Korean Tax Newsletter (October, 2008)
Proposed Revisions to Laws
Our September 2008 newsletter introduced major proposed revisions announced by the Ministry of Finance and Strategy (“MOSF”) under the title “Revisions to Tax Laws in 2008”. In this month’s edition, we will additionally cover the proposed revisions to the Corporate Income Tax Law (“CITL”) and the Tax Incentive Limitation Law (“TILL”) that were not introduced previously.
(Note) The National Assembly has not passed a resolution for the proposed revisions and therefore, those introduced in this newsletter may be amended or repealed during the legislation process.
Corporate Income Tax Law
Utilization of Carried Forward Tax Losses (“NOL”)
Under the current CITL, in case where a domestic company (“liquidating company”) is merged into another domestic company (“surviving company”), the NOL of the surviving company incurred before the merger can be carried forward for 5 years and can be offset against the taxable income of the combined company after the merger, unless the merger is regarded as a “reverse merger” under the Article 45-3 of the CITL, under which the NOL of the surviving company can not be used to offset against the taxable income of the combined company after the merger.
According to the proposed revision, however, the NOL of the surviving company incurred before the merger can be offset only against the taxable income to be generated from the business which the surviving company had previously operated before the merger. In other words, such NOL of the surviving company can not be offset against the taxable income to be generated from the business transferred from the liquidating company.
Also, with the proposed revision, the limitation of utilization of the NOL in the “reverse merger” under the Article 45-3 of the CITL will be abolished.
This proposed revision will apply to mergers made on or after January 1, 2009.
Scope of entertainment expense
Under the current CITL, sales allowances (including sale incentive, sales discount, etc.) paid to un-related parties would not be treated as entertainment expense and thus can be tax deductible as sales expense, provided that the amount is reasonable in light of the socially acceptable business practice. According to the proposed revision, such deductible sales allowances are more clearly specified as follows:
- Spending in a normal transaction in case there is a preagreement.
- Spending satisfying certain requirements (e.g. the expense incurred in the course of fulfilling the governmental authority’s policy or guidance) even if there is no preagreement.
This proposed revision will be applied to spendings made on or after January 1, 2009.
Filing and payment of withholding tax on salary income
Under the current Individual Income Tax Law (“IITL”), those who pay the salary income, in general, are required to file and pay withholding tax on the salary income by the 10th day of the month following the month when they pay the salary income to their employees. However, those who (other than financial and insurance companies) had 10 employees or less in the last fiscal year are allowed to file and pay withholding tax on a biannual basis when they receive an approval from the tax authorities. With the proposed revision, those who have 20 employees or less in the last fiscal year will be also allowed to file and pay withholding tax on salary income of employees on a biannual basis.
Tax Incentive Limitation Law
Partnership taxation and deemed liquidation income
With the revision, in case where a domestic company elects to adopt the ‘partnership taxation system’ under the TILL, the deemed liquidation income to be calculated under the Presidential Decree of the TILL will be taxed. In such case, the partnership will be liable to file a tax return and make a tax payment for the deemed liquidation income within 3 months after the end of prior fiscal year before new adoption of the partnership taxation system. The deemed liquidation income tax will be allowed to be paid in installment over 3 years.
This proposed revision will be applied to companies which elect to adopt the partnership taxation system on or after January 1, 2009.
Developments at Tax Authorities
Postponement of tax audit
On October 29, 2008, the NTS announced that it will postpone tax audits on companies (including those who have received a notice of the tax audit commencement) of which sales revenue is 500 billion won or less. Also, according to the announcement, the NTS will finalize ongoing tax audits as soon as possible, and will positively consider deferring the collection of the tax bill assessed as a result of the tax audit. For large companies with more than 500 billion won of sales revenue, the postponement will be decided taking into consideration special situation of the companies. However, the NTS also announced its plan to conduct tax audits in a stricter manner on willful tax evasion such as issuance/receipt of fake tax invoices, disguised foreign exchange transactions, etc.
Advance Ruling System
On September 18, 2008, the NTS announced that the “advance ruling system” which we introduced in our February 2008 newsletter would be implemented from October 1, 2008. The major contents of the announcement include the followings:
- Qualified applicants
A business taxpayer including non-residents and foreign companies without a permanent establishment (“PE”) in Korea, who had (or will have) specific transactions, can request an advance ruling.
- Subject of an advance ruling
A business taxpayer can request this advance ruling from the NTS on matters for the interpretation of tax laws in relation to specific transactions. The specific transactions mean transactions which have already occurred. The specific transactions may also cover transactions which have not occurred yet but will occur in the near future. In such case, the taxpayer is required to verify that the specific transaction will occur in the near future with supporting documents.
However, the NTS will not issue an advance ruling on inquiries which are based on hypothetical facts, transactions which violate (or are suspicious of violation of) the relevant laws or are related to tax avoidance or evasion, or require factual judgment (e.g. determination of the beneficial owner in international transactions, the existence of a PE in Korea, etc).
- Process for request
A business taxpayer can request an advance ruling in real name by filing an application form for advance ruling request with the NTS which should be accompanied with necessary documents for verification of facts and review of inquiries.
In general, an advance ruling request should be filed by the statutory filing due date of the tax return for the fiscal year on which the relevant transaction date falls.
Recent Tax Rulings and Cases
Transfer of shares through the merger (Kooksim 2007seo5282, 2008.7.29)
In case where a foreign company (“AA”) which owns shares in an unlisted Korean company is merged into another foreign company (“BB”), all of AA’s assets, including the shares in the Korean company, are comprehensively transferred to BB. According to this tax appeal case of the National Tax Tribunal, the transfer of the Korean company shares through the merger made between AA and BB is deemed as the sales of shares subject to the capital gains tax under Article 93 of the CITL. In addition, the transfer of the Korean company shares through the merger is subject to the Securities Transaction Tax (“STT”) under Article 1 of the STT Law.