Korean Tax Newsletter (June, 2014)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
NTS holds meeting with executives of foreign invested companies in Korea
On May 29, 2014, the National Tax Service (“NTS”) held a meeting with executives of foreign invested companies in Korea. In the meeting, NTS and executives discussed regarding difficulties of foreign invested companies in keeping up with tax administration. NTS recommended that the Horizontal Compliance Program and the Advance Pricing Agreement (“APA”) be used to reduce uncertainty of tax matters in Korea.
NTS also indicated that they will reduce the number of tax audits and shorten the tax audit period for both domestic and foreign companies. NTS mentioned that it is planning to organize a business committee with foreign invested companies. They will meet regularly to gather information on the concerned difficulties and recommendations, and plans to reflect them in the national tax administration policy.
Announcement of advance notice for the proposed revision of PD-FIPL for Regional HQ and R&D center
On June 12, 2014, the Ministry of Trade, Industry and Energy (“MOTIE”) announced an advance notice for the proposed revision of Presidential Decree (“PD”) on Foreign Investment Promotion Law (“FIPL”) aiming to provide detailed criteria for Regional Headquarters of Global Company (“Regional HQ”) and Research and Development center (“R&D center”) of a foreign invested company. This is to attract foreign multinational companies to relocate their headquarters to Korea and provide customized support for foreign invested R&D centers. This proposed revision was introduced earlier in our January 2014 Korean Tax Newsletter.
The requirements for application on Regional HQ and R&D center under the proposed revision of PD-FIPL are as follows:
- Global company, a parent company of Regional HQ, approved by Foreign Investment Committee, or with past five-years average revenues exceeding KRW 3 trillion;
- Regional HQ engages in controlling activities over at least two overseas companies;
- Total number of regular employees at the Regional HQ is greater than 10; and
- Global company holds, directly or indirectly, 50% or more shares of the Regional HQ.
- The R&D center has five employees or more with either master’s degree or bachelor’s degree and with a minimum of 3 years in R&D experiences;
- Investment into R&D facilities is at least KRW 100 million or more; and
- Foreigner holds at least 30% shares of the foreign company.
Korea Tax News
Beneficial Owner of deemed dividend income resulting from TP adjustment (Josim2013Seo1175, 2014.05.23)
The Tax Tribunal (“TT”) issued its decision on beneficial owner in relation to the deemed dividend income resulting from the TP adjustment through a secondary adjustment.
On this case, the tax authorities performed a tax audit on previously filed CIT returns and made TP adjustments resulting in deemed dividends to a foreign related party (A) for the respective periods through the secondary adjustment. The taxpayer, however, argued that (A) should not be treated as a beneficial owner as (A) takes roles of only managing and supporting activities without assuming any risks from the business. Based on substance-over-form principle, the taxpayer asserted that (A) is a mere conduit company and the beneficial owner should be its controlling company (B) which ultimately sets the terms and conditions of major agreements/transactions and assume business risks.
However, the tax authorities asserted that (A) should be the beneficial owner of deemed dividend income based on the fact that (A) was incorporated for the purpose of performing transactions, and undertake managing and supporting activities, and (A), in practice, carries out such duties. As such, (A) is not considered to have been set up as a conduit company for tax avoidance purposes.
Considering these facts, the TT upheld the tax authority’s decision that (A) should be regarded as the beneficial owner of deemed dividend income resulting from TP adjustment.
Determination of sales price for share exchange transaction (Bubgyububin2014-72, 2014.03.18)
The NTS issued a tax ruling on determination of sales price in the share exchange transaction. Under the facts in the ruling, company (A) and (B) which are related parties made an agreement that they would exchange their holding of unlisted shares [c] and [d], and make an additional cash settlement for the difference between share values of [c] and [d]. The values of share [c] and [d] were determined with the DCF valuation method and the difference between share values [c] and [d] was paid in cash.
According to this ruling, in case where the company (A) receives additional cash from the company (B) for its exchange of unlisted shares with another unlisted shares, the sales price to be recognized for tax purposes by the company (A) should be determined at the sum of the fair market value of the shares which are newly acquired and the cash amount to be received.