The client had operated a chemical factory for more than 40 years before it moved its factory to another location. While transferring the factory, the client sold the land on which the original factory was located and rented land for the interim operation of the factory. The client incurred an input VAT on demolition expenses, which the tax authority denied deducting against output VAT, arguing that it was land related input VAT. Under the Korean VAT Law, land related input VAT is not deductible.
Kim & Chang represented the client as the plaintiff and successfully persuaded the judge that the input VAT was directly related to the client’s VAT-able business (i.e., chemical business) based on the fact that (i) the client operated the factory for more than 40 years, (ii) the client continued to rent the land and operated the factory during the interim period and earned revenue, and (iii) any business that is closing will have expenditure like demolition, which is deductible.
This was the first case where the deductibility of input VAT on demolition expenses incurred in the course of a factory transfer was at issue. Even though a large portion of the demolition expense related to cleaning up the land after demolishing the chemical factory which may be seen as being related to land, Kim & Chang successfully argued that all of the demolition expenses were directly related to the client’s chemical manufacturing business, based on extensive legal research of the relevant precedents and thorough fact finding with respect to the background to the client’s factory transfer.
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