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Korean Tax Newsletter (June, 2008)


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Proposed Revisions to Laws

On June 3, 2008, the Ministry of Strategy and Finance ("MOSF") announced a proposal for revisions to the Corporate Income Tax Law ("CITL") and Tax Incentive Limitation Law ("TILL"). The MOSF plans to submit the proposals to the National Assembly for their approval. The major proposed revisions are as follows:

Corporate Income Tax Law

- Decrease in corporate income tax rate

In our March 2008 newsletter, we introduced the MOSF's plan to gradually lower the corporate income tax rate. With the proposed revision, the MOSF changed the commencement year to which the tax rate of 10%/20% will be applied from FY2012 to FY2010. The revised plan is summarized as follows:

Current Proposed Revision
Tax Base Tax Rate Tax Base Tax Rate
FY2008
~ 2009
FY2010
~ onwards
Above 100
million won
25% Above 200
million won
22% 20%
100 million
won or below
13% 200 million
won or below
11% 10%


In addition, according the proposal, the tax rate of 11%/22% will be also applied to the interim corporate tax return to be filed in FY2008.

Tax Incentive Limitation Law

- Decrease in minimum tax for companies

With the proposed revision, the minimum tax will be lowered as follows:

< For Small and Medium-sized Companies ("SMCs") >
 
Current Proposed Revision
Tax Rate Tax Rate
FY2008 ~ 2009 FY2010 ~ onwards
10% 8% 7%
 
< For companies other than SMCs >
 
  Current Proposed Revision
Tax Base Tax Rate Tax Rate
FY2008
~ 2009
FY2010
~ onwards
Above 100
Billion won
15% 14% 13%
100 Billion
won or below
13% 11% 10%



- Tax credit for investment in R&D facilities

Currently, if a company makes an investment in certain R&D facilities, it is eligible for a tax credit at 7% of the investment amount. According to the proposed revision, companies will be able to claim 10% tax credit on investment in R&D facilities effective from FY 2008.

- Tax credit for investment in energy saving facilities

Currently, if a company makes an investment in certain energy saving facilities, it is eligible for a tax credit at 10% of the investment amount. According to the proposed revision, companies will be able to claim 20% tax credit on investment in the energy saving facilities. This proposed revision will be applied to investments made on or after the promulgation date.


Developments at Tax Authorities

Agreement between Korea and Latvia for a new tax treaty

On June 15, 2008, the MOSF announced that the tax treaty between Korea and Latvia was agreed and signed between the two countries. The main contents of the agreed tax treaty are as follows:

  • Capital gains tax
    Taxed in the resident country only; however, capital gains derived from the alienation of immovable property may be taxed in the country where the immovable property is situated.
  • Withholding tax rates for passive income
    - Dividend: 5% or 10%
    - Interest: 10%
    - Rotalties: 10%
  • Limitation on benefits
    The treaty will have a provision for limitation on benefits to prevent treaty shopping.

The agreed tax treaty will be in force after completing the ratification procedures of the National Assembly.


Recent Tax Rulings and Cases

Deemed Acquisition Tax ("DAT") and Substance Over Form Rule ( Seoul High Court 2007nu32176, 2008.06.17)

Under the prior Local Tax Law ("LTL") before revision on December 31, 2007, when a party together with its related parties acquires 51% or more interest in an unlisted company ("controlling shareholder"), the controlling shareholder is subject to the DAT on taxable assets held by the unlisted company at 2.2% of the book value of the underlying taxable assets multiplied by its shareholding ratio. To become related parties for DAT purposes, there should be a 50% or more direcrt shareholding relationship to each other (i.e. either direct investor or investee relationship).

As such, there was the case in which two subsidiaries wholly owned by a company ("AA") acquire shares in a target company ("BB") by 50.01% and 49.99%, respectively. The local tax authorities have imposed DAT by disregarding two subsidiaries (sister companies) by the application of substance-over-from rules if the subsidiaries were mere holding companies not having actual substance.

In this decision, the Seoul High Court made a favorable judgment to AA to cancel the DAT assessment, on the basis that AA is not the controlling shareholder under the LTL and two subsidiaries can not be disregarded.

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

 

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