Tom orrow s W orld Asia Pacific Real Estate Asia Pacific Real - - PowerPoint PPT Presentation

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Tom orrow ’s W orld Asia Pacific Real Estate Asia Pacific Real Estate Conference 2013

6 December 2013

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Ta xa tion in Korea

Taejin Park

• Korean Tax Update

Jaedok Lee

• Tax Efficient Holding Structure

Ashley Choi

• Key Ways to Approach Korean capital

K orea n Ta x La nd sca p e K orea n Ta x La nd sca p e Taejin Park

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Agend a Agend a

Section one Korean Tax Update. Section two Audit trends Section three Major issues facing foreign capital

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 1. Tax Treaty Update

. a

eaty Update

• The Fist Income Tax Treaty between Korea and Hong Kong
• Agreed to a comprehensive scope of tax information exchange including real estate-

Agreed to a comprehensive scope of tax information exchange including real estate related tax

• Dividend withholding tax rate: 10%/ 15%
• Amended Korea-Luxembourg Income Tax Treaty effective in Sep 2013

D l d h i i h l d h ldi i bli h d d h

• Deleted the provision that excludes holding companies established under the

special law of Lux from the applicable scope of the treaty

• Added that nothing under the Treaty will be construed as restricting the application

Added that nothing under the Treaty will be construed as restricting the application

• f any provisions of the laws of both countries which are designed to prevent the

avoidance of taxes

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 1. Tax Treaty Update, cont’d

. a

eaty Update, co t d

• Protocol to amend Korea-Singapore Income Tax Treaty was effective in June 2013
• It permits that if information is requested by a contracting state, the other state

It permits that if information is requested by a contracting state, the other state shall use its information gathering measures to obtain the requested information and shall not decline to supply information.

• Korea, U.S., U.K., Australia agree on offshore tax information sharing

A d i h h US UK d A li h ff h i f i fi h

• Agreed with the US, UK and Australia to share offshore tax information fight cross-

border tax evasion.

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 2. key Ruling Update

. ey u

g Update

• In the recent court ruling, Cayman LP which was established as an intermediary entity

In the recent court ruling, Cayman LP which was established as an intermediary entity is determined to be classified as a beneficial owner of the Korean sourced income and should pay corporate income tax in Korea

• The case involves a LP established by a group of investors in Cayman Islands and the

ruling provides that a comprehensive review must be conducted to determine that the LP i i h i i i h d d i i d d f i LP constitutes a separate entity having its own rights and duties independent from its investors, in other words that the LP may be a foreign entity for Korean corporate income tax purpose. income tax purpose.

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 3. Am endm ent to the Tax Act for 20 13
• The definition of “foreign corporation” would be extended as follows:
• Before
• A corporation with its headquarter or main office in a foreign country
• Amended
• A corporation with its headquarter or main office in a foreign country with the

following requirements; i) having a legal personality in Korea, ii) Only comprised of partners with limited liability, iii) h i h l l i h d li bili i h di i f i b iii) having the legal rights and liabilities that are distinct from its members, or iv) the same or the most similar kind of domestic entity constitutes a corporation under Korean laws

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 4. Proposed Am endm ent to the Tax Act for 20 14
• New Compliance procedures for claiming tax exemption under the relevant tax treaties
• Before
• Income exemption form withholding under the relevant tax treaties: Submission of

an application for claiming tax exemption under the tax treaty. T b d d ff ti J

• To be amended effective on Jan 2014
• A beneficial owner receiving income exempt from withholding under the treaties

through an overseas investment vehicle (“OIV”) is required to submit an application g ( ) q pp form to the withholding agent

• Incom e exem ption from withholding subject to OIV rule

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 4. Proposed Am endm ent to the Tax Act for 20 14, cont’d
• Tax exemption on dividend shall be abolished in Free Economic Zone
• Before
• Withholding tax on dividend income : Exem pt
• To be amended effective on Jan 2014

A di t th d ft d t f i i t h i t i t t i

• According to the draft amendment, foreign investors who invest into certain

designated area (e.g. Free Economic Zone), tax exemption on dividends will be abolished.

• Subject to dividend withholding tax

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 5. NTS Audit Directive for 20 13
• Focused on the tax avoidance using offshore financial accounts.

Focused on the tax avoidance using offshore financial accounts.

• Also tax payers alleged to avoid tax on Koran source income by pretending to be

non0residents.

• Added that nothing under the Treaty will be construed as restricting the application
• f any provisions of the laws of both countries which are designed to prevent the

id f avoidance of taxes.

• On-going inspection on whether the foreign income recipient is a beneficial owner.

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Korea n Ta x Up d a te Korea n Ta x Up d a te

• 6. OIV rule
• OIV conducting the following activities:
• Obtaining funds by making offers for investment

Obtaining funds by making offers for investment

• Acquiring, managing, or disposing of investment assets; and
• Distributing profits to its investors.
• Look-through principle
• Example of Beneficial Owners
• Qualifying foreign pension funds

Qualifying foreign pension funds

• Foreign securities depositories with the Korean Securities Depository account
• OIV deemed as beneficial owners under tax treaties.

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• .

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Korea n Ta x Up d a te

Docum entation required

Korea n Ta x Up d a te

• 6. OIV rule, cont’d

Docum entation required

Tax payer Docum entation Recipient A ① A li ti f d d t OIV (HK) A (US) B (HK)

90% 10%

Dutch Investors A ① Application for reduced rate OIV (HK) B ① Application for reduced rate OIV (HK) POIV (Dutch) ① Declaration of OIV ② Documentation to support public OIV (Lux)

90%

OIV (HK) POIV (Netherlands) Pension fund (UK) Investors (Dutch) ② Documentation to support public OIV status OIV (HK) ① Declaration of OIV ② Schedule of beneficial owner OIV

20% 50% 30% Dividend

Pension fund ① Application for reduced rate ② Documentation to substantiate deemed beneficial owner status OIV (Lux) ① Declaration of OIV ② WHT Luxembourg

100%

② Schedule of beneficial owner ③ Declaration received from POIV(Netherlands) and OIV (HK) agent Korean Co

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Korea n Ta x Up d a te

Calculation of average rate

Korea n Ta x Up d a te

• 6. OIV rule, cont’d

Country Ownership Reduced tax rate

(including resident tax)

WHT

Calculation of average rate

A (US) B (HK)

10%

Dutch Netherlands 20% 15% 3% Hong Kong 50% 12.1% (11%*90/ 100+22%*10/ 100) 6.05% UK 30% 5% 1.5%

90% 10%

OIV (HK) POIV (Netherlands) Pension fund (UK) Investors UK 30% 5% 1.5% Total 100% 10.55% OIV

20% 50% 30%

OIV Luxembourg

100% Dividend

Korean Co

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Ta x Efficient Hold ing Structures Ta x Efficient Hold ing Structures Jaedok Lee

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Agend a Agend a

Section one LLC Type Real Estate Fund (REF) Section two Trust Type REF Section three P-REIT Section four CR-REIT Section five PFV

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LLC Ty p e REF

Classification LLC Type REF

LLC Ty p e REF

Classification LLC Type REF Entity Type Limited liability company (“Yuhan hoesa”) At least 50% of the assets Investors Asset Qualification At least 50% of the assets should be real estate or real estate-related securities Ownership At least two investors are Supervision Trust service Capital investment Requirem ent required Public offer N/ A Instruction by Investor should not be involved LLC Type REF FSS (*) Trustee Supervision Registration Trust service Management service Investor in management Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31 2014 AMC Acquisition December 31, 2014 Corporate Incom e tax Avoidable through dividend declared deduction Capital Gain Tax on Avoidable through dividend Asset

(*) FSS: Financial Supervisory Service

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Capital Gain Tax on transfer of Property Avoidable through dividend declared deduction

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Trust Ty p e REF

Classification Trust Type REF

Trust Ty p e REF

Classification Trust Type REF Entity Type Trust A t Q lifi ti At least 50% of the assets h ld b l t t l Investors Asset Qualification should be real estate or real estate-related securities Ownership Requirem ent At least two investors are required Supervision Trust service Capital investment Requirem ent required Public offer N/ A Instruction by I Investor should not be involved i

Trust Type REF

FSS Trustee Supervision Registration Trust service Management service Investor in management Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31, 2014 Acquisition AMC 3 , 4 Corporate Incom e tax Not taxable Capital Gain Tax on transfer of Property Not taxable Asset

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transfer of Property

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P REIT

Classification P-REIT Entity Type Stock corporation (“Chusik hoesa”)

P-REIT

Entity Type Stock corporation ( Chusik hoesa ) Asset Qualification At least 70% of the assets should be real estate Single shareholder including its Investors Ownership Requirem ent g g related parties is not allowed to hold shares in excess of 40% of total issued shares P bli ff At least 30% of total issued shares Supervision Trust service Capital investment Public offer At least 30% of total issued shares should be offered to the public Instruction by Investor Investor can participate in management as a shareholder in accordance with the Articles of In i P-REIT MLIT (*) Trustee Supervision Registration Management service Investor corporation. Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31 2014 Acquisition AMC December 31, 2014 Corporate Incom e tax Avoidable through dividend declared deduction Capital Gain Tax on transfer of Property Avoidable through dividend declared deduction Asset

(*) MLIT: Ministry of Land, Infrastructure and Transport

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transfer of Property declared deduction

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CR REIT

Classification CR-REIT Stock corporation

CR-REIT

Entity Type Stock corporation (“Chusik hoesa”) At least 70% of the assets should be real estate. Seller should repay at least 50% of existing debt with the sales proceeds under Investor Asset Qualification the sales proceeds under corporate restructuring plan. Approval is necessary from Financial Supervisory Service regarding corporate restructuring plan

• MLIT

Supervision Trust service Capital investment p Ownership Requirem ent N/ A Public offer N/ A CR-REIT

• MLIT

Trustee

• FSS

Approval Management service Instruction by Investor Investor can participate in management as a shareholder in accordance with the Articles of Incorporation. 30% reduction from regular AMC Acquisition Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31, 2014 Corporate Incom e tax Avoidable through dividend declared deduction Asset

PwC Asia Pacific Real Estate Conference 2013 | Singapore

declared deduction Capital Gain Tax on transfer of Property Avoidable through dividend declared deduction

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PFV

Classification PFV

PFV

Classification PFV Entity Type Stock corporation (“Chusik hoesa”) Asset Qualification Facility and SOC investments, Investor Asset Qualification natural resource development Ownership Requirem ent Financial institution should be a shareholder of a PFV holding at least 5% of capital

• Capital investment (5%)
• Cash management

Capital investment 5 p Public offer N/ A Instruction by Investor Investor can participate in management as a shareholder in d ith th A ti l f PFV Tax Office

Financial Institution

Report

• Cash management

Management service Instruction by Investor accordance with the Articles of Incorporation. Acquisition Tax 50% reduction from regular acquisition tax of 4.6% upon i iti b D b 31 201

AMC

Acquisition acquisition by December 31, 2014 Corporate Incom e tax Avoidable through dividend declared deduction Capital Gain Ta on A oidable thro gh di idend Asset

* MLIT: Ministry of Land, Infrastructure and Transport

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Capital Gain Tax on transfer of Property Avoidable through dividend declared deduction

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Key W a y s to Ap p roa ch to K orea n Key W a y s to Ap p roa ch to K orea n Ca p ita l Ashley Choi

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Agend a Agend a

Section one Major players and their needs Section two Key ways to approach to Korean capital

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1 Ma jor p la y ers a nd their need s

• 1. Ma jor p la y ers a nd their need s

Investor type SWF Pension funds / Institutional investors I di t i t t Direct investment Indirect investment through “Trust” Preferred structure Direct investment (Special tax benefit) (e.g. Section 892) Investors’ needs for their investm ents Low risk, stabilized cash flow, and the focused location for investments their investm ents

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1 1 Direct inv estm ent structure 1.1 Direct inv estm ent structure

Tax Im plications Special ta benefit (e g section 892)

• Special tax benefit (e.g. section 892)

Major issue SWF, etc Korea

Investment

• Whether qualification can be satisfied

Korea Overseas Fund Overseas

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Investment Asset

1 2 Ind irect inv estm ent structure 1.2 Ind irect inv estm ent structure

Tax Im plications

• Not taxable entity

Korean Investors y

• Foreign tax refund

T Asset Manager Trustee Financial Supervisory

Trust Service Registration Investment

Major issue

• How the trust is treated from overseas

Trust Manager Service

Management Service

Korea

Investment

How the trust is treated from overseas jurisdiction

• Transparent vs. Non-transparent

Overseas Fund Overseas

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Investment Asset

2 K ey W a y s to a p p roa ch to Korea n Ca p ita l

• 2. K ey W a y s to a p p roa ch to Korea n Ca p ita l

Relation

• riented

atm osphere atm osphere

Understanding

• f

Korean m arket

Well inform ed

• f precedent

investm ent structures Effective com m unication com m unication

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