A Q&A guide to tax on corporate transactions in South Korea. This Q&A provides a high level overview of tax in South Korea and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.
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This Q&A is part of the PLC multi-jurisdictional guide to South Korea. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactionsmjg.
The National Tax Service (NTS) is the authority responsible for enforcing all direct and indirect national taxes. For local taxes, each local government is responsible for enforcing local taxes within its jurisdiction under the supervision of the Ministry of Public Administration and Security.
It is possible to obtain guidance or clearance from the tax authorities where there is uncertainty about the correct tax treatment. This guidance can be obtained through a formal advance ruling through the advance ruling system. When seeking an advance ruling, the party for whom the advance ruling is sought must disclose its identity and all relevant facts. Assuming the facts provided by the relevant party are correct, the advance ruling is binding on the government and the tax authority.
Acquisition tax is payable if a company acquires certain assets listed in the Local Tax Act (LTA). These assets include:
Golf club memberships.
Health club memberships.
Depending on the type of asset acquired, the applicable tax rate provided in the LTA will range from 2% to 4% of the acquisition price of the acquired property (Basic Acquisition Rate). However, under the LTA, the applicable rates may in some cases be increased by two to four times the Basic Acquisition Rate. Some examples provided in the LTA are set out below:
For villas, land and buildings owned by golf clubs, luxury dwelling houses, luxury entertainment complexes or luxury boats meeting certain requirements specifically listed in the LTA, the applicable rate is the Basic Acquisition Rate plus an additional 8%.
If the taxable assets acquired for business purposes is situated in specifically designated areas of restricted population growth (such as the Seoul metropolitan area), the applicable rate is the Basic Acquisition Rate plus an additional 4%.
In addition, when enforcing the LTA, the head of each local government entity has discretion to increase or decrease the applicable rate to the extent that the increase or decrease does not exceed 50% of the rates provided in the LTA. Therefore, the actual applicable acquisition tax rate may be different, depending on the local jurisdiction.
Stamp tax is payable by the parties executing certain types of documents (as listed in the Stamp Tax Act) if the execution of such documents takes place in South Korea. These documents must be affixed with the appropriate stamps as evidence of the payment of the applicable stamp tax. The amount of stamp tax payable on each document ranges from a nominal amount up to KRW350,000 (as at 1 March 2012, US$1 was about KRW1,119.6), with the applicable amount determined based on the total value of the transactions undertaken in the relevant documents.
Under the Securities Transaction Tax Act (STTA), securities transaction tax (STT) is payable on the transfer of:
Shares of companies established under the Commercial Code or under any special law.
Interests in partnerships, limited partnerships and limited liability companies established under the Commercial Code.
For the purposes of this chapter, the two items listed above must be collectively referred to as STT Securities.
The STT rate, as provided in the SSTA, is 0.5% of the sale price. However, if it is deemed urgently necessary to foster the South Korean capital market, this rate may be lowered pursuant to the Presidential Decree to the STTA (Presidential Decree). At present, the exceptional rates provided under the Presidential Decree are as follows:
0.15% for KRX KOSPI Market-listed securities. (This should not be confused with the 0.15% Special Tax for Rural Development, which is separately payable in addition to the STT.)
0.3% for KRX KOSDAQ-registered securities.
On transfer of the STT Securities, STT must be paid to the NTS by the following designated taxpayer:
Where STT Securities are sold within the stock market established by the Korea Stock Exchange: the Korea Securities Depositary.
Where STT Securities are sold through the finance investment companies: the relevant finance investment company.
Where STT Securities are sold in a different way to the two methods listed above, STT must be paid to the NTS by seller. However, if the seller is a foreign company without a permanent establishment (PE) in South Korea, then the buyer must pay.
In practice, if the designated taxpayer (who bears the legal obligation to pay STT) is not the seller, the designated taxpayer usually collects STT from the seller before it pays STT to the NTS. However, if the designated taxpayer does not collect STT from the seller for any reason, the designated taxpayer still bears the obligation to pay STT to the NTS.
A company is subject to corporate income tax (corporation tax) on the profits of its business under the Corporate Income Tax Act (CITA) (see below). The following rules apply:
Calculation of taxable profits. For corporation tax purposes, all taxable revenue of a company is aggregated, regardless of whether the revenue is classified as capital gains or ordinary business profits. Corporation tax is paid by reference to the company's business year. Taxable profits are calculated by subtracting the total amount of deductible losses attributable to a certain business year from the total amount of gross revenue attributable to the same business year. The classification of revenue and deductible losses used in calculating taxable profits generally corresponds with the classifications of revenue and expenses used in the preparation of the financial statements of a company (that is, prepared in accordance with South Korean generally accepted accounting principles (GAAP)). However, tax law provides for certain revenue that is not classified as income under South Korean GAAP to be recognised as revenue when calculating taxable profits. Also, certain items classified as expenses under South Korean GAAP are not, for tax purposes, deductible as losses.
Therefore, in filing a tax return, certain adjustments of the income and expenses shown in the financial statements of a company (prepared in accordance with South Korean GAAP) must be made to correctly calculate the relevant tax liability. For a particular expense or loss item to be deductible, generally either:
the expense or loss should have been incurred in connection with the business of the company and the expense or loss should be of a type and scope that is generally accepted and considered ordinary in the same trade or type of business;
the expense or loss should otherwise be directly connected to revenue.
Tax rates. There are three different tax brackets for corporate taxes:
for taxable income up to KRW200 million: the rate is 10% (first tax bracket);
for taxable income of KRW200 million to KRW20 billion: KRW20 million plus 20% of the portion of income that exceeds KRW200 million (second tax bracket);
for taxable income that exceeds KRW20 billion: KRW3.98 billion plus 22% of the portion of income that exceeds KRW20 billion (third tax bracket).
In addition, a local income tax equivalent to 10% of the corporation tax amount is also payable, resulting in a current effective corporate tax rate of approximately 11% for the first tax bracket, 22% for the second tax bracket and 24.2% for the third tax bracket (see below, Surtax on corporation tax).
Capital gains and losses. As CITA does not generally distinguish between capital gains and ordinary business profit for corporation tax purposes, capital gains made from sales of assets are not generally calculated separately from ordinary business profit. The actual sales price received by a company on the sale of an asset is merely included as revenue while the book value of the asset is treated as deductible expenses in its calculation of the corporation tax base. Therefore, the capital loss can be offset against not only capital gains but also against ordinary business profit. There is no further additional tax on these capital gains. However, if a company owns certain land and/or buildings listed in Article 55(2) of CITA (mostly residential building or non-business related land), the capital gains made from its sale is subject to additional corporation tax at 10% to 40%, depending on the type of property owned.
Loss relief rules. Losses accruing in each business year can generally be carried forward for periods of up to ten years. Further, carrying back to the immediately preceding business year is only recognised in limited circumstances in relation to relevant small and medium-sized enterprises (SMEs) in certain specified industries (such as manufacturing), and only up to prescribed limits.
Further, losses can generally survive a change in ownership (losses survive without regard to shareholder changes). Some restrictions apply in relation to mergers and divisions (spin-offs and split-offs). If a company merges with another company, the pre-merger losses of the merged company which are carried over to the surviving company can only be offset against income derived from the area(s) of business activities with which these losses were associated before the merger (and vice versa in relation to the pre-merger losses of the surviving company). For example: before the merger, Corporation A operated businesses A1 and A2 and Corporation B operated businesses B1 and B2. Following the merger, B continues as the surviving entity operating businesses A1, A2, B1 and B2. In that case, any pre-merger losses of A that are carried over following the merger can only be offset against the profits that B earns from businesses A1 and A2.
Similar rules apply to corporate division (spin-off or split-off) cases.
Avoiding double taxation on dividend income. A certain portion of dividends received by a company from its subsidiary are not included in its income for corporation tax purposes. The actual scope of this exclusion is determined depending on the shareholding ratio of the recipient company in the subsidiary and certain other factors such as the aggregate amount of borrowed money by the recipient company. For the purpose of this exclusion, deemed dividends are treated the same as the dividends actually received.
Tax grouping. A domestic company and another domestic company controlled completely (100%) by the first domestic company may, subject to obtaining approval from the NTS Commissioner, file consolidated tax returns. In these cases, if two or more wholly owned subsidiary companies exist, all of the relevant companies in the grouping must submit a consolidated tax return.
Surtax on corporation tax. Whenever corporation tax is paid, local income tax equivalent to 10% of corporation tax is payable to the relevant local governments as a surtax.
Under the Value Added Tax Act (VAT Act), VAT is imposed on all taxable transactions, uniformly at 10%, except for certain limited cases where the applicable rate is reduced to 0%, including for:
Goods for export.
Services provided outside South Korea.
International transportation service by ships and aircraft.
Other goods or services supplied to earn foreign exchange.
Under the VAT Act, a taxable transaction means any supply of goods or services by an independent entrepreneur unless this supply of goods or services is expressly provided as a VAT-exempt business under the VAT Act.
VAT tax returns should be filed twice a year for each calendar half-year by the entrepreneur who supplies goods or services pursuant to the taxable transactions.
If the total amount of VAT to be payable on goods and services supplied by the taxpayer filing the VAT tax return (output tax amount) is greater than the total amount of VAT paid by the taxpayer for the purchase of goods and services used or to be used for his own business (input tax amount) during the taxable period, the difference between the output tax amount and the input tax amount must be paid by the taxpayer to the NTS. If the input tax amount is greater than the output tax amount, NTS refunds the difference.
Certain other taxes may be payable, depending on the type of business carried on by the relevant parties to the transaction. These taxes include the:
Tobacco consumption tax.
These taxes are imposed on foreign companies whenever triggering events occur (see Question 3) at the same rate as South Korean companies regardless of their presence in South Korea.
As with stamp tax and acquisition tax (see above), STT is imposed when a foreign company transfers STT Securities issued by South Korean companies, regardless of whether the transferring foreign company has a presence in South Korea. However, the method for collecting STT differs as follows:
If the shares are sold within the stock market established by the Korea Stock Exchange, then the Korea Securities Depositary will collect STT from the seller and pay this to the NTS.
If the shares are sold through the finance investment companies, the burden is on the finance investment companies to collect STT from the seller and pay this to the NTS.
If the shares are sold in a different way to the two methods above, the seller must pay STT directly to the NTS. However, if the seller is a foreign company without a PE in South Korea, the buyer will collect the STT from the seller and pay this to the NTS.
A non-resident trading company (foreign company) that does not have either a PE or certain real estate-related income (as specified in the CITA) is not required to file a corporate tax return in South Korea. However, if such a company has any income that falls within the taxable categories listed in Article 93 of the CITA which are derived from sources within South Korea (South Korean Source Income), this income is subject to withholding tax. In such case, the payer of South Korean Source Income usually withholds corporation tax under the applicable withholding rates when the payment is made and pays this to the NTS. However, since the legal burden to pay withholding tax to the NTS is on the payer of such income, the payer is still liable to pay the relevant amount of the withholding tax to the NTS, even if the payer did not collect the withholding tax from the payee. The withholding tax rate is subject to reduction or exemption, pursuant to the applicable double tax treaty.
Corporation tax on South Korean Source Income is assessed and collected in the same manner as for a South Korean company, if accrued from either:
A foreign company's PE in South Korea.
Certain real estate-related income.
However, no corporation tax is levied on the liquidation income of a foreign company. In addition, in certain circumstances a South Korean company may be taxed on the profits of a controlled foreign company (CFC). A CFC is a non-South Korean company which is controlled by persons resident in South Korea and whose head office or principal office is located in a state or region where the tax burden is 15% or less of the income actually earned by the non-South Korean company. For the purposes of a CFC, any person who directly or indirectly holds 20% or more of the total outstanding shares or equity interests of a company as of the end of each business year is considered to control the company.
Profits of a CFC may be apportioned to the South Korean company under the CFC regime, unless the CFC benefits from one of a number of exemptions. For example, the CFC rules do not apply if the relevant CFC either:
Actually engages in business (except for certain businesses such as wholesale business or financial or insurance business) after having established fixed facilities such as offices.
Engages in, as its main business, the holding of stocks and other investment securities and satisfies certain requirements (that is, the requirements set out in Article 18(2) of the Act for the Co-ordination of International Tax Affairs).
A non-resident exporter or the service supplier does not need to pay VAT when either:
Goods are imported into South Korea.
Services are supplied within South Korea by a non-resident who does not have a PE in South Korea.
This is because the obligation to collect VAT is imposed on the importer of such goods or the recipient of such services (such as the South Korean importer or South Korean resident receiving the service). However, if the service is supplied within South Korea by a non-resident's PE located in South Korea, then the non-resident with a PE in South Korea must collect and pay VAT for the supply of the service. Furthermore, in this case, the non-resident with a PE in South Korea must register for a business licence in South Korea.
Dividends paid by a South Korean company to another South Korean company are not generally subject to South Korean withholding taxes.
Dividends paid to a foreign company by a South Korean company constitute South Korean Source Income subject to corporation tax. Therefore, a South Korean company which pays dividends to a foreign company must withhold 22% (20% corporation tax plus 10% of the corporation tax amount as local income tax paid as surtax) of the dividends and pay the withheld amount to NTS by the tenth day of the month immediately following the month of withholding (Article 98(1) (3), Corporate Tax Act) (CTA), unless a lower withholding tax rate applies under a relevant tax treaty.
Capital gains (that is, the difference between the actual sale value and the book value of the shares) from sale of shares held by a company, regardless of whether the relevant shares are treasury shares or shares held as investments, are treated in the same way as ordinary business profits. That is, the actual sale value received is recognised as revenue and the book value of the shares is recognised as deductible losses in the calculation of the corporation tax base for the business year during which the sale is made (see Question 4, Corporation tax).
No VAT is chargeable on the sale of shares.
The acquisition of shares does not generally trigger acquisition tax. However, if a corporate buyer becomes an oligopolistic shareholder (that is, a member of a group consisting of specially related persons who hold more than 50% of the total shares in a company (oligopolistic shareholder)) as a result of acquiring shares in another company (other than a listed company), the corporate buyer is deemed to have acquired real estate assets of the other company proportionate to the corporate buyer's newly acquired shareholding percentage. As a result, the corporate buyer is liable to pay acquisition tax on the real estate assets of the company it is deemed to have acquired. However, this does not apply if the corporate buyer became an oligopolistic shareholder by acquiring shares or interests in the other company at the time of the other company's incorporation.
Corporation tax is exempted for capital gains made from the sale of the following shares (Article 13, Special Tax Treatment Control Law) (STTCL):
Shares that are acquired by any small or medium-sized start-up business investment company through its investment in a founder under the Support for Small and Medium Enterprise Establishment Act (founder) or in a venture business no later than 31 December 2012.
Shares that are acquired by a new technology project financing company through its investment in a new technology business operator under the Technology Credit Guarantee Fund Act (new technology business operator) or in a venture business no later than 31 December 2012.
Shares that are acquired by any small or medium-sized start-up business investment company, any venture enterprise investment limited liability company or any new technology project financing company in return for its investment in a founder, a new technology business operator, or a venture business no later than 31 December 2012 through start-up investment associations (as defined in the STTCL).
Shares that are acquired by company operating funds in return for its investment in a founder, a new technology business operator, or a venture business not later than 31 December 2012 through start-up investment associations (as defined in the STTCL).
If a South Korean company becomes a wholly owned subsidiary of another company through a comprehensive share exchange or transfer satisfying the requirements of Article 38(1) of STTCL, payment of corporation tax on capital gains resulting from this exchange or transfer can be deferred until the original subsidiary shareholders dispose of the parent company shares (Article 38(1), STTCL).
If a shareholder of a South Korean company establishes a new holding company or converts an existing South Korean company into a holding company through an in-kind investment of shares or comprehensive exchange or transfer of shares before 31 December 2012, payment of corporation tax on capital gains resulting from this investment, or exchange or transfer, can be deferred until the shareholder disposes of shares in the holding company (Article 38-1(1), STTCL).
If a South Korean-resident shareholder of a South Korean company makes an in-kind investment of shares into a converted holding company or exchanges the shareholder's shares in the South Korean company with shares of the converted holding company before 31 December 2012, provided certain requirements provided in STTCL are fully satisfied, payment of corporation tax on capital gains resulting from this investment or share exchange can be deferred until the shareholder disposes of holding company shares (Article 38-2(2), STTCL).
There are no specific tax reliefs available.
In comparison with other classes of assets, a depreciation of shares is not recognised.
Unless the acquisition of shares by a corporate buyer can be considered as being in the pursuit of its business purposes (for example, a securities investment company purchasing shares), the shares acquired by the corporate buyer are treated as non-business related assets. If a company has non-business related assets, a certain portion of interest paid in relation to loans incurred by the company are not treated as deductible expenses.
If a corporate buyer becomes an oligopolistic shareholder as a result of acquiring shares in another company (other than a listed company), the corporate buyer is deemed to have acquired real estate assets of the other company proportionate to the corporate buyer's newly acquired shareholding percentage. Therefore, the corporate buyer is liable to pay acquisition tax on the real estate assets of the company which it is deemed to have acquired.
For tax purposes, a share disposal by a corporate seller is treated in the same way as any other asset disposal by the corporate seller. There are no notable tax advantages or disadvantages.
Gains or losses arising from the disposal can be offset against the seller's profits or losses which are attributable to the same business year during which the share disposal is made.
Capital gains from the sale of shares are not calculated separately from ordinary business profits. All revenues and losses attributable to a business year are aggregated for corporation tax purposes. There are no structures commonly used to minimise tax.
Corporation tax is payable on capital gains arising from the disposal of business assets of a capital nature by a corporate seller unless the capital gains are offset by other losses of the corporate seller arising in the same business year in which the disposal occurs. For certain real estate, additional corporation tax may be payable (see Question 4, Corporation tax: Capital gains and losses).
Acquisition tax is payable by a company acquiring chargeable assets (see Question 3, Acquisition tax).
VAT is generally chargeable on a supply of business assets. However, where a seller transfers all or part of its business as a going concern to a buyer who intends to use the assets to carry on the same kind of business, the supply generally falls outside the scope of VAT (see Question 5, VAT).
Land is not subject to VAT. If a sale includes land and buildings, VAT is payable on the portion of the sales price which is apportioned to buildings.
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, at its option, avoid paying corporation tax on capital gains by treating the transfer price of these assets as the book value of these assets (that is, the capital gains becomes nil).
Depreciation (or amortisation) expenses in relation to acquired assets are treated as deductible expenses. Depreciation can be offset against any taxable gains of the company.
If a corporate buyer acquires non-business related assets, a certain portion of interest paid by the company, calculated under CITA, is not treated as deductible expenses.
A corporate seller's losses on an asset disposal are available to be offset against not only capital gains but also its taxable gains of any nature arising during the same business year.
A corporate seller pays corporation tax on chargeable gains (see Question 4, Corporation tax: Capital gains and losses).
There are no common structures used to minimise tax.
CITA considers a merger as a process in which all of the non-surviving company's net assets are transferred to the surviving company in exchange for shares of the surviving company and/or cash (merger consideration) and the non-surviving company is dissolved. Therefore, if the value of the merger consideration is higher than the book value of the assets transferred by the non-surviving company, the merger may give rise to corporation tax on capital gains by the non-surviving company. Further, if the value of the merger consideration distributed to the non-surviving company's shareholders on completion of the merger exceeds the shareholders' acquisition cost of the non-surviving company's shares, the excess amount is treated as a deemed dividend distributed to the shareholders. Therefore, the non-surviving company's corporate shareholders are subject to corporation tax on the deemed dividend unless it is offset by the corporate shareholders' losses (see Question 4, Corporation tax).
The difference between the market value of the net assets transferred by the non-surviving company and the merger consideration is recognised as a loss or gain by the surviving company for the first five business years after the business year in which the merger took place (the loss or gain being equally distributed into five instalments for each business year).
No VAT is chargeable on mergers.
Acquisition tax may be payable on the surviving company's acquisition of assets from the non-surviving company (see Question 3, Acquisition tax).
The ability to merge on a tax-free basis also applies where all of the following conditions are satisfied:
The merger occurs between domestic companies that have each operated their respective business continuously for one year or more as of the date of registration of the merger.
At least 80% of the total amount of the consideration the merged company pays the shareholders of the non-surviving company is in the form of shares of the merged company.
The continuing company continues to operate the business acquired through the merger at least until the last day of the business year in which the merger has been registered.
If a wholly owned subsidiary is merged into a parent company, provided that both are domestic companies, the merger can still be implemented on a tax-free basis even if the above conditions are not satisfied.
An exemption applies in relation to the part of acquisition tax that results from a merger between companies that have operated business for one year or longer, unless the business operated by any of these companies is a consumptive service business operating, for example:
The tax burden can be minimised in a merger if either:
A wholly owned subsidiary is merged into its parent company.
The merger satisfies certain conditions (see Question 20).
If a JVC is formed by establishing a new company or by an existing company issuing new shares to new members, registration licence tax is payable by the JVC at 0.48% (including surtax) of the paid-in capital registered on incorporation of JVC or increased amount of paid-in capital, respectively.
In both cases, if the head office of the JVC is located in specifically designated areas of restricted population growth (such as the Seoul metropolitan area), registration licence tax rate is increased by three times to 1.44% (including surtax).
If a JVC is formed using an existing company whereby the shares in the JVC held by its existing corporate shareholders are transferred to new members, corporation tax may be payable on any capital gain made on the transferred shares by the existing corporate shareholders. Tax may also be payable on any transfer of assets or shares from the equity owners to the JVC (see Question 4, Corporation tax).
As the JVC and its equity owners are considered specially related entities under CITA, they may, for corporation tax purposes, be subject to adjustments for unfair transaction denial (which is similar to transfer pricing adjustments applied in international transactions) in relation to any non-arm's-length transactions with the JVC. The unfair transaction denial rules usually apply to transactions between specially related parties defined under CITA. Typical examples of a special relationship include:
Where one company controls another.
Where two companies are under common control.
Between a company and its shareholder.
If a transaction between specially related parties is not at arm's length, the profits or losses of the parties are adjusted to reflect an arm's-length position. Adjustments for unfair transaction denial may also apply to the JVC's funding from its shareholders. A shareholder lender will not face an unfair transaction denial adjustment if it lends on an independent and arm's-length basis. However, if the interest charged on a shareholder loan to a JVC is excessive, the JVC cannot deduct interest payments to the extent of the excessive interest.
Any new member of a JVC who becomes an oligopolistic shareholder is additionally liable for acquisition tax in relation to chargeable assets of the JVC on acquisition of the shares of JVC (see Question 3, Acquisition tax).
VAT is not payable on the transfer of shares or a business as a going concern, but may be payable on the transfer of other assets to the JVC (see Question 5, VAT).
There are no common structures used to minimise tax.
On a reduction of capital, conversion of capital or exchange of shares, a shareholder may be subject to corporation tax on capital gains on either a:
Disposal or deemed disposal of its existing shares.
Distribution or deemed distribution of new shares.
A reorganisation may also involve the transfer of a trade or business of the reorganised company to a third party. This may give rise to corporation tax on capital gains on the disposal of that trade or business by the transferring company (see Question 4, Corporation tax).
VAT is not payable on transactions involving shares or securities.
There are no specific reliefs available. The seller may be able to take advantage of general reliefs or exemptions (see Questions 10 and 15). It may also be possible to transfer assets or shares to the JVC through a reconstruction or reorganisation (see Questions 23 and 24).
There are no common structures used to minimise tax. Each individual transaction should be structured to take maximum advantage of the reliefs and exemptions available.
A company remains liable for corporation tax on its profits from a winding-up. If a liquidator continues the company's trade, the usual corporation tax rules apply in calculating tax liabilities.
The tax implications of liquidation arise in two steps:
Cessation of trade. The company pays corporation tax on income generated from its business operations until the liquidation is registered in the company's commercial registry.
Winding-up and liquidation. At the time of its winding-up, the company pays corporation tax on the amount by which its residual assets exceed its equity capital. This tax aims to cover any taxable gains (such as the increased value of company assets) that were not addressed during the company's operational years, and all corporation taxes are only settled at this final stage.
Expenses incurred during a winding-up (such as relevant taxes) generally rank in priority to unsecured expenses incurred before the start of the winding-up. To the extent that a creditor does not receive payment in full, bad debt relief is generally available for corporation tax and VAT. Conversely, if the creditor company formally releases a debt, this may give rise to a taxable receipt in the debtor company, unless any exceptions apply (for example, if the debt is released as part of a statutory insolvency arrangement).
Any distribution of assets by the liquidator to the shareholders is generally treated as consideration for the disposal (or part disposal) of the shares in the company, and gives rise to a capital loss (gain) to the shareholders, unless an exceptional exemption applies.
When a company repurchases its own shares to reduce capital, the amount paid by the company is classified as either a:
Repayment of capital amount.
The capital repayment consists of the amount originally subscribed for the share, and the deemed dividend is any excess. To the extent that the recipient is a company, the deemed dividend may give rise to corporation tax unless it is excluded from its income for corporation tax purposes (see Question 4, Corporation tax).
Generally there are no specific reliefs available.
There are no structures commonly used to minimise tax.
In an MBO, a company or business is sold to the existing management, which is usually backed by one or more private venture capital institutions. Many of the same tax issues that arise on a standard share sale or business sale equally arise on an MBO (see Questions 9 to 18).
The existing management generally makes its purchase through a newly incorporated South Korean company, Newco, funded by third-party (bank) debt finance. Newco may also be funded through third-party equity and debt provided by venture capital institutions.
This third-party involvement gives rise to extra tax complexities. Newco can generally take a deduction on corporation tax for any interest paid to a third-party bank or venture capital institution. However, since Newco has no profits of its own and dividends received from the acquired company are to some extent excluded from income calculation of Newco (see Question 4, Corporation tax), it may be necessary to ensure that losses of Newco are used by the company purchased by Newco through forming appropriate tax groups.
There are no specific reliefs or exemptions that apply to an MBO.
There are no common structures that are specifically tax efficient compared to other transaction structures.
There are no relevant proposals for reform.
Qualified. Republic of Korea, 1987; New York, US, 1996
Areas of practice. Tax; structured finance.
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