Tax supporting system in Foreign Investment Promotion Act

 The Korea Herald 2000.06.21

    It appears to be simple for a foreigner to start a new business in Korea, but in reality there are many difficulties. It was a known fact that those foreigners who wished to invest in Korea particularly prior to the liberalization of foreign exchange could not but accept ineffectiveness. Since the IMF bailout program in 1997, however, Korea has reorganized overall regulations related with foreign investment, resulting in the new Foreign Investment Promotion Act currently in effect.

    The purpose of the act is to contribute to the sound development of the national economy through effective inducement of foreign investment by providing support for and facilitating foreign investment. It focuses on the improvement of the domestic investment environment with its foreign investment system reorganized based on the standpoint of foreign investors.

    Particularly following the "IMF crisis", Korean government recognized that the management of the foreign investment so far had been exceedingly bureaucratic. Hence, the new act is now support-oriented. Some of the major changes are as follows:

    - In the case of foreign investment, government regulations were reduced to a minimum.

    - Permission and/or approval systems were streamlined to speed up investment processes.

    - One-stop service became available through the Korea Investment Service Center (KISC), an organization established inside KOTRA.

    - Tax support was extended, and various incentives including subsidies were included.

    The Special Tax Treatment Control Act that deals with tax supporting systems in detail particularly for foreign investors reveals concrete support measures such as extension of the tax reduction period, tax reductions or exemptions for business establishments located within the Seoul metropolitan area, and tax reductions or exemptions based on the size of investment and employment.

    However, it is important to identify in advance whether a foreign investor is eligible for various tax support measures. Hence, it would be useful to study the definition of some terminology used in the new law.

    Article 2 of the Foreign Investment Promotion Act defines foreigner as follows:

    Foreigner shall mean the foreign national possessing foreign nationality, a legal entity organized under the laws of a foreign nation, an organization representing foreign national government for overseas relations, international organization handling in relation with the development financing such as IBRD, IFC, ADB, international organization handling and/or representing other overseas investment businesses, and the person who is living abroad on a permanent basis with Korean nationality (including the person who obtained a permanent resident visa or obtained resident permission equivalent to a permanent resident visa).

    Now what's the legal interpretation of foreign investment?Foreign investment means that:

    - A foreigner shall participate in business activities of a Korean corporation pursuant to the Foreign Investment Promotion Act, and- The foreigner shall own 10 percent or more of shares of the Korean corporation and exercise his voting rights; and- The foreigner shall invest in the Korean corporation to practically exert his influence on management of that corporation. Such investment shall be proved with a joint venture agreement or other substantiating documents.

    Those enterprises whose shares were owned by a foreigner by indirect methods such as purchasing the shares through the stock market are not considered as foreign- invested enterprises who can receive relevant support under the Foreign Investment Promotion Act.

    Now what kinds of tax supporting system are there for an investment made by a foreigner? Tax incentives include:

    - Reductions or exemptions on acquisition tax, registration tax, property tax and aggregate land tax for the property acquired and/or owned.

    - Reductions or exemptions on tariffs, special excise tax and value-added tax arising from inducement of capital goods.

    - Reductions or exemptions of corporate tax and income tax arising from the object of tax reductions or exemptions businesses.

    Such tax incentives depend on such types of businesses as the service businesses that are crucial in strengthening the international competitiveness of the domestic industries or the businesses that are based on cutting-edge technologies, and the business run by foreign-invested enterprise that is located in the foreign investment zone.

    Since the act provides details such as amount limit and the nature of the business, the first step will be to study legally whether the business is applicable to tax benefits such as tax reductions or exemptions.

    Once the enterprise is verified to be eligible for such tax benefits, the local tax, corporate tax, income tax, etc. that are mentioned above can be either reduced or exempted. In other words, the properties acquired or owned by the foreign-invested enterprise to conduct the businesses applicable to the tax benefits are subject to reduction or exemption of acquisition tax, registration tax, and consolidated land tax.

    Acquisition tax refers to tax imposed at a certain rate against the amount for acquiring real estates, etc., and the registration tax refers to the tax imposed when registering such purchased real estates on public book. Property tax refers to the tax levied on the owner of the real estate for his possession of real estate such as a building. Land is excluded from the property tax, but is included in the consolidated land tax.

    In the case of acquisition tax, registration tax and property tax, the tax reductions are available for the first three years for up to 100 percent of the amount that is calculated by multiplying the amount of relevant property by the foreign investment ratio. For the subsequent two years, the tax reductions are available for up to 50 percent of the amount. For the consolidated land tax, the same reduction rate shall be applied, but a different calculation method for tax reduction is used.

    The writer is a certified public accountant with the law firm of Kim, Shin & Yu. He can be reached at yslee@ksy.co.kr. - Ed.