Korean Tax Newsletter

News from the tax authorities

◉ Tax Seminar for SMC’s foreign investment

The National Tax Service (NTS) held “on-site tax seminars for small and medium-sized companies (SMCs) expanding overseas.”

The NTS’s Overseas Market Development Tax Support Team consists of 25 officials from the headquarters and regional offices with extensive knowledge and practical experience in international taxation and overseas investment. Their primary responsibilities include:

(i) Organizing tax seminars for overseas-entering enterprises
(ii) Publishing tax guidance materials
(iii) Collecting and resolving difficulties faced by overseas investors
(iv) Providing consultation on tax issues arising throughout the entire business lifecycle—from establishment to operation and liquidation—including transactions with overseas subsidiaries

Main Seminar Topics - The key topics covered in the seminars are as follows:
    ▪ Overview of tax issues enterprises expanding overseas
    ▪ Methods of overseas direct investment and related tax considerations
    ▪ Submission of various reports and documentation related to overseas

investment
    ▪ Foreign financial account reporting system
    ▪ Foreign tax credit and dividend exemption schemes
    ▪ Tax issues arising upon liquidation of foreign subsidiaries
    ▪ Arm’s length pricing for transactions with overseas related parties
    ▪ Various tax support measures related to overseas investment

◉ Tax Audit on “Super Cars”  

To prevent irregular tax avoidance practices involving high-value corporate vehicles, the government has implemented institutional measures since 2016, including mandatory subscription to dedicated insurance and preparation of vehicle operation logs. Furthermore, beginning in 2024, corporate vehicles valued at KRW 80 million or more are required to carry “light green license plates.” Despite these measures, such activities continue to increase.
Accordingly, the NTS conducted an in-depth analysis of the private use of corporate vehicles and, in the process, identified the following additional types of tax evasion by corporations.

① Luxurious and extravagant personal consumption by controlling shareholders and their families using corporate funds

② Outflow of corporate funds through irregular accounting treatment or disguised transactions

③ Suspected improper gifting to the children of controlling shareholders

    ▪ The 19 corporations selected for investigation collectively owned a total of 90 high-value vehicles, valued at approximately KRW 30 billion; in addition, total amount of suspected tax evasion is estimated at approximately KRW 300 billion
    ▪ The NTS has not only focused on the issue of private use of corporate-owned high-value vehicles, but also on malicious tax evasion by corporations that have avoided paying proper taxes through various irregular or abusive schemes.

In addition to scrutinizing improper and illegal corporate practices, the NTS plans to conduct thorough verification of the process of wealth accumulation by controlling shareholders and their families; and of related companies suspected of involvement in tax evasion

To this end, the NTS will mobilize all available investigative measures, including temporary seizure and custody, financial account tracking, and digital forensic techniques (including document analysis). The objective is to ensure the imposition of appropriate taxes.

Furthermore, where deliberate tax evasion is identified during the investigation - such as use of borrowed-name accounts to underreport sales or divert corporate funds; or fabrication or manipulation of supporting documentation - the NTS will respond rigorously, including referral for criminal prosecution under the Punishment of Tax Evaders Act.

Recent tax rulings and cases

1. Deductibility of Acquisition Cost of Shares in a Subsidiary Absorbed by the Parent Company through a Merger without Capital Increase (JoShim 2024Bu4501, March 4, 2026)

◉ Tax Tribunal response

In cases where the merging corporation held shares in the merged (absorbed) corporation prior to the merger and subsequently extinguished all such shares in the course of the merger, it is reasonable to view any gain or loss arising from such extinguishment as a capital transaction included in merger gains or losses (Seoul High Court Decision, February 3, 2012, 2010Nu43466, to the same effect).

In the present case, the merger without capital increase between the claimant corporation (parent company) and the merged entity (subsidiary) appears, in substance, to be equivalent to a capital transaction where new shares (or treasury shares) are issued upon the merger, held, and subsequently extinguished.

In addition, Article 17 of the Corporate Tax Act provides that matters involving changes in capital resulting from a merger shall be treated as capital transactions.

Considering the above, even though the shares of the merged subsidiary were extinguished without being replaced by any other assets due to the parent company absorbing the subsidiary at a merger ratio of 1:0 without issuing new shares, such transaction constitutes a capital transaction. Accordingly, the acquisition cost of the shares in the merged subsidiary shall not be deductible as a loss for tax purposes.

2. Whether Employee Discount Benefits Are Included in the VAT Tax Base (Ministry of Economy and Finance, VAT Division-405)

◉ Ruling Response

Where a domestic corporation sells or provides goods or services that it produces or supplies to all officers and employees at a price lower than the fair market value, in accordance with uniformly applicable standards, the difference between the selling price and the fair market value shall be treated as a sales discount.

Accordingly, such amount is regarded as deductible from the VAT taxable base (supply value) and shall not be included in the VAT tax base.

However, if it is subject to the deemed supply of goods or the anti-avoidance rule (which requires factual judgement), the FMV would be the VAT base.

3. Timing of Dividend Income Recognition and Applicability of Withholding Tax Special Provisions Where Income Distributed from a Private Collective Investment Vehicle Is Not Further Distributed by a New Technology Business Investment Association (Ministry of Economy and Finance, Financial Tax Division-417, May 13, 2026)

◉ Ruling request

Question 1

Where a new technology business investment association applies Article 14(5) of the Restriction of Special Taxation Act and does not distribute income to its partners, the timing of dividend income recognition for the partners is at issue:

(Option 1): At the time the investment association makes a distribution to the partners

(i.e., withholding timing = income recognition timing)

(Option 2): At the time the income is attributed to the investment association (pass-through entity)

(i.e., withholding timing ≠ income recognition timing)

Question 2

Where a partnership (PEF) satisfies the requirements of a qualified collective investment vehicle, the issue is whether income distributed from the partnership to a passive partner (new technology investment association) constitutes dividend income under Article 17(1)5 of the Income Tax Act, thereby qualifying for the application of the withholding tax special provisions under Article 14(5) of the Restriction of Special Taxation Act:

(Option 1): Not considered income derived from a collective investment vehicle
⇒ Withholding tax shall be imposed by the partnership

(Option 2): Considered income derived from a collective investment vehicle
⇒ Article 14(5) of the Restriction of Special Taxation Act shall apply

◉ Ruling request

In relation to Question 1, the timing of recognition of dividend income subject to the special provisions under Article 14(5) of the Restriction of Special Taxation Act shall be determined in accordance with Article 46 of the Enforcement Decree of the Income Tax Act, regardless of the timing of withholding (Option 2).

In relation to Question 2, the special provisions under Article 14(5) of the Restriction of Special Taxation Act may also apply to income distributed to a passive partner from a partnership subject to the partnership taxation regime under Article 100-15 of the same Act (Option 2).

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