Korean Tax Newsletter (July, 2008)
Proposed Revisions to Tax Laws
International Tax Coordination Law
- Thin capitalization ratio for Korean branches of foreign banks
If a domestic company borrows a loan from a Foreign Controlling Shareholder ("FCS") or a third party with a guarantee from the FCS, and such borrowing exceeds 300% of the FCS' equity in the company is not deductible.
According to the proposed revision by the Ministry of Strategy and Finance ("MOSF"), however, 600% of the thin capitalization ratio, which used to be applied for financial companies before the revision on December 31, 2007, would apply to Korean branches of foreign banks again.
Regulation on tax exemptions for foreign investments (Notice of the MOSF 2004-16)
Under Article 121-2 of the Tax Incentive Limitation Law ("TILL"), foreign invested companies conducting a business involving highly advanced technology or an industry support service business are eligible for tax exemptions. Details of the qualified business involving highly advanced technology or the industry support service business are stipulated in the Notice of the MOSF as delegated by the TILL and its Presidential Decree.
According to the proposed revision of the Notice, certain chemical and biological high technologies including nano-fiber, chemical management service, bio-equivalence test technology, etc. will be included in the list of the qualified business involving highly advanced technology or the industry support service business.
Developments at Tax Authorities
Committee for selection of tax audit targets
The National Tax Service (“NTS”) established a Committee for Selection of Tax Audit Target Companies (“the Committee”) on May 2008, in order to enhance objectiveness and transparency for selection of tax audit target companies. The Committee consists of 5 NTS officials and 6 outside experts (such as certified tax accountants, professors, lawyers and/or tax researchers). In its first meeting on July 22, 2008, it was decided that companies satisfying the following requirements would be excluded from tax audit targets for FY 2006 and 2007 unless they are conducting a leasing business or speculative business:
- The annual gross revenue amount of the company does not exceed KRW 1 billion;
- The company has faithfully fulfilled the administrative tax cooperation obligation (e.g., filing and payment of national taxes, submission of payment statements or schedule of VAT invoices, etc.); and
- The company has not been punished for tax evasion in the past 3 years or is not suspected of tax evasion.
Integrated Management System for Voice of Customers (“VOC”) and NTS Customer Satisfaction Center (“NTS CSC”)
The NTS announced that it has established the integrated management system for VOC (“VOC System”) and NTS CSC on July 1, 2008 in order to systematically deal with the difficulties or dissatisfaction of taxpayers, and manage and maintain them in a database.
When taxpayers make complaints regarding their difficulties or dissatisfaction by telephone or internet or to tax officers in any district tax offices, the difficulties or dissatisfaction are filed and managed in the VOC System. Furthermore, the settlement process and the result of the complaints should be notified to the taxpayer by cellular phone text message and email. The NTS expects to use this System as a device for improvement of tax administration by systematically managing various types of difficulties of taxpayers.
Recent Tax Rulings and Cases
Loan for housing rental deposit to employees ( Jaebubin-166, 2008.05.28)
According to the existing NTS rulings (Seomyun2team-269, 2008.02.12, etc.), when a company gives a loan for housing rental deposit to their employees with no interest or at a low interest rate instead of providing a company housing, the deemed interest amount of the loan should be calculated and treated as taxable income to the company and earned income to the employees by applying the anti-avoidance rule under the Corporate Income Tax Law (“CITL”).
Contrary to this, according to the Supreme Court Case (Daebub2004du7993, 2006.05.11), extension of a loan for the housing rental deposit should be seen the same as providing the company housing to their employees in substance and therefore the anti-avoidance rule under the CITL should not be applied. In line with the Supreme Court decision, this ruling by MOSF made it clear that the deemed interest amount should not be taxed for both the company and the employees when, under the internal policy, the company extended the loan for housing rental deposit to their employees assigned to work in the place where the company housing has not been arranged.
Revenue recognition of banks in relation to the balance of checking accounts ( Kooksim 2007seo1205, 2008.06.11)
Banks generally recognize income for deposits that have not been deposited or withdrawn for the past 5 years by depositors, since the depositor’s right to claim the deposit expires after 5 years from the last deposit or withdrawal date. However, in the case of a checking account which is opened for the issuance and settlement of checks or notes, the initial date of expiration should not be the last deposit or withdrawal date, rather it should be the date when depositors cancelled the contract for the checking account.
As such, the balance amount of checking accounts without cancellation of the contract will not be recognized as taxable income to banks, even if there has been no transaction for deposit or withdrawal for the past 5 years.
Considerations for the use of unregistered patents ( Jaekukjo-66, 2008.05.16)
In case where a Korean company (“AA”) pays consideration to an US company (“BB”) for the use of an US patent not registered in Korea, the consideration may not fall under the royalties sourced in Korea as set forth under Article 6 [Source of Income] of the Korea-US tax treaty.
However, if knowledge, know-how or technology in relation to the patent is provided by BB and is actually used by AA in Korea, the consideration for the use of such knowledge, knowhow or technology will constitute Korean-sourced royalty income subject to a withholding tax at 16.5% in Korea.