Ifthe property leasing business is operated as an individual business operatorand is to be converted into a corporation for reasons, such as income taxburden, the method for converting the corporation into a corporation is to investmentleased property in kind as a corporation, or establish a corporation first andmake an acquisition of leased property to a corporation later.  

The method of in-kind investment refers to the valuingbusiness assets provided to the leasing business by the value at the time ofconversion of the corporation (as the appraisal value recognized by the court)and making investment in-kind as the corporation's capital. In this case, the amount of capital registered is the net asset value ofcapital which value of the liability transferred from the valuation of assetsto the legal entity is subtracted.

Themethod of acquisition of business refers to a case where a corporation isestablished for the leasing business and a leasing business corporation isestablished by transferring the asset value, such as real estate for leasingbusiness and related liabilities to the corporation in a comprehensive manner. Inthis case, it is important to note that the taxpayer benefits are payablewithin three months of establishing a new corporation.

Inany case, since the property that was provided for the rental business has beenhanded over to the newly established corporation, it is subject to the transfertax, as it corresponds to the transfer of the real estate, regardless ofwhether the business was transferred in-kind or not. However, in this case,when the corporation is converted into a corporation with the necessary conditions,the corporation imposes a tax on the transfer income tax that occurs when thecorporation transfers the real estate. This is called carryover tax. These taxbenefits apply to all types of businesses, except for some spoiled ones such asnight life liquor stores.

On the other hand, theconversion of a private leasing company into a corporation is equivalent to theacquisition of a succession; therefore it will also exempt the burden ofacquisition tax (including registration tax) that will be borne by theconversion. In case of a corporation located in the Seoul Metropolitan Area,which is overpopulation control area, if the real estate is acquired within 5years after the new establishment, the registration tax portion (2.4%) of the acquisitiontax will be tripled. However, if the business operator converts to acorporation, there would be no heavy tax burden.

(Incase of a local tax exemption, 20% of the exemption amount shall be subject toSpecial Tax for Rural Development. In case converted corporation is located inoverpopulation control area, total tax burden shall be 1.6%.

2. Comparing the tax burden with the case ofindividual business operators

Incase of individual leasing operator, 6.6% ~ 44% (including local income tax) ofmulti-level progressive tax rate shall be applied. Standard of annual incometax for 100 million KRW to 200 million KRW, the applicable tax rate is jaw-dropping40%.

In addition, the additional tax burden such asproperty tax and the quasi-collective burden would make individual businessoperator more difficult.

On the other hand, whenoperating as a corporation, if the standard of taxation is 1 ~ 200 million KRW,the tax burden imposed to the leasing company greatly changes because thecorporation tax rate is 11% (including local income tax). In the case ofindividual business operators, the labor cost of the employer is included inthe business income. However, since the CEO's salary is also recognized as thecorporation's expense after the corporate conversion, the appropriate salary iscalculated considering the contribution of the employer to the leasing businessTaxable income of a corporation can be further reduced. In this case, ofcourse, considering the additional burden of the income tax on the personalsalary of the representative, it would be more reasonable to set the salarylevel after considering the total burden of tax burden.

On the other hand, in this case, considering the dividend, it is pointed out thatthe difference compared to individual taxpayers is almost the same. In reality,it is extremely rare for business operator to pay dividend 100% of the incomeeach year. Therefore, if we assume that the business operators pay only partialdividend or no dividend, we can say that the corporation has much morebenefit. 

3. Stock valuation of corporations withexcessive real estate property

Asmentioned above, one of the reasons for individual leasing operator to convertinto a corporation is to reduce the income tax burden of the annual rentalincome. However, in some cases, conversions work as a solution to cut a gift orinheritance tax when transferring the wealth to the children.

The assumption is that the value of the asset after conversion to a corporationshall not be valued higher than the asset value of holding a real estate in thename of a individual leasing operator.

Forreal estate leasing business corporation, most assets are composed of realestate, unless there are special circumstances. Such case is called"excessive real estate corporation" and according to Article 54 (4) 3of the Enforcement Decree of the inheritance tax law, if 80% of the asset valueis comprised of real estate, the corporation has to evaluate stock valuation asnet asset value, so that there would be no big difference compared to an individualbusiness entity's asset valuation. In other words, in the case of an individualbusiness, the net asset value becomes the evaluation value of the gift taxinheritance tax, and the corporation's stock valuation is evaluated as the netasset value.

On the other hand, in the case of a general corporation, stockvaluation of company established for less than 3 years, only considers netasset value. However, when evaluating companies that are established more than3 years, weighted average of net profit loss and net asset value (3:2) is beingused. (In case of real estate corporations, 2:3) 

Ifwe use the weighted average value of the net profit value and the net assetvalue, we can expect the share price to be reduced, but if we evaluate it onlywith the net asset value, there would be no difference compared to anindividual business operator.

4. How to save tax

Incase of real estate leasing corporation, the corporate tax rate is applied tothe corporation, which means there would be a tax benefit.

However, considering donations and gift, it would be effective to convert intoa corporation if the valuation of stocks after the conversion of corporation isreduced compared to the value of real estate when it was an individual businessoperator. Moreover, in the case of a leasing corporation, the salary of anindividual company is also the expense of the corporation.

Whenit comes to stock valuation, it is a natural for a company to be a real estateleasing corporation, where proportion of real estate in total assets exceeds80%.

However, if we can reserve the lease income in thecompany for a while or adjust the real estate proportion with other assets sothat real estate assets proportion to be less than 80%, we will be able toadjust 2:3 weighted average ratio of net profit value and net asset value. 

Would it be beneficial to apply the net assetvalue in this case? Would it be beneficial to apply a weighted average of thenet profit and net asset value ratios? We shall review how it would work andstructure our asset portfolio in order to make sound asset management.