Korean Tax Newsletter (November, 2020)

▲ News from the tax authorities 

Proposed taxation of retained income of individual-like corporations

On 29 October 2020, Korea’s Ministry of Economy and Finance (MOEF) proposed an enforcement decree amendment that would adopt taxation of the retained income of individual-like corporations established for the purpose of avoiding income tax on interest and/or rental income (also known as “passive business corporations”).

The proposal would define a passive business corporation as a corporation deriving 50% or more of its income from passive sources such as the disposal of real estate, stocks, bonds, etc. for two consecutive years.

• The corporation’s retained earnings reserved for employment, investment, and R&D expenses within the next two years would be excluded from taxation, and corporations with passive income of less than 50% would not be subject to this rule. 
• Other corporations such as start-ups, SMEs, or any other corporations established and ruled under the separate laws that promote business incentives also would be excluded.
  

The MOEF will continue to consider and collect opinions from business leaders on the proposed enforcement decree amendment.

▲Tax rulings 

1. A corporation investing in another corporation through an in-kind contribution may continue to be eligible for the tax deferral benefit under the relevant qualified restructuring clause in the Korean Corporate Income Tax Law (CITL). (MOEF Bupinsejegwa-1230, 2020.09.21) 

Ruling
A corporation that utilized the tax deferral benefit under the former Korean Tax Incentive Limitation Law (TILL) by recognizing the loss on the reserve relating to its contributed shares in an invested company will be able to apply the relevant qualified restructuring clause in the CITL and continue to benefit from the tax deferral.

2. A taxpayer that unknowingly received misrepresented VAT invoices was determined not to be at fault, due to the fact that it performed normal due diligence and the amount of misrepresentation concerned was less than 1% of total purchases.(Josim2019kwang4339, 2020.09.17)

• Facts and Background
  • The taxpayer is a scrap material wholesaler without its own storage, and purchased materials from a scrapper that delivered the materials directly to the taxpayer. The tax authorities issued a VAT assessment to the taxpayer on the grounds that the tax invoices received from the scrapper differed from the facts and, therefore, were misrepresented.
  • The taxpayer claimed that it performed the normal due diligence to confirm the scrapper’s business, and had no malicious intent to omit or falsely report the transaction, and hence should not be subject to the additional VAT assessed.
• Ruling
  
  • The tax tribunal ruled that the taxpayer did now know that the invoices were misrepresented and should not be penalized for the following reasons:
    
    • The taxpayer visited the scrapper’s business site to confirm its business and its ability to carry out normal business operations. The taxpayer provided proof of the visit (e.g., photos taken during the visit, credit card statements for the site visit expenses, copies of the scrapper’s business registration, business cards, etc);
    • The amount of the purchases from the scrapper were less than 1% of the taxpayer’s total purchases for the fiscal year (FY2014), and hence considerably difficult to fully verify; and
    • The taxpayer fully paid the purchase amounts and the VAT thereof to the scrapper and has not received a refund.
      

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Contacts

For further questions or inquiries, please kindly contact representatives listed below.

Inbound Tax Leader, Scott Oleson, +82 (2) 6676-2012 / scoleson@deloitte.com
Inbound Tax Leader, Hong Seok Han : +82 (2) 6676-2585 / hseok@deloitte.com
M&A Tax Partner , Young Pil Kim : +82 (2) 6676-2432 / youngpkim@deloitte.com
BPS Tax Partner, Park Sung Han, +82 (2) 6676-2521 / sunghpark@deloitte.com
TP Partner, Lee Yong Chan, +82 (2) 6676-2828 / yongclee@deloitte.com
GES Partner, Seo Min Soo, +82 (2) 6676-2590 / mseo@deloitte.com