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Taxation on the Stock Transfer of Domestic Corporation between Foreign Corporations
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2015-09-11
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Taxation on the Stock Transfer of Domestic Corporation (in Korea) between Foreign Corporations

 

I.    Overview

The Foreign Corporation ‘B' (located in China) which is holding whole capital stocks of Domestic Corporation ‘A' plans to transfer all those stocks to it's subsidiary, Foreign Corporation ‘C' (located in Virgin Islands).  The Taxation matter on this case by Tax authority in Korea and the process of the security transfer will be reviewed here with relative statute.

 

. Review

1. Tax on Capital Gains

1) Non-Taxable Income

It is regarded as a domestic source income under the Article 93 in Corporate Tax Act in Korea when the Foreign Corporation ‘B' (located in China) transfer the shares of Domestic Corporation ‘A'.  But it is not taxable income under the Article 13 in Tax Treaty between Korea and China (Article 93-9 in Corporate Tax Act, Article 13-5 in Tax Treaty between Korea and China)

 

2) Application of Non-Taxation, Tax Exemption

As per the Tax Treaty, it will be regarded as a Tax Exemption case.  In order to be exempt from the income tax, the transferee, upon the verifying the domestic source income actually accrued, should submit the application with a transferor's resident certificate issued by the authorities of country in which the transferor is located, to the head of a tax office having the jurisdiction over the place of tax payment of the income payer, by the 9th day of the following month of a day on which the income is paid. (Article 138-4 in Enforcement Decree of the Corporate Tax Act)

 

3) Check Point

Having the taxation right on the Capital Gains by local authority, it is not important issue on the transfer value, but the matter of being a constructive Gift should be considered.  In case it is a local transaction, it will be issued as the constructive Gift when it is upper or undervalued.  Considering as a foreign transaction, if the transferee is profit-making corporation, the Gift tax is not to be levied for this transaction under the ‘Inheritance Tax and Gift Tax Act' in Korea.  But in case the transferee is Non-resident or Non-profit making corporation, the relevant details should be reviewed.     

 

2. Securities Transaction Tax

1) Taxable Income

Having no stipulated in the Tax Treaty, the securities transaction tax is to be levied on the transaction, 0.5% of the arm's length price regardless of the Transfer value (Article 7 & 8 in Security Transaction Tax Act).

 

2) Process for Tax Payment

The Foreign Corporation which has no place of business in Korea, transfers share certificates, etc., not through any financial investment business operator, the transferee of such share certificates, etc. shall be the taxpayer. (Article 3 in Security Transaction Tax Act).

 

The foreign corporation which has no place of business in Korea, the location of the head or principal office of the corporation which has issued the share certificates on which the securities transaction tax is levied. (Article 4 in Security Transaction Tax Act).

 

The filing and payment of the tax amount of each quarter due date is within two months from the last day of the quarter to which the transfer date belongs.(Article10-1-2 in Security Transaction Tax Act)

 

3. Judgment on the Gift of domestic asset

1)   Having the taxation right on the Capital Gains by local authority, the transfer value could be decided at the discretion of the party concerned.  But it should be carefully considered that, as per the principle of substantial taxation, it could be taxable as a Gift income if the transfer is undervalued or no valued at all, (Article 92-10-c in Corporate Tax Act)

 

2)   The transfer contract and bank payment certificate should be secured and submitted.

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