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Korean Tax Newsletter (April, 2007)


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Revisions to Tax Legislations

Revisions to Ministerial Decrees

The Ministry of Finance and Economy ("MOFE") announced revisions to the Ministerial Decrees of tax legislations on March 30, 2007 in line with revisions to the tax laws and Presidential Decrees we covered previously. The following are revisions to the Ministerial Decrees of Corporate Income Tax Law ("CITL") and Tax Incentive Limitation Law ("TILL").

  • Revision to the Ministerial Decree of CITL
    • Formula for the weighted-average borrowing interest rate
      If a company makes a loan to a related party, the weighted-average borrowing interest rate instead of the previous statutory interest rate, should be newly used as the imputed interest rate under the anti-avoidance rule of the CITL. The formula for the calculation of the weighted-average borrowing interest rate under the Ministerial Decree of CITL is as follows:
      The weighted-average borrowing interest rate =
      Sum of [each borrowing balance as at when a company makes a
      related party loan
      × interest rate of each borrowing as at time of borrowing]
       
      Sum of each borrowing balance as at when a company makes a
      related party loan

      calculating the above rate, the borrowings from related parties are excluded.

    • Scope of capital lease
      As previously mentioned in February Newsletter, if a lease meets the conditions provided in the CITL, it can be regarded as a capital lease even if the asset is not leased from a leasing company. Should one of the below conditions be met, the lease transaction should be classified as a capital lease.

      ⅰ) The lessor transfers the ownership of the lease asset to the lessee by or before the end of the lease term free of charge or at a pre-arranged price;
      ⅱ) The lessee has the option to purchase the asset at a price less than 10% of acquisition cost of the lease assets as of the lease execution date or to renew the lease agreement for an amount less than 10% of acquisition cost of lease asset;
      ⅲ) The lease term is 75% or more of the standard useful life of the lease asset prescribed by the CITL;
      ⅳ) At the time of executing the lease, the present value of the minimum lease payments calculated under the Korean GAAP is 90% or more of the book value of the lease asset; or,
      ⅴ) The lease asset is of such a specialized nature that the lessee can only use it for its own special purpose, and not feasible for the lease asset to be used for another purpose as it would incur a significant amount of expenses, etc.

  • Revision to the Ministerial Decree of TILL
    • Extension of scope for equipment qualifying for Temporary Investment Tax Credits("TITC")
      With the revision, communication service providers are also able to claim TITC on a number of wireless equipments that are acquired to be leased, consigned, or otherwise used with other parties.

 

Tax Treaty with the Bolivarial Republic of Venezuela

The tax treaty between Korea and the Bolivarial Republic of Venezuela, signed on June 26, 2006, will apply to the payment of income made on or after January 1, 2008. The main contents of the convention are summarized below:

  • Withholding tax rates (including resident surtax) for passive income:
    - Dividend: 5.5% or 11%
    - Interest: 5.5% or 11%
    - Royalty: 5.5% or 11%

  • Capital gains:
    - Gains derived by a resident of Venezuela from alienation of immovable property situated in Korea may be taxed in Korea, and vice versa.
    - Gains from the alienation of shares or other rights of the capital stock of a company the property of which consists directly of indirectly principally of immovable property situated in Korea may be taxed in Korea, and vice versa.
    - Gains from the alienation of shares that represent a participation of more than 20 per cent of the stock of a company which is a resident of Korea may be taxed in Korea, and vice versa.

 


Developments at Tax Authorities

Application for Early Settlement of Tax Assessment Notice

On March 27, 2007, the National Tax Service ("NTS") announced a new introduction of the application system for Early Settlement of Tax Assessment Notice, which will be effective from April 2, 2007.

Should the tax auditor assess tax to a taxpayer as a result of a tax audit, a Pre-Assessment Notice is issued following the closure of the audit and the taxpayer will have 30 days to request for the Review of Adequacy of tax Imposition ("RATI"). currently, the taxpayer can receive the Tax Assessment Notice only after the passage of the 30 day period, even if the taxpayer chooses not to request for a RATI, which can result in additional under-payment penalties accuing at 10.95% per annum.

Under the newly introduced system, taxpayers can apply for an early settlement of the Tax Assessment Notice by submitting an application form so that the Tax Assessment Notice can be issued prior to the 30 days' waiting period.



Recent Tax Rulings and Cases

Interest income from foreign currency denominated bond issued by a non-Korean resident ( Seomyun2team-415, 2007.03.14)
Where a non-resident with no Permanent Establishment (PE) in Korea purchases foreign currency denominated bonds issued by other non-residents without PEs in Korea, interest income derived from the bonds would not be considered as Korean source interest income under CITL even if the bonds were issued in Korea.


Indirect foreign tax credit for dividend received from a Chinese subsidiary ( Seomyun2team-393, 2007.03.12)
From January 1, 2007, a domestic company who wholly owns a Chinese subsidiary is entitled to claim indirect foreign tax credits for dividends from the Chinese subsidiary in accordance with the Article (4) of the 2nd Protocol between Korea and China.

 

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