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Korea (Rep.)

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Corporate tax cut period for large-scale foreign invested companies extended

It has been reported that the government announced on 17 August 2007 that the corporate income tax cut for large-scale foreign invested companies will be extended to 7 years from the current 5 years in order to promote foreign investment in the Free Economic Zones (FEZs). Pursuant to the extension, large-scale foreign invested company will be permitted to claim a corporate tax reduction of 100% for the first 5 years and 50% for the 6th and 7th years.

Additionally, it was also reported that foreign companies located in the FEZs will be provided with a 3-year value added tax exemption similar to the current 100% customs duties exemption. The government is also said to be planning to include research and development companies to the list of foreign companies eligible for the tax reduction and exemption, as well as increase the number of FEZs in the country.

New partnership tax rules

It has been reported that the government of Korea (Rep.) announced a preliminary draft of proposed new rules on partnership taxation. Once debated and approved by the National Assembly, the new rules will take effect from 1 January 2009.

Under the current tax law of Korea (Rep.), there are separate tax systems for individuals and corporations, but partnerships do not have a separate tax system and lie in a grey area between the two. The tax system for corporations is applicable to limited companies (i.e. Chusik Hoesa (CH) or Yuhan Hoesa (YH)) or to unlimited companies (i.e. Hapmyong Hoesa (HMH) or Hapja Hoesa (HJH)). The liability of the CH and YH is limited to the amount of the contributed capital. HMHs, which consist of partners with unlimited liabilities and HJHs, which consist of at least one partner, have unlimited liabilities.
Pursuant to the new proposed partnership tax rules, taxpayers are to be provided with more flexibility in alleviating double taxation. The following are the key points of the proposals, which may be amended prior to enactment:

-   Entities affected: The partnership tax rules will be applicable to the existing unlimited companies (i.e. HMH and HJH) as well as two new entities that shall be introduced, i.e. the Hapja Johap (HJ) limited partnership and the Yunhanchaegim Hoesa (YCH) limited liability company. A HMH, HJH and YCH will be allowed to elect to be taxed as either a corporation or as a partnership. The HJ will be allowed to elect to be taxed under the individual tax system or under the proposed partnership tax system. The election would be valid for a consecutive 5-year period and cannot be rescinded;
-   Avoidance of double taxation: A partnership would be treated as a flow-through entity, with each partner subject to corporate or individual tax on their respective share of income;
-   Allocation of income or loss: Losses would be limited by a partner's "outside basis" (as defined). Excess losses could be carried forward for 5 years for use when the partner's outside basis is increased;
-   Taxation of in-kind contributions: There will be two options of deferring the tax on gains arising from in-kind contribution made to the partnership. The first would be deferring the gain until the partnership sells the assets. The second option would be to recognize the gain upon contribution of the asset but tax payment on the gain can be made over three annual installments after a 3-year grace period;
-   Transaction between partner and partnership: Transactions between a partner and the partnership would be treated as third-party transactions; and
-   Anti-avoidance: The new rules will incorporate anti-avoidance measures such as (i) ratio of allocation on income and loss, (ii) reasonable allocation of loss or profit in term of economic substance, and (iii) partner's tax liability on transactions between partner and partnership.

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