Korean Tax Newsletter (May, 2008)
Revisions to Tax Laws
Commercial Code ("CC")
The Ministry of Justice ("MOJ") announced its plan to revise the CC on May 7, 2008. We introduce the major plans of MOJ as follows:
- Minimum paid-in capital requirements
Currently, there are minimum capital requirements of 50 million won for a Chusik Hoesa (Stock Company) and 10 million won for a Yuhan Hoesa (Limited Liability Company), however, the above requirements will be abolished.
Furthermore, Chusik Hoesa will be allowed to issue shares with no par value.
- Different types of shares
According to the proposed revision, a Chusik Hoesa will be able to issue different types of shares, for example, those with no or restricted voting rights, dividends right, distribution rights of residual assets or transfer/conversion /redemption rights.
- Issuance of shares with no voting rights
Currently, a Chusik Hoesa can not issue shares with no voting rights for more than one quarter of total issued shares.
According to the proposed revision, it can issue the shares with no voting rights up to one half of total issued shares.
- Use of legal reserve
Currently, a legal reserve (both retained earning reserve and capital reserve) can be used to offset against accumulated lossed or for the capital injection purposes only. According to the proposed revision, however, the legal reserve exceeding 150% of paid-in-capital can be used without such restrictions (e.g. cash dividends, etc.) subject to the resolution of shareholders meeting.
- Number of shareholders in Yuhan Hoesa
Currently, a Yuhan Hoesa can not have more than 50 shareholders. According to the proposed revision, such restriction will be abolished.
- Transfer of equity in Yuhan Hoesa
Currently, in order for shareholders of a Yuhan Hoesa to transfer their equity, the resolution in extraordinary shareholders' meeting in required in principle. According to the proposed revision, shareholders of a Yuhan Hoesa will be able to transfer their equity without such restriction, but it can be limited by the Articles of Incorporation ("AOI") of the Yuhan Hoesa.
- Simplified process in establishing small companies
Under the current CC, the original AOI of a company is in force only after being notarized. According to the proposed revision, in case where incorporators would establish a company by themselves (Bal Ki Seol Lip in Korean) with paid-in-capital of less than 1 billion won, the original AOI of the company will not be obliged to get a notarization, instead it will be enforced by the singing of the incorporators.
Notary Public Act (proposed on May, 2, 2008)
- Simplified process in establishing small companies
Under the current law, the minutes of shareholders' (incorporators') meetings of a company which is submitted to the court registry for corporate registration should be notarized. According to the proposed revision, in case where incorporators would establish a company by themselves (Bal Ki Seol Lip in Korean) with paid-in-capital of less than 1 billion won, the minutes do not need to be notarized.
Law for Commercial Registration ("LCR") (proposed on May, 2, 2008)
- Registration of similar corporate name
According to the current LCR, only a corporate name which is clearly distinguishable from the name already registered in the same district can be registered. According to the proposed revision, a new established company can not use the same name as the existing name, but can use a similar name to that of existing company in the same district.
Developments at Tax Authorities
Committee for Taxpayers Protection
On May 1, the National Tax Service ("NTS") announced that it established the "Committee for Taxpayers Protection" in district / regional tax offices. The commissioner of the committee should be an outside expert other than tax officers. According to the NTS announcement, if tax auditors want to extend the tax audit period or scope of the audit, the extension should be approved by the committee.
Recent Tax Rulings and Cases
Grace Period for Small and Medium Sized Companies ("SMC") ( Seomyun1team-706, 2008.04.16)
The provision of the Presidential Decree of Law for Small and Medium Sized Companies ("LSMC") which equally applies in determining SMC status of the companies for tax purposes was revised on December 27, 2005. The transitional rule for this revision providers a three-year grace period to companies disqualified for SMCs in accordance with the revised Presidential Decree.
This ruling confirms that the SMC status is determined at year-end of the fiscal year, therefore companies that have a year-end date of December 31, 2008 can not enjoy the grace period under the Presidential Decree of LSMC.
Local Tax Exemption on Houses Acquired through Court Auction ( Daebeobwon 2007du1139, 2008.1.17)
Under Article 273-2 of the Local Tax Law ("LTL") before the revision on September 1, 2006, in case where an individual purchases a house from another individual, 25% of the acquisition tax and 50% of the registration tax were exempt. However, it was not clear whether to include houses acquired through a court auction in the scope of such tax exemption. Further, there were two conflicting decisions in the District / High Courts. However, in this Supreme Court case, the tax exemption under Article 273-2 of the LTL does not apply to the acquisition of houses through a court auction.
According to the current LTL (revised on September 1. 2006), the tax exemption can be applicable to the acquisition of houses by companies as well as individuals. According to this court case, it seems that, in case where companies purchase a house through a court auction, acquisition/registration tax will not be exempted.