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Newsletter | December 2014, Issue 4
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Tax
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Tax tribunal decision recognizing high-technology tax exemption in cases of a consigned factory to an unrelated operator
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According to Article 116-2 (1) of the STTCL, a foreign-invested company may take advantage of high-technology business tax exemptions so long as it installs or operates factory facilities. In this regard, it was previously unclear whether having another unrelated company operate a factory under a management consignment contract qualified as the taxpayer-consignor’s “operation of a factory” for high-technology tax exemption purposes.
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In a recent case, a company had an unrelated third party operate a factory under a management consignment contract. The tax authorities rejected the high-technology tax exemption and imposed additional corporate income tax arguing that the third party’s operation did not qualify as the appellant’s “operation of a factory,” and therefore, a tax exemption did not apply.
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Kim & Chang, representing the appellant (i.e., the party owning the factory and seeking the tax exemption), obtained a favorable decision from the Tax Tribunal, which held that the tax exemption should apply. Specifically, the following arguments were particularly persuasive:
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The appellant carried out a design process and a mold manufacturing process, both of which were core processes using high-technology on their own;
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The purpose of the high-technology tax exemption is to spread the use of high-technology in Korea, and since the appellant conducted internal training for design skill development, the appellant’s activities are consistent with the specific purpose of the tax exemption;
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The appellant rented a factory in its own name and owned machines used in the manufacturing process;
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Throughout the manufacturing process, the appellant supervised and managed the personnel of the third party operating the factory under a management consignment contract; and
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Products were sold by and in the name of the appellant.
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