Acquisitions (from the buyer’s perspective)

Tax treatment of different acquisitions

What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?

Investors may purchase a company by way of an asset purchase or a stock purchase. Each method has its own tax advantages and disadvantages.

Acquisition of stock in a company

Advantages: A buyer may benefit from the tax losses of the target company. Acquisition tax may not be levied on a share acquisition if the buyers and its affiliates collectively acquire, in aggregate, no more than 50 per cent of the shares in the target company.

Disadvantages: No deductions (for example, depreciation, amortisation) are available for the purchase price until the disposal of the shares. If the buyer and its affiliates collectively acquire, in aggregate, more than 50 per cent of the shares in the target company, the buyer will be subject to acquisition tax. The buyer and its affiliates, as a majority shareholder, bear secondary tax liability for the target company when the target company fails to pay tax.

Acquisition of business assets and liabilities

Advantages: The purchase price may be depreciated (or amortised) for tax purposes. Depreciation (or amortisation) can be offset against any taxable gains of the company.

Disadvantages: The buyer may be subject to acquisition tax on purchasing applicable assets. The benefits of any tax losses incurred by the target company remain with the seller. If a corporate buyer acquires non-business related assets, a certain portion of interest paid by the company is categorised as non-deductible expenses.

Step-up in basis

In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?

Assets and liabilities are valued in the course of an asset purchase, which may result in a capital gains tax liability for the seller and affect the depreciable amount for the buyer. Where a comprehensive business is purchased at its fair market value, the acquisition cost of the target business’s assets may be stepped up (or down) to their fair market value. In this case, the buyer needs to apportion the total consideration to the assets acquired.

Goodwill is the excess amount of the consideration paid over the fair value of the net assets transferred. For tax purposes, goodwill can only be recognised if it is traceable to a valuable intangible asset and if an appropriate method has been used to calculate the goodwill. Goodwill can be amortised on a straight-line basis over a period of five years or more within the tax limit to the extent that the amortisation expenses are recognised for accounting purposes.

The depreciation cost of the assets charged in the accounts is deductible for tax purposes within the tax limit, provided it is calculated based on the depreciation method and useful life stipulated for each type of asset under the Corporate Tax Act (CTA). Taxpayers typically choose the straight-line method, declining-balance method or unit of production method to depreciate their assets.

Domicile of acquisition company

Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?

Various tax incentives and benefits are designed to promote foreign direct investment in Korea. Foreign direct investment which meets a set of qualifications may enjoy exemption from or reductions in corporate income tax or business income, dividend income, earned income etc, and customs duties on capital goods as prescribed in the Restriction of Special Taxation Act (RSTA). However, there is no preference for an acquisition company’s jurisdiction law.

Company mergers and share exchanges

Are company mergers or share exchanges common forms of acquisition?

Until now, mergers have been mostly used among Korean companies for corporate restructuring, such as consolidation of affiliates. Mergers involve a cumbersome process required under the Korean Commercial Act (KCA), and usually take six months or so to complete. Under Korean tax laws, if the merger occurs for the purpose of corporate restructuring, the disappearing entity may receive a tax exemption on capital gain taxes on certain of its real estate transferred in the merger.

Tax benefits in issuing stock

Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?

There are no special tax benefits for the acquirer in issuing stock as a consideration rather than cash. However, if the merger conditions meet certain requirements such as the stock price being more than 80 per cent of the merger consideration, the acquirer is entitled to the tax deferred benefit of the merger purchase profit and benefits such as the transfer of the acquired corporation’s carryover deficit, tax reduction and tax credits.

Transaction taxes

Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?

Acquisition of stock in a company Security transaction tax

A securities transaction tax (STT) is imposed on the transfer of stock of a corporation established under the KCA or any special act, or on the transfer of an interest in a partnership, limited partnership or limited liability company established under the KCA. The Korea Securities Depository and financial investment business entities under the Financial Investment Services and Capital Market Act are required to collect tax at the time of a transaction. The tax is computed by multiplying the tax base by the tax rate (0.15 per cent, 0.3 per cent or 0.5 per cent). Where the transfer price is lower than the fair market value in the case of a related-party transaction, the fair market value is used as the tax basis for calculating STT.

Deemed acquisition tax

In the case of a share transfer, acquisition tax is generally not levied. An exception applies where the invested company has certain statute-defined underlying assets (eg, land, buildings, structures, vehicles, certain equipment and various memberships) that are subject to acquisition tax. Where the investor and its affiliates collectively acquire in aggregate more than 50 per cent of the shares in the target company, they are deemed to have indirectly acquired those taxable properties through the share acquisition, so they are subject to deemed acquisition tax.

Acquisition of business assets and liabilities

Stamp tax is levied on the transfer of certain assets listed in the Stamp Tax Act. The rate of stamp tax varies according to the asset acquired. Transfers of real estate are subject to stamp tax ranging from 20,000 to 350,000 Korean won, depending on the acquisition price.

Under the Korean Local Tax Act, a company acquiring land, buildings, vehicles or certain memberships (eg, golf club memberships, condominium memberships or sports complex memberships) is liable for acquisition tax, based on the transfer price, type and location of such taxable assets. In certain cases, the applicable acquisition tax rate is higher than the normal rate.

VAT on the asset transfer depends on whether the transfer is classified as an individual asset transfer or comprehensive business transfer under Korean tax law. In the case of an individual asset transfer, a seller should withhold VAT at 10 per cent from a buyer and remit the collected VAT to the relevant tax authority. A comprehensive business transfer is exempt from VAT.

Net operating losses, other tax attributes and insolvency proceedings

Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?

Although there is no provision that generally imposes limitations after a change of control, there are provisions applicable to specific types of deferred tax assets. Preservation of net operating losses, tax credits and deferred tax assets is rendered possible by the CTA, only in the case of qualified acquisition or acquisition with or among wholly owned subsidiaries to facilitate restructuring (reorganisation) of bankrupt or insolvent companies, as preservation of net operating losses, tax credits and deferred tax assets of target groups at the time of acquisition may result in an aggravated financial statement of the acquiring company and in the loss of tax revenue. Preservation of net operating losses, tax credits and deferred tax assets is not allowed in the case of non-qualified acquisitions. However, preservation of relevant reservations only is allowed in the case of preserving retirement and severance benefits and allowance for bad debts.

Interest relief

Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?

The buyer can use debt or equity to fund its investment. The dividend is not tax-deductible, but interest can be deducted from taxable income. Expenses incurred in the course of borrowing, such as guarantee fees and bank fees, can also be deducted for tax purposes. Therefore, the buyer often prefers to use debt.

In general, interest expenses incurred in connection with a trade or business are deductible for Korean corporate tax purposes. However, certain interest expenses are not deductible, including (among others):

  • interest on debt incurred specifically for use in construction projects or for the purchase of fixed assets;
  • interest on private loans where the source is unknown;
  • interest of the recipient that cannot be identified;
  • interest on debt used for the purchase of non-business-related assets; or
  • interest paid to the foreign controlling shareholder that exceeds the limit under the thin capitalisation rules.

Under Korea’s thin capitalisation rules, where a Korean company borrows from its foreign controlling shareholder an amount in excess of two times the equity from the foreign controlled shareholder (six times in the case of a financial institution), interest on the excess portion of the borrowing is not deductible in computing taxable income. Money borrowed from a foreign controlling shareholder includes amounts borrowed from an unrelated third party based on guarantees provided by a foreign controlling shareholder. The non-deductible amount of interest is treated as a deemed dividend or other outflow of income, and withholding tax (WHT) may apply.

Protections for acquisitions

What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?

Acquisition of stock in a companyTax indemnities and warranties

In a share transfer, the buyer takes over all assets and related liabilities together with contingent assets and liabilities. Therefore, the buyer normally requires more extensive indemnities and warranties than in the case of an asset transfer.

Tax losses

In principle, on a change of ownership, the tax losses of a Korean company transfer along with the company.

Crystallisation of tax charges

Since the purchase in a share transfer should assume the historical tax liability of the target company for the previous periods within the statute of limitations in Korea, it is usual for the purchaser to obtain an appropriate indemnity from the seller.

Acquisition of business assets and liabilities

Tax losses or historical tax liabilities are not transferred with the assets in an asset acquisition. In the case of an individual asset transfer, the buyer does not incur a secondary tax liability for any unpaid tax or tax liabilities of the seller that relate to the transferred assets on the official transfer date. However, in a comprehensive business transfer, the buyer assumes a secondary tax liability on any already fixed and determinable tax liabilities of the seller on the official transfer date.

Tax indemnity insurance

In Korea, tax indemnity insurance is not common.

Post-acquisition planning


What post-acquisition restructuring, if any, is typically carried out and why?

With respect to share acquisitions, there is no change in the company’s relations with its employees. For mergers, the surviving corporation assumes all of the merger company’s labour liabilities by the KCA and the Labour Standards Act (LSA).

In an asset transfer, the buyer will automatically assume the historical labour liabilities if the transaction is deemed to be a ‘business transfer’ under the standards provided in the LSA. If the transaction is deemed to be a business transfer, the buyer will be bound by the terms of existing employment agreements and other commitments by the LSA (unless the employees agree otherwise) for the employees being transferred to the purchaser. This may result in the transfer of severance obligations as well as employee liabilities arising from claims based on an existing employment relationship with the seller.

Acquisitions of companies under insolvency proceedings will be subject to the relevant bankruptcy laws and supervised by the court and court-appointed receiver. The acquisition transaction will also require approval by certain groups of creditors unless the transaction is permitted under the terms of an already approved plan.

For certain insolvent companies, a separate non-court workout procedure driven by creditor financial institutions is available under Korean law. In such workout proceedings, a committee comprising certain of the creditors performs the pivotal role in organising and implementing such procedures.


Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

Corporate income tax (CIT) relief

With respect to a division which meets the following requirements (that is, a qualified division), capital gains or losses on a transfer may be deemed nil where a domestic corporation that has continuously operated a business for at least five years as on the registration date of the division is divided upon meeting the following requirements:

  • the division involves an independent business category that can be operated after the division;
  • the assets and liabilities of the divided business category are comprehensively succeeded;
  • where the total costs received by the stockholders of a divided corporation are in stocks, and such stocks are allocated in proportion to the stocks held by each stockholder of the divided corporation, and the controlling stockholders of the divided corporation hold such stocks until the end date of the business year in which the division is registered; and
  • where a corporation established through division continues to operate the business succeeded to from the divided corporation until the last day of the business year in which the registration date of the division falls.
STT exemption

No STT is levied where stocks are transferred for the purposes of a qualified division.

Acquisition tax exemption

No acquisition tax is levied on property acquired on or before 31 December 2018 by the qualified division.

Migration of residence

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

It is possible for Korean companies to migrate to or continue their existence in other jurisdictions. There are no specific taxes in Korea relating exclusively to the migration of a company. To migrate into another jurisdiction, a Korean company must approve and file the respective corporate authorisations with the Korean Public Registry. If the migrating company ceases its operations in Korea, it will need to wind up its local business and cancel its taxpayer registration. Within 25 days of the date when the company ended all business operations, the company must file a final balance and income tax return, notify the tax authority and pay income tax for any remaining or leftover income. The company must pay the corresponding income tax due at closing.

Interest and dividend payments

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Dividends paid to a non-resident are subject to WHT of 22 per cent unless the WHT is exempted or the WHT rate is reduced by a tax treaty between Korea and the other contracting state.

Interest paid to a non-resident is subject to WHT of 22 per cent (or 15.4 per cent for interest on bonds issued by the state, local government and a domestic corporation), unless the WHT is exempted or the WHT rate is reduced by a tax treaty between Korea and the other contracting state.

Tax-efficient extraction of profits

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

It is common to extract the profit as service fees or royalties, which are not subject to WHT, if some service is actually rendered by the non-resident corporation. Fundamentally, the tax-efficient means for extracting profits from Korea vary from case to case.

Disposals (from the seller’s perspective)


How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?

Parties typically negotiate and enter into an agreement for acquisitions and disposals of shares, businesses or assets of privately owned companies. The process of acquiring a company varies depending on the nature of the deal participants and the complexity of the deal but, in the case of competitive bidding, the parties typically proceed in the following process:

  • execute a confidentiality agreement, issue an information memorandum and process letter;
  • conduct a preliminary bidding process and finalise the shortlist for preliminary bidders;
  • conduct due diligence;
  • circulate the seller’s initial draft of the definitive agreement;
  • conduct a formal bidding process (submit a bidding application and the buyer’s mark up to the initial draft of the definitive agreement);
  • select the preferred bidder;
  • conduct confirmatory due diligence (as applicable);
  • negotiate and execute the definitive agreement;
  • prepare closing deliverables and satisfy closing conditions; and
  • closing.

In addition, while the duration of the acquisition process may vary depending on the nature of the deal and the dynamics among the transaction parties, it could take anywhere from a few months to half a year or longer.

Disposals of stock

Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real-property, energy and natural-resource companies?

Generally, non-residents of Korea are liable to capital gains tax on Korean securities at the lower of the following rates:

  • 10 per cent of the gross proceeds realised from the sale (11 per cent, including the 10 per cent surtax); or
  • 20 per cent of the net capital gain (22 per cent, including the 10 per cent surtax).

Residents of countries that have concluded a double taxation agreement (DTA) with Korea, or countries with reciprocity rules, will, based on their investment registration card, be either exempted or taxed, depending on the DTA. And the Korean government offers investment incentives (for example, tax exemptions and tax deductions) to companies engaged in certain high-tech activities or located in foreign investment zones, free economic zones, free trade zones and special industrial complexes. Many of these incentives are found in the Foreign Investment Promotion Act and RSTA.

Avoiding and deferring tax

If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?

CIT relief

If a company transfers all of its assets to another company in exchange for shares or interests in the other company and dissolves itself, the seller may avoid paying CIT on capital gains by treating the transfer price of these assets as the book value of these assets.

No acquisition tax is levied where:

  • property is acquired no later than 31 December 2018 by a qualified merger;
  • property is acquired in the course of a qualifying investment in kind;
  • a corporation becomes a holding company under the prescribed fair trade laws. Acquisition tax may be reduced by 75 per cent on real estate acquired by any of the following enterprises within four years from the date of its incorporation, provided that the acquisition is made in order to conduct relevant business;
  • a small or medium-sized enterprise incorporated no later than 31 December 2020 in an area other than an over-concentration limitation zone of the Seoul Metropolitan area (small or medium-sized start-up enterprise); and
  • an enterprise verified no later than 31 December 2020 as a venture business within three years of the date of incorporation (small or medium-sized start-up venture business).

Update and trends

Key developments of the past year

Are there any emerging trends or hot topics in the law of tax on inbound investment?

Key developments of the past year18 Are there any emerging trends or hot topics in the law of tax on inbound investment?

Korea had operated a reduction or exemption from corporate tax and other related taxes on a foreign capital company to promote inbound investment by foreign investors. The EU decided this system may cause a harmful preferential tax regime in light of fair taxation, and included Korea in its list of non-cooperative jurisdictions. This made the Korean government abolish the reduction or exemption from corporate tax, etc, on a foreign-capital-invested company by revising the Restriction of Special Taxation Act. The revised act became effective on 1 January 2019. However, foreign-capital-invested companies that applied the reduction or exemption of such taxes by the end of 2018 are still eligible for a reduction or exemption from corporate tax, etc, subject to the previous act.