Korean Tax Newsletter (April, 2011)
Revisions to PD of Corporate Income Tax Laws
Revisions to the Presidential Decree ("PD") of the Corporate Income Tax Law ("CITL") were promulgated on 31 March 2011 and are generally effective as from that date. The major changes are summarized below.
Valuation of donations in kind
Previously, when a company made a donation in kind, the designated donation amount should be valued at the fair market value ("FMV") of the donated property. Under the amendment, the designated donation amount can be valued at book value, except for the donation made to a related party, which still must be valued at FMV. The new rule applies to donations made after 31 March 2011.
New exception to "holding shares requirement" for a qualified tax-free reorganizations
Previously, for a reorganization to be considered as a qualified tax-free reorganization (e.g. merger, spin-off, etc.), the shareholders of the aquired company should hold shares issued by the acquiring company at least for three years from the end of the fiscal year in which the transaction takes place ("holding shares requirement"). However, an exception to the holding shares requirement is available where the shareholders should dispose of less than 50% of the shares or the shares are disposed of due to a bankruptcy. Under the revised PD, the exception also applies where a shareholder disposes of the shares to comply with legal obligations under the relevant laws. This revision is effective for reorganization transactions made during the fiscal year in which the revised PD is enforced.
Revisions to Commercial Code("CC")
On 14 April 2011, revisions to the CC were promulgated and are generally effective as from 14 April 2012, one year after the promulgation date. The major revisions to the CC are as follows:
- A company can issue stock with no par value and can opt to issue stock with or without par value. In addition, the minimum capital requirement is abolished;
- A company can acquire treasury stock to the extent the amount of the purchase does not exceed distributable retained earnings;
- A company can distribute dividends in kind (e.g. in stock); previously, dividends had to be distributed in cash; and
- The limit on the number of shareholders of a Yuhan Hoesa (up to 50 persons) is abolished and the shareholders can transfer their shares; however, the company is permitted to restrict the transfer of shares under its articles of association.
Recent tax rulings and cases
Transfer of Korean company shares through a merger between foreign companies (High Court2009Nu 27796, 2010.04.01)
In 2006, a Spanish company that owned the shares of a Korean company was merged into its Spanish parent company. In 2007, the tax office claimed that the transfer of a Korean company’s shares via a merger should be treated as a normal transfer of the shares of a Korean company for purposes of capital gains tax ("CGT") and share transfer tax ("STT"), and it thereby levied tax assessments of CGT and STT on the transaction. The taxpayer appealed the case to the National Tax Tribunal ("NTT"), but the NTT made a ruling in favor of the tax office in 2008.
The Administrative Court and High Court made decisions in favor of the taxpayer in 2009 and 2010, respectively. The courts held that the transfer of a Korean company’s shares through a merger between foreign companies should not be subject to CGT and STT. The case is now under the review of the Supreme Court.
Exemption from deemed acqusition tax (Supreme Court 2009 du 20816, 2011. 1. 27.)
According to a decision of the Supreme Court, majority shareholders that acquire an interest in a corporation that was exempt from the acquisition tax on real estate due to the conditions of concession are also exempt from the deemed acquisition tax.
Pre-notice of tax audit subject to the administrative litigation. (Supreme Court 2009 du 23617, 2011. 3. 10.)
According to a Supreme Court decision, a taxpayer can file an administrative claim with respect to the tax authorities’ decision to carry out a tax audit. The administrative claim can be filed on the tax authorities’ action or a decision causing a direct legal impact on the taxpayer (individual or an entity). The Supreme Court ruled that a decision to carry out an audit is the tax authorities’ action that directly affects a taxpayer’s rights and obligations.