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Korean Tax Newsletter (November, 2008)


Proposed Revisions to Laws

Local Tax Law ("LTL")

The Ministry of Public Administration and Security (“MOPAS”) announced its proposal to revise the LTL on September 25, 2008, which will generally be effective beginning FY 2010.

(Note) The National Assembly has not passed a resolution for the proposal and therefore, those introduced in this newsletter may be amended or repealed during the legislation process.

Currently, all local taxes are governed by a single tax law which covers general rules, specific local tax provisions as well as local tax exemptions. According to the proposal, the existing single tax law will be divided into the following three separate laws:

Local tax basic law

Local tax basic law will cover common and general rules which are currently included in the national tax basic law, the current LTL, etc. Main contents of the local tax basic law are as follows:

  • Amended tax return filing
    Under the current LTL, a taxpayer who has filed his/her local tax return within the statutory due date can file an amended local tax return only when there is occurrence of certain prescribed subsequent events such as change of local tax amount payable due to adjustments of construction expenses or relevant court decision made after the tax return filing. According to the proposed revision, however, taxpayers will be allowed to file the amended tax return (including a return to claim a local tax refund) without any limitation of prescribed subsequent events.
  • Tax return filing after due date
    Currently, local tax return filing after statutory due date can be allowed only for the acquisition tax within 30 days after the statutory due date. With the revision, all the local tax returns may be filed after the due date as long as an assessment by the tax authority has not been made.

Local tax law (new version)

Under the proposed revision, the existing 16 items of local taxes will be simplified into 9 categories. Major changes are summarized as follows:

Current Proposed
Acquisition tax (including surtax i.e., agricultural & fishery tax) / Registration tax Acquisition tax
Property tax / City planning tax Property tax
Registration tax (not related to the acquisition transaction) / license tax Registration license tax
Local education tax To be integrated into the principal tax
Resident surtax / Business place tax Maintained, but planned to be combined into a local income tax under the next step of LTL revision

The tax rate of the integrated items will be summed up so that the combined effective tax rate will be the same as under the current local tax regime.

Local tax incentive limitation law

A separate law will be established to provide local tax exemptions or reductions, which have been covered by the current LTL, Tax Incentive Limitation Law and local tax ordinance. Some of the existing local tax exemptions or reductions deemed as no longer necessary or overlapping with another benefit may be eliminated or reduced. Details of the local tax incentive limitation law have yet to be drafted.

Revisions to Tax Laws

Presidential Decree of the International Tax Coordination Law ("PD of ITCL")

Thin capitalization ratio for financial companies

We introduced the proposed revision to the PD of ITCL which prescribes thin capitalization ratio for financial companies in our July newsletter. In this regard, the revised PD of ITCL was promulgated on October 7, 2008 and effective from the fiscal year to which the promulgation date belongs.

According to the promulgated PD of ITCL, the revised 600% of the thin capitalization ratio is applied to financial companies (including Korean branches of foreign financial companies).

Developments at Tax Authorities

New tax treaty with the Kingdom of Saudi Arabia

The tax treaty between Korea and the Kingdom of Saudi Arabia signed on March 24, 2007 is effective as of December 1, 2008. The main contents of the convention are summarized as below:

  • Withholding tax rates (including Korean resident surtax) for passive income:
    - Dividend: 5% or 10%
    - Interest: 5%
    - Royalty: 5% or 10%

  • Capital gains:
    - Capital gains are generally taxable in the resident country of the person who derived the capital gains.
    - However, capital gains derived by a resident of a Contracting State may be taxed in the other Contracting State in the following cases:
    1. gains from alienation of immovable property situated in the other Contracting State;
    2. gains from alienation of shares which derive more than 50% of value directly or indirectly from immovable property situated in the other Contracting State; and
    3. gains from alienation of shares forming part of substantial interest which are deemed to exist when at least 15% shareholding is directly or indirectly held.

  • other income:
    Income derived by a resident of a Contracting State will be taxed only in the Contracting State of the resident.

Recent Tax Rulings and Cases

Qualified merger conditions (Beobin-2550, 2008.9.22)

Under the Corporate Income Tax Law ("CITL"), the tax net Operating Loss ("NOL") of the merged company can be utilized after the merger to reduce the taxable income generated from the business transferred from the merged company to the surviving company through the merger, if certain conditions are met. The condition for the utilization of the tax NOL, among others, is that both the surviving company and the merged company have continued to operate their business for one year or more as of the merger registration date ("business purpose merger condition"). (This condition is one of those for qualified tax-free merger.)

According to this ruling, although the surviving or merged company was established through a comprehensive business transfer, it should operate its business for one year or longer from the comprehensive business transfer date to meet the business purpose merger condition, regardless of business operating period conducted by the business transferor company before the comprehensive business transfer.

Capital gains from sale of beneficiary certificates (Jaekookjo-145, 2008.7.16)

A foreign company having no permanent establishment in Korea holds a 'beneficiary certificate' of an investment trust under the Indirect Investment Asset Management Business Act ("IIAMBA"), in which the investment asset is real estate located in Korea and the profits distributed to the certificate holder are regarded as dividends under Article of 17 of the Income Tax Law

Under such fact, in case where the foreign company sells the beneficiary certificate to another foreign company, the income of the foreign company earned from the transfer does not fall under the capital gains derived from the transfer of immovable property, rather it would be treated as capital gains derived from the transfer of the "other securities". The capital gains from the transfer of "other securities" by a foreign company to another foreign company may not be included in the scope of Korea source capital gains under the CITL.


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