Tax News May 2016
01 5월 2016
Q. In a transaction between the domestic business establishment of a foreign company and the
foreign company’s headquarters, what expenses from guaranteed transactions are excluded from
A. If the Korean branch of a foreign bank transfers credit risk to the overseas headquarters of the
bank through transactions such as risk participation transactions or stand-by L/C transactions,
which are recognized as items excluded from the scope of credit extension in accordance with
the Banking Act and its Enforcement Decree (and other related regulations such as the
Regulations on Supervision of Banking Institutions), the expenses arising from such financial
transactions shall not be considered ‘expenses such as fees arising from guaranteed transactions’
as prescribed by Article 64 (1) 2 of the Enforcement Rule of the Corporate Tax Act.
Source: Ministry of Strategy and Finance (Feb. 23, 2016)
Q.When additional capital increase is made in a business for which tax reduction/exemption has
been granted, doestax reduction/exemption apply for the increased capital without making a
separate application for tax reduction/exemption?
A.1) For a foreign-invested company to receive tax reduction/exemption for the portion of
increased capital, the company should submit an application for tax reduction/exemption to the
Minister of Strategy and Finance in accordance with Articles 121-2 (6) and 121-4 (1) of the
Restriction of Special Taxation Act, unless the company is exempted from application for tax
reduction/exemption pursuant to Article 121-4 (5) of the same Act.
2) Whether a technology for which a foreign-invested company applied for tax
reduction/exemption satisfies the criteria for granting tax reduction/exemption in Article 121-2
(1) 1 of the Restriction of Special Taxation Act and Article 116-2 (2) of the Enforcement Decree
of the same Act shall be determined and notified by the Minister of Strategy and Finance who
received the application for tax reduction/exemption.
3) Where it is difficult to separately account for common gains and losses, such as where
a foreign -invested company made capital increase in a business that is identical to a business
subject to tax reduction/exemption and the two businesses share the same processing line of the
same business establishment, proportional calculation shall apply in accordance with
Article 51-6 of the Enforcement Rule of the Restriction of Special Taxation Act and Article 121-
4-0 (1) of the Basic Guidelines of the Act. However, the relevant facts shall be considered when
determining such matters.
4) In calculating the amount of tax reduction or exemption for a foreign-invested company’s
increased capital, Article 121-4 (4) of the Restriction of Special Taxation Act defines the tax
reduction amount calculation formula for foreign-invested companies that continue using
business-purpose fixed assets of businesses for which tax reduction/exemption has been
expired for the business in which capital increase has been made. Whether or not the formula can
be applied shall be decided based on Article 116-6 (4) of the Enforcement Decree of the same
Source: National Tax Service (Feb. 17, 2016)
Q.Can the civil settlements and legal expenses for an overseas civil lawsuit on price-fixing be
included in deductible expense?
A. A Korean company was filed a civil lawsuit in the U.S. by a group of indirect buyers, and
another civil lawsuit in Canada by a group of direct and indirect buyers for violating fair trade.
The case was closed after the company paid civil settlements.
If Korea’s Fair Trade Commission did not impose sanctions on the company for the said issue of
fair trade violation, the legal expenses and civil settlements paid do not fall under the Article 21
Subparagraph 5 of the Corporate Tax Act (refer below). Therefore, as such expenses do not
qualify as non-deductible expenses, they are considered deductible expenses under Article 19 of
the same Act.
Source: Ministry of Strategy and Finance (Feb. 5, 2016)