Korean Tax Newsletter (June, 2011)
Revisions to Tax Law
Revisions to Tax Incentive Limitation Law
On 23 June 2011, the Strategy and Finance Committee of the National Assembly approved revisions to the Tax Incentive Limitation Law (“TILL”). The revisions still must be reviewed and approved by the Judiciary Committee of the National Assembly before they become effective.
One of the changes to the TILL would be a new tax deduction for self-managed Real Estate Investment Trusts (REITs) that directly invest and manage real estate with their own full-time employees (including asset management professionals). Such REITS that build or acquire houses that are 149㎡ or smaller and then rent out the houses would be able to deduct 50% of the rental income generated from their tax bases. This tax benefit would be granted for six years from the year in which rental income is first generated. If a tax loss is incurred for five years from the year in which the REITs commence operations, the deduction would be provided for six years as from the fifth year. The tax benefit would apply to rental houses that are newly constructed or acquired with no previous residence after the enforcement of the revision.
Please note that, under current rules, consigned-management REITs (another type of REITs) receive tax benefits through the dividends paid deduction under the Corporate Income Tax Law. The consigned-management REITs are paper companies that consign the investment and management of real estate to asset management companies.
Revisions to Local Tax Incentive Limitation Law
On 1 June 2011, the Ministry of Public Administration and Security (“MOPAS”) announced a proposal to transfer all of the local tax exemption provisions in the TILL to the Local Tax Incentive Limitation Law (“LTILL”). The basic guidelines for the transfer of the exemption provisions would be as follows:
- Local tax exemptions would be available only in the LTILL.
- All measures relating to a local tax exemption stipulated in the TILL would be transferred to the LTILL without any changes in the tax benefits.
- The local tax exemption provisions to be transferred to the LTILL would have sunset clauses. Currently, 57% of the local tax exemption provisions under the TILL do not have sunset clauses.
The revisions are expected to be submitted to the National Assembly in mid-September 2011.
Additional Agreement on Exchange of Tax Information
Korea has concluded 12 Tax Information Exchange Agreements (“TIEAs”) (including agreements with Bermuda and the Cayman Islands) since 2009 in an effort to adopt a more collective and cohesive approach to addressing issues relating to international speculative funds and offshore tax evasion. In addition, in the first half of 2011, the MOSF signed draft TIEAs with the British Virgin Islands and Costa Rica.
Recent tax rulings and cases
Deduction of Property Tax from Aggregated Real Estate Tax (Seoul Administrative Court 2010guhap33891, 2011. 06. 02)
Aggregated Real Estate Tax (“ARET”) is imposed on certain real estate, which is also subject to Property Tax. To prevent double taxation, the ARET Law allows a tax credit for Property Tax paid which may be offset against the ARET. The tax credit amount is calculated as follows:
[Publicly announced land value x fair market price ratio for ARET x fair market price ratio for Property Tax].
The Seoul Administrative Court recently ruled that because the fair market price ratio for ARET is multiplied twice in the calculation of the tax credit, it would result in double taxation [i.e. double taxation amount = Property Tax x (1 - the fair market price ratio for ARET)].
The National Tax Service has appealed the case to the High Court so there is likely to be considerable publicity on the case.
Scope of "Company House" (Jaesoduek-177, 2011. 05. 03)
According to article 38(1)6 of the Presidential Decree to the Personal Income Tax Law, where a company provides a “company house” (as prescribed in the law) to directors who are not shareholders or employees at a low (or free) rent, the benefit derived from the company house will not constitute taxable salary income to the directors or employees. A tax ruling issued in May 2010 stated that a residence hotel does not fall within the scope of the definition of a company house for tax purposes because a house means a building for long-term residential use and a residence hotel is not intended for that use. However, this new tax ruling notes that a full examination of the facts and circumstances, including building structures, size of the guest rooms and facilities provided, method of calculating the rental fees, structure and style of the hotel, obligation of guests, etc. would be required to determine whether a residence hotel should be treated for tax purposes the same as a company house.