1. Introduction

In Korea, real estate investors that invest in real estate via certain investment vehicles are granted several tax benefits, including an acquisition tax reduction that is granted to real estate investment vehicles (the "Tax Reduction"). Recently, however, the Korean government is moving towards abolishing the Tax Reduction. If the Tax Reduction is revoked, investors who intend to make investments in real estate via real estate investment vehicles would be directly affected by such revocation.

2. Acquisition Tax Reduction for Real Estate Investment Vehicles under Current System

Various types of real estate investment vehicles are used in Korea, and among those investment vehicles, the Tax Reduction has been granted to (i) real estate funds ("REFs") under the Financial Investment Services and Capital Markets Act, (ii) real estate investment trusts ("REITs") under the Real Estate Investment Company Act, and (iii) companies which meet the requirements set forth in Article 51-2 (1) 9 of the Corporate Tax Act (typically, such companies are called project financing vehicles ("PFVs")). The current Restriction of Special Taxation Act specifies that the aforementioned investment vehicles are given a 30% reduction of the amount of the acquisition tax which is imposed on the acquisition of real estate. Such tax benefit has been regarded as one of major reasons why investors use investment vehicles in making investments in real estate.

The Tax Reduction has been granted for over 10 years in Korea. REITs and REFs have enjoyed the Tax Reduction since 2001, and PFVs have been granted the Tax Reduction since 2004 under the Restriction of Special Taxation Act.

3. Announcement of the Korean Government Regarding Revocation of Tax Reduction

The current Restriction of Special Taxation Act specifies that the Tax Reduction applies to the acquisition of real estate by real estate investment vehicles until December 31, 2014. Granting the Tax Reduction for real estate investment vehicles with this type of deadline sunset clause was commenced in 2004, and the expiration date of the relevant sunset clause has already been extended several times through repeated amendments to the Restriction of Special Taxation Act.

However, on August 7, 2014, the Ministry of Strategy and Finance (the "MOSF") issued a legislative notice regarding partial amendments to the Restriction of Special Taxation Act, providing that there would be no clause specifying extension of the expiration date of the latest sunset clause and that the sunset clause would be deleted through such amendments.

In the event the Tax Reduction is indeed abolished in accordance with the aforementioned legislative notice, such action is likely to discourage real estate investment using investment vehicles and adversely affect the real estate investment market.

However, the Ministry of Security and Public Administration (the government agency in charge of local taxes which include the acquisition tax) issued supportive comments about the revocation of the Tax Reduction on August 17, 2014. In such comments, the Ministry of Security and Public Administration explained the necessity of the revocation of the Tax Reduction due to budget shortfalls for welfare policies, adding that it had already collected opinions from competent governmental agencies such as the Financial Services Commission and the Ministry of Land, Infrastructure and Transport and interested parties in May 2014. In addition, the Ministry of Security and Public Administration stated that concerns over the decrease of real estate investment due to the revocation of the Tax Reduction were exaggerated, given that the market for real estate funds in Korea has increased continuously despite the decrease in the amount of the Tax Reduction from 50% to 30% in 2010.

4. Response from the Market

The legislative notice regarding the proposed amendment eliminating the Tax Reduction has provoked a strong backlash from the real estate investment industry.

Real estate investment industry professionals are concerned that the revocation of the Tax Reduction would further weaken the sluggish real estate investment market due to a potential decrease in the rate of return on real estate investment. Even though the Korean government intends to collect more tax revenue through the revocation of Tax Reduction, industry watchers claim that the weakened real estate investment market would actually lead to a reduction of overall tax revenue, and since 60% of real estate invested through real estate investment vehicles is concentrated in Seoul, local governments other than Seoul would not see any dramatic increase in their tax revenue through the revocation of the Tax Reduction.

It has been reported that Korea Association of Real Estate Investment Trusts has officially requested the MOSF to reconsider the proposed amendment to revoke the Tax Reduction.

5. Future Outlook

The proposed amendment of the Restriction of Special Taxation Act specifying the revocation of the Tax Reduction has been announced by a 'legislative notice'. A legislative notice is given to collect opinions from the Korean public by announcing the contents of amendments to laws prior to submitting the bill to the legislature. The period of the legislative notice for the amendment to the Restriction of Special Taxation Act continues until September 3, 2014, and until such deadline, any person may present his/her opinion to the MOSF regarding the proposed amendment. However, as explained by the MOSF, the Korean government has continued to discuss the revocation plan with interested parties and is not very likely to change its position prior to its submission of the amendment bill to the Korean National Assembly.

We do note that it has not been determined whether or not the legislature (the Korean National Assembly) will indeed adopt the proposed amendment. Therefore, investors are recommended to stay informed of latest updates regarding this issue.

Nevertheless, since there is a strong possibility that the Tax Reduction could be revoked, any investor that intends to invest in real estate in Korea via a real estate investment vehicle is advised to make its investment within 2014 to take advantage of the Tax Reduction.