Korean Tax Newsletter (January, 2016)
Korean Tax Newsletter is a monthly publication of Deloitte Anjin LLC. We hope you will find useful information in this newsletter.
Korea-Macao agreed on exchange of tax information
The Ministry of Strategy and Finance ("MOSF") has made an agreement on exchange of tax information with the tax authority of Macao on January 22, 2016. According to the agreement, a country can request for financial transaction information, ownership information of the company, etc. to the counter-party country, and participate in tax investigation of the counter-party country, if necessary. However, the country which requests for such information should keep the information credential and limit disclosure of the information only to persons who are relevant with levy, collection or appeal decision of the concerned tax. Once the agreement enters into force after the formal signature on the agreement and the ratification procedures by the National Assembly, the Korean tax authority can secure the financial and taxation information of Korean companies and individuals held by Macao tax authority for prevention of potential offshore tax evasions.
Korea-Serbia tax treaty signed
On January 22, 2016, the Korean government signed on the tax treaty between Korea and Serbia. The Ministry of Foreign Affairs plans to proceed with the ratification procedures by the National Assembly and make the tax treaty enter into force. The tax treaty shall enter into force and be effective from the later date on which each party notifies the other party that all necessary domestic procedures for effectuation of the treaty have been complied with.
Proposed revision to the tax treaty between Korea and Turkey
The Ministry of Strategy and Finance ("MOSF”) signed a proposed revision to the tax treaty with Turkey on January 29, 2016 at the treaty revision negotiation meeting held in Turkey. The major proposed revisions can be summarized as the follows:
|Withholding tax rates|
|Dividend||15% (with ownership of at least 25%) / 20%||10% (with ownership of at least 25%) / 15%(*)|
|Interest||15% (in case of bond for a period exceeding 2 years: 10%)||10%|
(*) In case where a branch is liable to pay corporate income tax on business profits sourced in the other country, it would be subject to a branch tax at 7.5% when the business profits after tax is remitted to its head office.
The proposed revision to the tax treaty includes a provision for limitation of benefits which denies a reduced withholding tax rate on dividends, interest or royalties in a tax avoidance purpose transaction and a provision for exchange of information. The treaty will enter into force after the official signing and ratification by the National Assembly are completed.
News from tax authorities
Separable and independent business unit requirement for a qualified tax-free spin-off
Under the current Corporate Income Tax Law (“CITL”), one of the conditions for a qualified tax-free spin-off is that the spun-off business should be a separable and independent business unit. However, in case where the spun-off company carries out real estate rental business or share investment business, it would not be viewed as a separable and independent business unit to be a tax-free spin-off.
The recent tax ruling case (Seomyun Bubin-1755, 2015.10.30) clarifies that in case where a domestic company, which carries out manufacturing business and owns shares of its subsidiary which generate dividend income, splits its manufacturing business into a new spun-off company and the existing company would carry out share investment business (there would be only dividend income) after the spin-off, such spin-off can be still regarded as a qualified tax-free spin-off as long as the spun-off business (which is manufacturing business) is a separable and independent business unit and the spin-off transaction satisfies other conditions under the CITL.
Application of tax treaty benefits for overseas investment vehicle
The MOSF released tax rulings (Jaekukjo-12, 2016.01.11 and Jaekukjo-56, 2015.11.24) on the application of tax treaty benefits to overseas investment vehicle (“OIV”).
Under the case in the tax rulings, a private equity fund incorporated as a Limited Partnership (“LP”) in Cayman Islands (which collects funds from investors, manages funds and distributes the profits) sold its shares in a Korean company to a Belgian company and applied tax treaties on capital gains between Korea and resident countries of each investors. However, the National Tax Service argued that Cayman LP is a beneficial owner, and since Korea does not have a tax treaty with Cayman Islands, therefore, tax treaty benefits such as exemption from capital gains tax in Korea should be denied.
Under those circumstances, the first inquiry in the ruling was whether the Cayman LP is an OIV under the CITL and if so, the second inquiry was whether the relevant tax treaties can apply to investors of the Cayman LP.
The MOSF replied to the first inquiry stating that whether the Cayman LP is an OIV under the CITL or not needs to be determined based on all relevant facts and circumstances. And with regard to the second inquiry, the MOSF replied that even though the Cayman LP is regarded as a foreign company under the CITL, if investors of the Cayman LP are actual beneficial owners of the Korean-source income and the Cayman LP itself is not the actual beneficial owner, investors of the Cayman LP can claim tax treaty benefits based on the relevant tax treaties.
Based on the above ruling, the ultimate investors of a foreign LP may consider taking a look-through approach for the application of tax treaty under the OIV regime. However, a possibility that the Korean tax authority would continue to argue that a foreign LP itself is a beneficial owner, since the above ruling contains a condition that the Cayman LP itself should not be regarded as an actual beneficial owner of Korean-source income.
Recent Tax Rulings and Cases
If you have any questions concerning the items in this month’s newsletter, please contact your tax advisor at Deloitte Anjin LLC or the following tax professionals.