Tax implications arising from the transfer of shares in an unlisted Korean company by foreign corporate shareholders
31 Jul 2018
The transfer of shares in an unlisted Korean company by a foreign corporate shareholder without a permanent establishment (“PE”) in Korea often occurs in the Korean business environment. In this month’s newsletter, we will look at Korean tax implications arising from the transfer of shares described above.
2. Main contents
(1) Tax implications of the seller
1. Capital gains tax (“CGT”)
Under the Korean Corporate Income Tax Law (“CITL”), the seller will be required to pay CGT equal to the smaller of (i) the share transfer value x 11% (including local income tax) or (ii) (subject to the provision of satisfactory evidence of the acquisition costs and certain transaction costs) the share transfer value less the acquisition costs and transaction costs x 22% (including local income tax) unless exempted under the relevant tax treaty.
If the CGT is not exempt from Korean taxation under the relevant tax treaty and the Korean tax laws and the seller is a foreign company which has no PE in Korea, the purchaser will be required to withhold the relevant CGT from the seller and make such payment together with the filing of tax return by the 10th day of the month following the month in which the transfer of shares is made.
Moreover, under the CITL, if the seller and the purchaser are foreign related parties, the sales proceeds or gains shall be calculated based on the actual sales price or the market value, whichever is greater. In this regard, the market value is an arm’s length price in the normal transactions between unrelated parties. If such price does not exist or cannot be found, the market value may be calculated using the method described under the Korean Individual Income Tax Law (the “IITL”).
Further, it is advisable to mention that the seller may file a corporate income tax return on or prior to March 31 of the year following the year in which the share transfer is effected and pay corporate income tax on such capital gains at normal corporate income tax rates, if the Korean company’s assets mainly consist of real property.
2. Securities transaction tax (“STT”)
Upon transfer of the shares in an unlisted Korean company, the seller will be subject to STT equal to 0.5% of the transfer value of the shares. In this regard, if the seller is a foreign company which has no PE in Korea, the purchaser will be required to withhold the relevant STT from the seller, file a return and make the tax payment to the relevant tax office within 2 months from the end of the half year in which the sale of the shares is made, unless the transfer is made on the Korea Exchange or through Korean securities companies. At the time of filing of the return, the purchaser must attach a document evidencing the transfer value of the shares (i.e., share transfer agreement) to such tax return.
In this connection, the tax base is, in principle, the actual transfer value. However, if the actual transfer value is deemed to be lower than the market value and the seller and the purchaser are foreign related parties, the market value (calculated using the method described under the IITL) will be also applied instead of the actual transfer value.
(2) Tax implications of the purchaser
Under the Korean local tax law (“LTL”), the purchaser would be required to report and pay an acquisition tax if it, together with its specially related parties, acquires more than 50% of the total shares of the unlisted Korean company. The purchaser would be required to file a return and make the tax payment within 60 days after the acquisition of the shares of the Korean company from the seller. The acquisition tax is imposed on certain assets of the Korean company, including land, buildings, memberships, vehicles and certain machinery used for construction or unloading, where the tax amount to be assessed is as follows: [(book value of the property subject to the property acquisition tax) x (2.2%) x (shareholding ratio of the Korean company)]. The foregoing tax rate of 2.2% on the acquisition tax includes an agriculture and fishery tax of 0.2%.
However, if the share transfer is made between related parties, the above deemed acquisition tax may be exempted.
3. Concluding remarks
As seen above, several taxes such as CGT, STT and acquisition tax can be levied upon the transfer of shares in a Korean company by a foreign corporate shareholder without a PE in Korea. Therefore, it would be desirable to promptly discuss this topic with tax experts when such transaction arises, in order to avoid any unwarranted tax risks.