Tax Law Revision on Assets

Date: January 21, 2020

I. Introduction

Since the restoration of heavy taxation on capital gains on Aug 3, 2017 taxation on assets keeps tougher. There have been so many changes in tax laws in a short span of time that more and more tax payers are concerned about how to make wise financial decisions. The best way to avoid mistakes is  have better knowledge about tax and tax laws. Therefore this post is to help tax payers to have more sophisticated knowledge about changes in tax systems particularly in terms of capital gains tax, in line with the newest measures from the Korean government to stabilize housing market on Dec16, 2019, inheritance tax and gift tax.

 

II. Tightened requirements for long-term holdingdeduction of single house owners

Under the revised capital gains tax law single high-priced house owners have to meet the two requirements to be eligible for long-term holding deduction: holding period and residency period. Previously, the law had required holding period only but two-year residency period has been added in 2020 and the deduction rate will vary depending on both holding residency period.

 

1) By 2019

Single home owners with a high-priced house which exceeds KRW 900 million are eligible for long-term holding deduction up to 80% (10 year holding period) depending on holding period regardless of residency period.

 

2) After 2020

For home owners who sell their house after Jan 1^st, 2020 deduction rates vary depending on residency period. Deduction rates shall be up to 80% for residency period of two years and more but the rates would be maximum 30% (15 year holding period).

 

3) From 2021

Revised capital gains tax law applies different long-term deduction rates to single expensive house owners based on their residency period.

		3~4yr	4~5yr	5~6yr	6~7yr	7~8yr	8~9yr	9~10yr	10yr ~
Single house owners	Total	24%	32%	40%	48%	56%	64%	72%	80%
	Holding	12%	16%	20%	24%	28%	32%	36%	40%
	residency	12%	16%	20%	24%	28%	32%	36%	40%
Multi home owners		6%	8%	10%	12%	14%	16%	18%	20~30%

* Multi-home owners areeligible for tax deduction up to 30% (15 year holding period) as in the past

* When to apply: houses sold after Jan 1^st, 2021

 

III. Tougher move-in requirements and reduction of overlapping holding period for temporary two-home owners in speculation-prone zone

Where a home-owner with a single house in a speculation-prone zone becomes a temporary two-home owner by buying another house the owner used to be given 3 years to sell one's old house to satisfy eligibility requirements for tax exemption for the old house. However the period reduced to 2 years (Sept 13, 2018) and reduced further to 1 year (Dec17, 2019) and the owner has to move into newly bought house within 1 year of its purchase.

 

1) By Sept 13, 2018

Temporary two-house owners meet the requirements for tax exemption as a single-house owner when the owner sells the old house within 3 years of acquiring of new house.

 

2) From Sept 14, 2018

Revised tax laws require temporary two-house owners to sell one's old house within 2 years of buying a new house.

* Two-house owners in the speculation-prone area

* The law applies to home-owners who buy a new house after Sept 14, 2018 and those who had a house in a speculation-prone area and buy another house in the area.

 

3) After Dec 17, 2019

Temporary two-house owners have to sell their old house and move in the new house within a year of its purchasing in order to be eligible for tax exemption.

* When to apply: houses newly purchased after Dec 17, 2019

 

IV. Temporary Capital Gains Tax Deduction for Multi-home Owners in Speculation-prone Zones

Multi-home owners in speculation-prone zones are in a predicament due to heavy capital gains tax and growing tax burdens incurred by realization of property tax and comprehensive real-estate tax. To help them out the government has decided to offer special temporary tax deduction and tax exemption exclusively when multi-house owners who have held a house in a speculation-prone area for more than 10 years and sell the house.

 

1) Current system

☞ Two-home owner: not eligible for long-term holding deduction + 10% additional tax

☞ Three-home owner: not eligible for long-term holding deduction + 20% additional tax

 

2) Temporary special tax deduction

Application of long-term holding deduction + exemption of 10 or 20 % additional tax

* When to apply: houses sold from Dec 17, 2019 to June 30, 2020

* Applied to the houses which were held formore than 10 years

 

◎ Tax increase on houseswhich were held less than 2 years

		Real-estate property other than house	House/ union member's right of residence
			Current	Revised
Holding period	Less than 1yr	50%	40%	50%
	Less than 2yrs	40%	Basic tax rate	40%
	More than 2 yrs.	Basic tax rate	Basic tax rate	Basic tax rate

*When to apply: houses sold after Jan 1, 2021

 

V. Ownership of a Lot is counted in a number ofhouse to decide whether a house in a speculation-prone area is subject to heavier capital gains tax

 

1) Currentsystem

The ownership of a lot is counted into the number of houses of a person in case of apartment  subscription or taking out loans. However, it is not the case for taxes including capital gains tax. The ownership of a lot does not affect deciding multi-home owners. However, union members' right of residence affects deciding number of houses, housing subscription and taking out loans.

 

2) Revised system

When a multi-home owner sells the house in a speculation-prone area it is subject toheavier capital gains tax because the house is taken into account in decidingthe number of house of a multi-home owner.

* When to apply: houses sold after Jan 1,2021

 

VI. Adding a Residency Requirement for Exemption of Capital Gains Tax on Registered Rental Housing

 

1) Current system

Single home-owners in a speculation-prone area are eligible for capital gains tax exemption when they meet the requirements of 2 years of holding and residency period for a house worth up to KRW 9 million. However,when the home owners registered themselves as a lease business operator they are eligible for capital gains exception regardless of residency period.

 

2) Revised system

Registered lease business operators have to meet the requirement of 2 year residency period to be eligible for capitalgains tax exemption as a single-home owner.

* Whento apply: houses registered as rental housing after Dec 17, 2019

 

VII. Expanding Applicable Subject of Special Taxation for Gift Tax on Succession to Family Business

The Restriction of Special Taxation Act which allowed only one heir to be eligible for tax deduction benefits has been revised to allow two or more heirs. However, total tax amount is the same regardless of the number of heirs.

 

1) Current system

Only one heir is eligible for succession deductions.

 

2) Revised system

Two or more are eligible for succession deductions but total tax amount is the same with the case when one heir succeeds to a family business.

* Whento apply: inheritance after Jan 1^st, 2021

 

VIII. Easing off the follow-up management requirements for employment retention in family-run companies which benefited from succession deductions

The beneficiaries of inheritance deductions have follow-up management obligations. They have to maintain average number of regular workers for 10 years and keep base number of employees 120% but they have been reduced to 7 years and 100%, respectively. Choices are granted in terms ofbase number of employees and gross salary base. Gross salary base need to be maintained about 80% and average wage needs to be maintained 100% during the follow-up management period.

 

1) Follow-up management period: 10yrs -> 7yrs

2) Employment retention rate of Mid-sized firm:120% -> 100%

3) Options for gross salary base;

① Maintain annual salary more than 80% of theprevious year

② Maintain average salary more than 100% during the follow-up management period

 

* When to apply;

☞ Reduction of follow-upmanagement period: inheritance succeeded after the enforcement of the revised law

☞ Alleviation of employmentretention obligation: retroactive application for inheritance succeeded before law revision in 2020.

 

IX. Extension of rate and limit for Inheritance TaxDeductions for Houses in which Ancestors and Heirs Have Lived Together

Where an ancestor and his/her heir have lived together for at least 10 years from the date inheritance commences and the heir meets the requirements of one house for one household he or she is subject to inheritance tax deductions for houses in which ancestors and heirs have lived together. The revised law has extended the limit and increased deduction rates.

1) Deduction rate: 80% -> 100%

2) Deduction limit: KRW 500 million -> KRW600 million

* When to apply: inheritance succeeded after the date of Jan 1^st, 2020

 

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