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Korean Tax Newsletter (December, 2007)


Revisions to Laws

Presidential Decree of Foreign Exchange Transaction Law ("FETL")

- Release from collection of foreign claims

Under the current FETL, if a Korean resident has claims against a non-resident, generally he/she should settle the claims within one and a half years from the maturity date of the credits. However, in case where the resident requests the Bank of Korea ("BOK") that he/she be released from the settlement of the claims and the BOK approves the resident's request as the collection of the claims is impossible, the obligation for collection shall be discharged. With the revision to the Presidential Decree of the FETL, however, the resident may report to a designated foreign exchange bank, instead of obtaining an approval from BOK, in order to be released from the obligation of settling the foreign claims.

The revised provision was enforced as of December 20, 2007

Developments at Tax Authorities

Plan for innovation of national tax administration in tax office directors' meeting

The Commissioner of the National Tax Service ("NTS") held the meeting with directors of regional/district tax offices on December 10, 2007. The main agenda of this meeting (especially related to tax audits) were as follows:

  • A "Pool" system in comprising audit teams: Tax auditors would be selected among the "Pool" which consists of staffs in various fields. Especially, in case of tax audits to be performed on large companies, the audit team can comprise of experts who have knowledge in the companies' industry.
  • Open discussion on tax audit progress: Currently, only the leader of the field audit team reported the tax audit progress to the director of tax office. According to NTS plan, however, all members of the audit team would be required to discuss the tax audit findings discovered in the audit process.
  • Establishment of "Tax Audit Review Committee": The NTS has a plan to establish "Tax Audit Review Committee" to hear difficulties and concerns that taxpayers have during the tax audit process, instead of having the taxpayers individually contacting the members of tax audit team.
  • For small scale taxpayers, who are below certain size, the tax audit will be performed in the tax office only and the field audit may be performed at the taxpayers' business site only if necessary (e.g., for inventory counting, etc).

Recent Tax Rulings and Cases

Valuation of shares in an unlisted foreign company ( Seomyun4team--3093, 2007.10.26)

In case where the value of shares in an unlisted foreign company, the equity of which has no number of issued shares, is to be calculated based on the formula under the Inheritance and Gift Tax Law ("IGTL"), the amount of equity is deemed as the number of total outstanding shares to compute net profit value and net asset value per share under the IGTL share valuation formula.

Tripled registration tax on real estate purchased in Seoul Metropolitan Area through a 5-year dormant company ( Seoul High Court 2007nu12691, 2007.12.4)

Under the Local Tax Law, a company purchasing real estate within 5 years from its incorporation in the Seoul Metropolitan Area is subject to a registration tax on the real estate at a rate of 7.2%, which is three times the normal rate (i.e., 2.4%). As a way to lighten the 7.2% of registration tax imposed on the purchase of real estate, there were cases where investors in Korea purchase real estate through a company which has existed for at least 5 years, however, in a dormant status. Despite this practice in the past, a local tax authority (i.e., Seoul City Government) levied 7.2% tax to a company which purchased real estate through a 5-year dormant company.

The Seoul Administrative Court had made a favorable judgment to the company to cancel the tax assessment (Seoul Administrative Court 2006guhab30683, 2007.4.6). Contrary to this, however, the Seoul High Court ("SHC") ruled that the 7.2% tax rate should be applied. The SHC's interpretation is that a new company is deemed to be created if the dormant company registers with the court for a change in company name, directors, address of the head office, its major business objectives and even its shareholders. As such, the SHC is of the view that the new corporation purchased real estate within 5 years from its incorporation.

However, this case does not seem to be resolved until the final judgment is made by the Supreme Court.


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