Advance Pricing Agreement
Foreign Invested Companies
Where a holding company defined by the Anti-Monopoly and Fair Trade Act receives dividends from any of its subsidiaries, such dividends may be excluded from the taxable income of the holding company (Corporate Income Tax Act, Article 18(2)).
The amount of the exclusion varies depending on the amount of the holding company's shareholding in the relevant subsidiary company. The Ministry of Finance and Economy has proposed an adjustment of the threshold requirements, summarized in the following table.
|Status of subsidiary||Percentage of holding company's shareholding in subsidiary||Rate of exclusion from taxable income|
|Unlisted||More than 80% and less than 100%||90%|
|Unlisted||50% to 80%||60%|
|Listed on Korea Stock Exchange/KOSDAQ||More than 40%||90%|
|Listed on Korea Stock Exchange/KOSDAQ||30% to 40%||60%|
Currently, dividends received by a general domestic corporation are subject to double taxation, unless the corporation is a holding company. The ministry has proposed a new statutory provision that permits the adjustment of double taxation on the dividend income of general domestic corporations. The following table summarizes the proposed statutory provisions.
|Status of subsidiary||Percentage of domestic corporation's shareholding in subsidiary||Rate of exclusion from taxable income|
|Listed on Korea Stock Exchange/KOSDAQ||More than 30%||50%|
|Listed on Korea Stock Exchange/KOSDAQ||30% or less||30%|
|Unlisted||More than 50%||50%|
|Unlisted||50% or less||30%|
The proposed adjustment does not apply to the following:
- dividends distributed between the affiliates of a large corporate group;
- dividends on shares held for less than three months; and
- dividends from a 'paper company' such as a mutual fund.
The ministry has proposed an amendment to Article 6 of the International Tax Coordination Law so that the due date for application of an advance pricing agreement falls on the date of expiration of the initial fiscal year to which the reported arm's-length price applies.
The ministry has also proposed that the maximum period subject to the agreement be amended from three years, to a period designated by the applicant. Currently, the arm's-length price under the agreement cannot be applied retroactively and the proposed amendment would allow this.
Article 121-2 of the Tax Benefit Limitation Law provides foreign invested companies with various tax exemptions. Application for such exemptions should be made to the relevant authorities on or before the date of expiration of the fiscal year in which the business of the relevant foreign invested company commenced.
The ministry has proposed to amend Article 121-2 so that exemptions for applications made after the expiration date will be permitted, provided that the relevant requirements are satisfied.
For the purposes of facilitating corporate restructuring, the ministry has proposed a year's extension of various tax exemptions granted to the restructuring companies. The exemptions are due to expire at the end of 2000.
The claim for correction should be made within one year from the due date for the relevant tax return. The ministry has proposed an extension to two years from the due date for the relevant tax return.
Also, under the proposed amendment to Article 51-2 of the Corporate Income Tax Act, where a CRV distributes 90% or more of its distributable net income, the amount of the dividends distributed may be deducted from the taxable income of the CRV.
For further information on this topic please contact Hee Ju Kim at Woo, Yun, Kang, Jeong & Han by telephone (+82 2 528 5200) or by fax (+82 2 528 5200) or by e-mail ([email protected]).
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