Real Estate Securitizations
Other Changes to Tax Laws
Recent changes to Korean tax laws impact significantly on asset-backed securitization (ABS) companies and transactions. This updates summarizes the relevant changes, which took effect on January 1 2002.
Many ABS transactions involve the securitization of real estate. Where an ABS company purchases real estate with the intention of securitizing it, the potential tax implications regarding real estate dispositions must be noted.
Before January 1 2002, gains from the disposition of real estate were subject to a special capital gains surtax of 16.5% (including a resident surtax). If an ABS company acquired real estate in a certain manner and disposed of it within five years, it received a 50% reduction of the special capital gains surtax.
The surtax was abolished on January 1 2002 and although the abolition should reduce an ABS company's tax burden, an additional corporate income tax may apply. In addition to standard corporate income tax, an 11% corporate income tax (including a resident surtax) will be imposed on capital gains derived from a real estate disposition.
The tax is designed to discourage speculative investment in real estate located in areas where the average land-price inflation rate for the quarter immediately preceding that in which the real estate is disposed of is (i) at least 3% higher than the rate for the previous quarter; or (ii) at least 10% higher than the rate for the same quarter in the previous year, where the area is a ‘metropolitan area’ under the Tax Benefits Limitation Law (or where urban development is planned or underway pursuant to the Restitution of Development Gains Act) and is subject to a decree of the Ministry of Finance and Economy because the area’s land price has increased (or is likely to increase) dramatically.
The Ministry of Finance and Economy has not yet issued a decree prescribing the areas to which the additional corporate income tax will apply.
Corporate income tax
Corporate income tax rates are reduced by 1% to 15% for taxable incomes of up to W100 million and by 1% to 27% for taxable incomes of more than W100 million. Consequently, the effective corporate income tax rates (including resident surtax rates) are now 16.5% and 29.7% respectively.
Many foreign investors establish ABS companies and purchase bonds issued by them in Korea. Certain changes (effective from July 1 2002) may affect the taxes imposed on payments made by ABS companies to foreign shareholders or foreign bond purchasers.
A foreign company wishing to exempt itself from withholding tax on a payment from a Korean source must submit a request (through the payer) to the tax office which has jurisdiction over the payer's main office. Such requests must be submitted before the date on which payment is due.
A Korean company making a payment to a foreign individual or entity must submit a report regarding the payment to the tax office which has jurisdiction over the Korean company's main office. This requirement replaces the existing tax clearance certification system. Reports must be submitted every six months, although the requirement does not apply if a payment made by a Korean company to a foreign company is exempt from withholding tax under a double tax treaty.
For further information on this topic please contact Catherine Eun-gyoung Shin at Woo Yun Kang Jeong & Han by telephone (+82 2528 5200) or by fax (+82 2528 5228) or by email ([email protected]).