On July 21, 2022, the Ministry of Economy and Finance announced its 2022 Tax Reform Plan (the “Tax Reform”). Notably from the real estate investment aspect, the Tax Reform includes plans for improving the dividend-paid-deductions (“DPD”) for corporate-type funds (REFs), REITs and PFV. They are, (i) to allow carryover of excess dividends paid by REFs/REITs/PFV to the following tax year for corporate income deduction purposes, and (ii) to extend the sunset date of DPD for PFV.
1. Carryover of excess dividends paid by corporate-type funds/REITs/PFV, etc.
DPD applies to certain special purpose entities such as corporate-type funds (excluding PEFs), REITs (excluding self-managed REITs), and PFV set forth in the Corporate Income Tax Law (Subparagraphs of Article 51-2(1)) and the Special Tax Treatment Control Law (Article 104(31)). In the past, even if dividends are paid in excess of taxable income for the relevant fiscal year, the excess dividends (i.e., the difference when the dividends paid are greater than the income for the relevant fiscal year) were unrecognized for income deduction purposes and extinguished without carryover. The Tax Reform allows the excess dividends to be carried over and deducted from the income generated in the following fiscal year to lower the taxpayer’s taxable income base.
Specifically, under the Tax Reform, the excess dividends can be carried over and deducted from the income generated in the following fiscal year(s) for up to five years, and such carried over excess dividends must be deducted from the income first ahead of the dividend paid in each fiscal year.
2. Extension of subset date of DPD for PFV
The regulations governing PFV transferred from the Corporate Income Tax Law to the Special Tax Treatment Control Law at the end of 2020. As the result, a sunset regulation was newly enacted to cease the DPD-based income deduction after December 31, 2022 which created great uncertainty for PFVs undertaking development projects whose completion dates fell outside the sunset date. Tax Reform proposes to extend the sunset date for the DPD for additional three years until December 31, 2025. It has been known that the Ministry was considering extending the sunset date for additional two years, but the actual Tax Reform announced included three-year extension plan.
The proposed Tax Reform will undergo the pre-legislative announcement period from July 22, 2022 until August 8, 2022. Thereafter, the Tax Reform will undergo deliberation within the Ministry during August and is expected to be submitted to the regular session of the National Assembly before September 2, 2022.
Related Topics
