Under the ruling, however, if there has been a change in the equity amount through capital increase, capital decrease, merger, spin-off, etc. during the fiscal year, the equity amount should be calculated based on the sum of daily balances of the equity for each separate period - before and after the date of change in equity.


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