Korean Tax Newsletter (April, 2008)
Revisions to Tax Laws
Ministerial Decree of Tax Incentive Limitation Law ("TILL")
- Tax credit on energy saving equipments
Currently, if a company makes an investment in certain energy saving equipments, it is eligible for a tax credit at 10% of the investment amount. According to the revision, those who manufacture equipments or parts to be used for producing new generative energy (e.g. solar energy, wind powered energy or hydroelectric energy, etc.) will be eligible for the tax credit on investment in facilities to manufacture such equipments or parts.
This revised provision is applied to investments made on or after January 1, 2008.
Proposed Revisions to Laws
Presidential Decree of Immigration
Under the current law, a foreign investor is qualified to obtain permanent residency in Korea if he/she meets one of the following criteria:
- Invests USD 2 million or more in Korea and hires 5 or more Korean employees,
- Invests USD 500 thousand or more in Korea, hires 3 or more Korean employees and lives 3 years or more continuously in Korea
With the proposed revision, however, foreign investors who invest USD 500 thousand or more and hires 5 or more Korean employees can be eligible for permanent residency in Korea, even if they do not live 3 years or more continuosly in Korea.
Developments at Tax Authorities
The Ministry of Public Administration and Security ("MOPAS") indicated that it has plans to revise the local tax law. In this section, we introduce the major plans of the MOPAS.
Pre-assessment notice for local tax assessment
Under the current local tax law, taxpayers can file a tax appeal for a pre-assessment notice within 30 days from the day taxpayers receive a pre-assessment notice. However, currently the pre-assessment notice for local tax assessment is not required. The MOPAS announced that a pre-assessment notice for local tax assessments will become mandatory when local tax authorities assess taxes as a result of local tax audits or due to multiplied tax rate provision.
Simplified filing and payment of resident surtax
Currently, a company which has places of business in several cities or districts should file a resident surtax (10% of the corporate income tax) return with each district office in which each business place belongs. The resident surtax amount should be allocated to each business place in proportion to the number of employees and building space. The MOPAS, however, has a plan to allow corporate taxpayers to file only with the district office having jurisdiction over the location of the head office, and to pay the total resident surtax amount (10% of the corporate tax amount).
Advance Ruling System
The MOPAS indicated that it is under consideration to introduce the "advance ruling system" with regard to the interpretation of local tax law. If a taxpayer requests a private tax ruling regarding a certain issue to the local tax authority in advance, the 'Local Tax Law Interpretation Committee' which was established on August 23, 2007 for the purpose of consistent and unified interpretation of local tax law, will review the inquiry and then local tax authority will issue a ruling response based on the review. More details of advance ruling of local tax have yet to be announced.
Recent Tax Rulings and Cases
Value added tax exemption on cellular phone messaging service of credit card company ( Jaebuga-36, 2008.01.23)
In case where a credit card company under the Specialized Credit Financial Business Act ("SCFBA") provides messaging services by which the company informs credit card users of the credit card usage information through cellular phone, such services are subject to Value Added Tax ("VAT"), under the prior ruling (Seomyun3team-70, 2008.01.09). In this recent ruling, however, the tax authority changed its position to treat the above-mentioned services as financial services which are prescribed as VAT exempt business under Article 12 of the Value Added Tax Law.
Capital gains from sale of shares of domestic company by a non-Korean resident ( Jaekookjo-771, 2007.12.26)
In case where a foreign company ("AA") without a permanent establishment in Korea sells shares of a Korean company ("BB"), the capital gains from the sale of shares are generally subject to withholding tax in Korea. However, capital gains can be exempt from income taxes if certain conditions under Article 132 of the Presidential Decree of the CITL are met. One of conditions, among others, is that AA together with its related parties have not owned 25% or more of the total issued shares of BB during the year of the share transfer and the immediately previous five years. According to this ruling, it is clarified that the total issued shares of BB include shares with no voting rights with respect to the above condition.