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Korean Tax Newsletter (July, 2007)


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Revisions to Tax Laws

Revisions to Tax Laws

On June 29 and July 19, 2007, the Ministry of Finance and Economy ("MOFE") announced revisions to the Individual Income Tax Law ("IITL") and the Value Added Tax Law ("VATL"), respectively. The followings are major features of the revisions to the IITL and the VATL.

  • Revision to the IITL
    • Expansion of Non-Taxable Income
      With the revision, the 'unemployment salary' and 'maternity leave salary' and 'child nurturing leave salary' received in accordance with the Employment Insurance Law become non-taxable income from January 1, 2008.
  • Revision to the VATL
    • Expansion of Scope of Service Eligible for a Zero-rated VAT
      Under the current law, lodging service rendered by a service provider operating hotel business is subject to 10 % VAT. With the revision, however, from July 1, 2007 through December 31, 2008, room charges from the lodging service will be eligible for a zero-rated VAT if the below conditions are met:
      1. The lodging service is rendered to foreign tourists;
      2. 'Foreigner Lodging Record Log' to be prescribed by the National Tax Service showing the foreign tourists' name, nationality, passport number as well as date and place of entry into Korea is maintained; and
      3. The service fee should not be borne by a domestic resident or a domestic company

Tax Treaty with the Republic of Lithuania

The tax treaty between Korea and the Republic of Lithuania signed on April 20, 2006 will apply to taxes withheld at source, for amounts payable on or after January 1, 2008. The main contents of the convention are summarized below:

  • Withholding tax rates (including resident surtax) for passive income:
    - Dividend : 5% or 10%
    - Interest : 10%
    - Royalty : 5% or 10%
  • Capital gains:
    • Gains derived by a resident of Lithuania from an alienation of immovable property situated in Korea may be taxed in Korea, and vice versa.
    • Gains from an alienation of shares in a company the assets of which mainly consist of immovable property situated in Korea may be taxed in Korea, and vice versa.

Revised Tax Treaty with the Kingdom of Thailand

The revised tax treaty between Korea and the Kingdom of Thailand signed on November 16, 2006 will apply to taxes withheld at the source on amounts paid or credited to Thai residents, on or after January 1 2008. The main contents of the convention are summarized below:

  • Withholding tax rates (including resident surtax) for passive income:
    - Dividend : 10%
    - Interest : 10% ro 15%
    - Royalty : 5%, 10% or 15%
  • Capital gains:
    • Gains derived by a resident of Thailand from an alienation of immovable property situated in Korea may be taxed in Korea, and vice versa.
    • Gains from an alienation of shares of the capital stock of a company, of an interest in a partnership, trust or estate, the property of which directly or indirectly consists principally of immovable property situated in Korea may be taxed in Korea, and vice versa.
    • Gains from an alienation of shares that represent a participation of more than 25 percent of the stock of a company which is a Korean resident may be taxed in Korea, and vice versa.


Developments at Tax Authorities

Introduction of VAT regulations for e-commerce business

With respect to the introduction of the VAT regulations for e-commerce business effective from July 2007, which was discussed in our previous January 2007 newsletter, the National Tax Service ("NTS") announced, on June 27, 2007, more detailed obligations which Internet Service Provider ("ISP", such as Auction, G-Market, and etc.) should comply with. Major features include the followings:

  • ISP should report itself as a tax agent of e-commerce merchants to its district tax office within 25 days from the end of every half year when both parties made such a tax agency agreement based on the VATL;
  • ISP should apply for a tax identification number required for VAT return filing for e-commerce merchants to tax authorities, since a tax agent should file VAT return and make a VAT payment on behalf of such e-commerce merchants; and
  • ISP should issue VAT invoices to the e-commerce merchants for commission income.


Recent Tax Rulings and Cases

Deferral of Spin-off Valuation Gains (Seomyun2team-1125, 2007.6.11)

Where a company spins off one of its divisions, the CITL grants a benefit that the income recognition of valuation gain of assets which have been transferred to a newly incorporated company can be deferred until the assets are depreciated or disposed of, if certain conditions are met. One of the conditions is that a separate business division should be spun off and assets and liabilities of the spun-off division should be comprehensively transferred to the new company; thus, the business can continue to operate after the spin-off. However, according to the recent tax ruling, even if a part of assets or liabilities of the division to be spun off are not transferred, the above benefit under the CITL can still be applicable if the business as a stand alone can continue to operate independently after the spin-off.

Export of Equipments for Leasing to Overseas Companies (Seomyun3team-1875, 2007.7.2)

Where a company exports construction equipments to lease them to a foreign company for a certain period of time without transferring an ownership in those equipments, the export is not regarded as a supply of goods under the VATL. However, where the ownership in those equipments is transferred before or after the end of rental period, the supply of goods under the VATL will be deemed to have taken place when the ownership of those equipments is transferred, for which zero-rated VAT is applied.

 

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