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Korean Tax Newsletter (May, 2011)


Proposed Revisions to Tax Laws

On 12 May 2011, the Ministry of Strategy and Finance (“MOSF”) announced a proposal to amend several laws, including the Tax Incentive Limitation Law (“TILL”) and the Inheritance and Gift Tax Law (“IGTL”). The proposed changes are expected to be promulgated in June.

Proposed revisions to TILL

R&D tax credit for new growth engine industry and original source technology

R&D expenditure for the new growth engine industry and original source technology is eligible for an R&D tax credit equal to 20% (30% for small and medium-sized companies) of the R&D expense. The proposed changes to the TILL would expand the scope of eligible R&D expenditure to include R&D expense incurred on wind and geothermal energy technology, 3D or 4D technology, smart vehicles, next generation LCD development technology and other IT convergence technology. The changes would apply to R&D expenditure incurred on and after the fiscal year in which the change becomes effective.

Proposed revisions to IGTL

Valuation method on unlisted shares

Share valuations under the IGTL are based on the weighted average of the net tax income value and the net tax asset value of the shares. Under the current IGTL, where a capital increase or capital reduction is made without consideration, the change in the number of outstanding shares as a result of the increase or reduction is considered to reflect the dilution effect of the shares when calculating the net tax income value per share. However, the dilution effect from a capital increase or reduction for consideration is not reflected in the calculation of net tax income value per share.

It is now proposed to treat capital increases or reductions for consideration in the same way as capital increases or reductions without consideration. In addition, the effect of a capital increase or reduction would be reflected in the net tax income value by deducting the cash outflow or adding cash inflow multiplied by the return on equity. This change would apply to valuations made after the effective date of the amendment.

Non-profit corporations subject to tax review

Under current law, a non-profit corporation whose asset amount is below KRW 1 billion can be exempt from certain obligations, such as a tax review by an external tax professionals and public disclosure of documents, including financial statements. It is proposed to amend the law to provide that a non-profit corporation whose aggregate amount of total revenue and value of contributed property exceeds KRW 0.5 billion in a fiscal year will be required to have a tax review and to publicly disclose documents, even though the total asset amount is below KRW 1 billion. The new rule would apply as from the fiscal year in which the amendment is effective.


Recent tax rulings and cases

Exclusion of Luxembourg SICAV and SICAF from treaty benefits (Jaekookjehyupryuk-252, 2011.05.16)

According to article 28 (Exclusion of Certain Companies) of the Korea-Luxembourg tax treaty, the treaty does not apply to holding companies (societies holding) within the meaning of special Luxembourg law, currently the Act (loi) of 31 July 1929 and the Decree (arrete grand-ducal) of 17 December 1938 or any similar law enacted by Luxembourg after the treaty was signed. According to this tax ruling, the tax authoritiy interprets that SICAVs and SICAFs, which are Luxembourg indirect investment companies, cannot claim the reduced withholding tax rates under the treaty based on article 28.

Application of foreign tax credit of PEF (Jaekookjo-128, 2011.04.01)

The Korean tax authorities have ruled that where a private equity fund under the Capital Market and Financial Investment Act elects partnership taxation, the foreign tax credit is applied to each partner of the fund on the portion of the foreign tax paid by the fund allocated based on the profit distribution ratio.

VAT obligation of nonresident (Jaebooga-167, 2011.03.18)

Where a nonresident registers with the Korean “open market” (cyber mall) as a seller, takes orders from Korean customers through that market and delivers the goods directly from overseas to the customer in Korea, the open market does not constitute a place of business of the nonresident for Korean VAT purposes and, therefore, the sales of goods through the open market are not subject to VAT in Korea.

Contacts

Name:
Seung Chan Park
Company:
Deloitte Anjin LLC
Job Title:
Tax, Partner
Phone:
+82 2 6676 2422
Email
separk@deloitte.com
Name:
Young Pil Kim
Company:
Deloitte Anjin LLC
Job Title:
Tax, Director
Phone:
+82 2 6676 2432
Email
youngpkim@deloitte.com
Name:
Young Kyung Koh
Company:
Deloitte Anjin LLC
Job Title:
Tax, Senior Manager
Phone:
+82 2 6676 2346
Email
youkoh@deloitte.com

 

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