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Tom Kwon
Lee & Ko, Seoul
[email protected]
Song Hee Oh
Lee & Ko, Seoul
[email protected]
Jae Woo Kim
Lee & Ko, Seoul
[email protected]
In August 2020, Korea passed a number of notable tax changes that are expected to significantly increase the tax burden on buying, holding and selling residential real estate in Korea. These changes are expected to have a significant impact on Korean and overseas investors in Korean residential real estate.
Rising residential property prices and concerns about property speculation by investors have been a recurring concern in Korea. President Moon Jae-in’s administration (the current administration) promised to address these issues when it took office in 2017. However, residential property prices have continued to rise despite the government taking over 20 measures to stabilize the property market since 2017 to regulate the residential property market. In some parts of the Seoul Metropolitan Area (SMA), such as the popular Gangnam District, average house prices have risen by over 100 percent since 2017.
In August 2020, the Korean National Assembly took additional measures to stabilize residential real estate[1] Enacted tax changes that will significantly increase the tax burden for Korean and foreign residents investing in residential real estate.
This article briefly summarizes some of these key changes to the Tax Law (Tax Law 2020 Changes).[2]
Increase in comprehensive real estate tax rates
One of the main focuses of the amendments to the Tax Act 2020 are the major changes to the comprehensive real estate tax regime (CRET). In general, Korea levies two types of taxes on property ownership:
• wealth tax;
• CRETE.
Property tax is collected by the local municipality while CRET is collected by the national government. Both property tax and CRET are levied annually.
As part of the 2020 tax law amendments, the CRET tax rates and calculation method have been revised to increase the CRET tax burden for taxpayers who own one or more residential property units that exceed a certain value. The increases will be particularly significant for multi-unit taxpayers. These changes apply to residential properties from tax year 2021.
Higher capital gains tax rates on residential property sales
With the 2020 tax law changes, tax rates on short-term capital gains for residential property transfers were also raised to prevent short-term speculation in the market. For example, for an individual, the capital gains tax rate on the sale of residential property increases to 77 percent (including local income tax) if the holding period is one year or less.
These new tax rates for short-term investment income will apply to transactions from June 1, 2021.
Higher tax burdens for real estate holding companies
For regulatory and tax reasons, many investors choose to use holding structures to invest in real estate in Korea. The 2020 tax law amendments also address perceived unfair tax benefits that result from the use of holding companies to acquire and hold residential property by some investors.
Some of the key points of the changes are:
• higher CRET rates for companies holding residential real estate;
• Eliminating tax deductions from the CRET base for companies that own residential real estate; and
• Increase in corporate tax rates (if applicable) for holding companies based on the profit from the sale of residential property (ie from 11 to 22 percent (including local income tax)).
These changes should also affect investors who hold residential real estate through collective investment vehicle structures such as real estate mutual funds (REITs), real estate funds (REFs), etc.
Changes related to CRET will apply to residential real estate from tax year 2021. The increase in the capital gains tax rate applies to transactions from January 1, 2021.
Increase in income tax rates
In general, the standard acquisition tax rates for buying residential property range from one to four percent depending on the region in which the property is located. The 2020 tax law changes will in certain cases significantly increase income tax rates. For example, for individual taxpayers who own three or more residential property units, the tax rate can be increased by up to 12 percent (excluding surcharge) if the individual purchases an additional unit in certain regions of the country.
These changes will apply to residential property purchases on or after January 1, 2021.
Elimination of preferential tax treatment for the rental business
Finally, the 2020 tax law changes have reduced the tax benefits for residential properties held as rental commercial property. Historically, investors who register and hold real estate for rental business purposes have received certain preferential tax treatment, such as: B. partial exemption from acquisition tax, reduced property tax rates, exemption from CRET, etc. The previous administration had provided these tax benefits to incentivize taxpayers to register and report rental income.
However, many of these residential property tax breaks that are held as rental will be reclaimed from January 1, 2021.
Conclusion
Recent measures to stabilize the real estate market, including the 2020 tax law changes, have generated strong criticism. Many critics have pointed out that these stabilization measures are complex, confusing, and that they have been implemented too quickly without being properly thought through by policy makers. In particular, some real estate experts have found that many of these measures are inconsistent with market principles and fail to take into account the fundamental reasons behind the rapid rise in residential property prices such as the shortage of residential units in the SMA.[3]
Despite the criticism, the National Assembly passed most of the tax stabilization measures proposed by the Moon Jae-in administration in August 2020. However, we don’t expect the 2020 tax law amendments to be the final word as the current administration is expected to propose further tax law changes in the near future.
The 2020 Tax Law amendments could have a significant impact on overseas investors buying, holding or selling Korean residential real estate, including investors who currently hold Korean residential real estate through collective investment vehicle structures such as REITs, REFs, etc. Such investors should re-examine their investments to assess the future tax implications.
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