REITs, REFs, and PFVs have benefitted from the non-application of a heavy acquisition tax rate for the acquisition of real properties located in the Seoul Metropolitan Area (“Non-application of Heavy Taxation”) pursuant to the Local Tax Special Treatment Control Law (“LTSTCL”). Recently, some local governments have imposed or collected a special rural development tax equivalent to 20% of the reduced acquisition tax amount which resulted from the Non-application of Heavy Taxation. However, in the Tax Tribunal case filed by Kim & Chang on behalf of the petitioner, the Tax Tribunal ruled that even if the petitioner was granted the Non-application of Heavy Taxation under the LTSTCL, it does not constitute a “tax exemption” as set forth in the requirements for payment of special rural development tax under the Act on Special Rural Development Tax (“Special Rural Tax Act”) and accordingly, does not trigger the obligation to pay the special rural development tax (Tax Tribunal Decision, rendered on October 23, 2023, the “Tax Tribunal Decision”). With this Tax Tribunal Decision, we expect that the controversies surrounding the local governments’ imposition of the rural development tax on similar cases will be soon be resolved. We provide the details of the controversies below:
Controversy Over Taxation on Reduced/Exempted Tax Under the Special Rural Tax Act
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(1) |
Non-Application of Heavy Taxation on Acquisition of Real Properties by REITs, Real Estate Funds and PFVs |
Pursuant to Article 180-2 (1) of the LTSTCL, the following entities are eligible for the Non-application of Heavy Taxation: (i) real estate investment companies (“REITs”) under the Real Estate Investment Company Act, (ii) real estate funds (“REFs”) under the Financial Investment Services and Capital Markets Act, and (iii) project financing vehicles (“PFVs”) under Article 104-31 (1) of the Special Tax Treatment Control Law.
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(2) |
Controversy Over Tax Exemption Under the Special Rural Tax Act |
Article 5 (1) of the Special Rural Tax Act stipulates that when an acquisition tax is subject to “tax exemption” under the LTSTCL, the special rural development tax shall be imposed on 20/100 of the reduced amount of acquisition tax (i.e., the portion of acquisition tax reduced by the tax exemption). Based on this provision, some local governments have imposed or collected the special rural development tax equivalent to 20% of the acquisition tax reduced by the Non-application of Heavy Taxation on the above investment vehicles eligible for the Non-application of Heavy Taxation (REITs, real estate funds, and PFVs) by deeming the Non-application of Heavy Taxation under Article 180-2 (1) of the LTSTCL as “tax exemption” under the Special Rural Tax Act.
For your information, initially, in its written tax ruling dated October 18, 2022, the Ministry of Economy and Finance (“MOEF”) which has the authority to interpret the special rural development tax (one of the national taxes), determined that the Non-application of Heavy Taxation does not constitute “tax exemption” set forth in the Special Rural Tax Act. Nevertheless, in quite a few cases, some local governments have still imposed the special rural development tax on the acquisition tax reduced through the Non-application of Heavy Taxation, arguing that the Non-application of Heavy Taxation constitutes “tax exemption” set forth in the Special Rural Tax Act based on a Supreme Court precedent (Supreme Court Decision 2022Du66125, March 16, 2023) or on the ground of equity on taxation.
Tax Tribunal Decision
This time, the Tax Tribunal ruled that the Non-application of Heavy Taxation is not a “tax exemption” under the Special Rural Tax Act, based on the following specific grounds: (i) the Non-application of Heavy Taxation is different from the tax exemption subject to the special rural development tax under the Special Rural Tax Act, (ii) imposing the special rural development tax is against the legality and clarity of taxation unless the Special Rural Tax Act explicitly stipulates that the Non-application of Heavy Taxation is subject to the special rural development tax; and (iii) the MOEF and the Ministry of the Interior and Safety have also rendered tax rulings that the Non-application of Heavy Taxation does not trigger the obligation to pay special rural development tax.
The Tax Tribunal rendered the Tax Tribunal Decision after its internal review, accepting the arguments of the petitioner and its counsel, Kim & Chang, and is expected to consistently render a decision against the imposition of the special rural development tax on the acquisition tax reduced through the Non-application of Heavy Taxation.
With the latest clarification from the Tax Tribunal Decision, REITs, real estate funds and PFVs that have paid the special rural development tax in the past may pursue the refund of the relevant tax amount or the cancellation of the tax assessment through legal proceedings, including the refund request or the tax appeal.
