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Moving into an industrial complex itself may warrant local tax reduction or exemption as long as the given criteria are met. Local tax reduction or exemption
◎ Eligible areas
– Industrial complexes under the Industrial Sites and Development Act (national industrial complex, general industrial complex, urban high-tech industrial complex, and agro-industrial complex)
– Host areas under the Industrial Cluster Development and Factory Establishment Act
– Technoparks created under the Act on Special Cases concerning Support for Technoparks
◎ Eligible real estate
– Land purchased to build industrial buildings, etc.
– Industrial buildings, etc. acquired by either new construction or expansion (including the case of building or expanding factory buildings to rent to an SME)
– Industrial buildings, etc. acquired after a considerable renovation in an industrial complex, etc.
◎ Details of local tax reduction
– Acquisition tax
– Property tax
– Reduction period: Five years from the date on which tax obligations are established for the first time
– Reduction rate: 35% in the Seoul metropolitan area, 75% in other regions
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According to Article 78 of the Restriction of Special Local Taxation Act, 50 percent of the acquisition tax is exempted on land purchased to build industrial buildings or on industrial buildings either newly built or expanded in an industrial complex designated under the Industrial Sites and Development Act. An additional tax reduction of up to 25 percent can be granted under a local ordinance. A complex-type FIZ is designated in a national industrial complex or general industrial complex; hence the company is eligible for acquisition tax reduction or exemption.
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A foreign-invested company whose application for tax reduction or exemption is approved on or after January 1, 2020 is still eligible for reduction or exemption of local taxes. Article 121- 2(4) of the Restriction of Special Taxation Act states that foreigninvested companies that applied for tax reduction or exemption by December 31, 2019 are eligible for a reduction or exemption of local taxes. However, with the addition of Article 78-3 of the same Act, local tax reduction or exemption can be granted if an application is filed by December 31, 2022. In other words, the legal base for providing local tax reduction or exemption was changed.
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Registration tax was repealed and integrated into acquisition tax when the Local Tax Act was revised on March 31, 2010 (enforced on January 1, 2011). Registration tax is effectively reduced or exempted since it has become a part of acquisition tax, which is reduced or exempted. However, it is technically incorrect to say that registration tax is exempted or reduced as such a tax no longer exists, and it is advised to refrain from mentioning the registration tax.
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The deadline for applying for tax reduction is the last day of the taxable year in which the foreign-invested company's business was commenced. If a foreign-invested company applies for and is granted tax reduction or exemption after the deadline, the company can receive a tax reduction or exemption for the tax year in which the application was submitted and for the remaining reduction or exemption period. However, the tax paid before the tax reduction or exemption decision will not be refunded.
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When a foreign-invested company is eligible for tax reduction or exemption for both foreign investment and startup small and medium-sized enterprises, the company may choose only one advantageous reduction or exemption.
◎ However, if the company keeps the book for its business eligible for foreign investment tax reduction or exemption completely independent from the other operations and their income sources can be separated, tax reduction or exemption for foreign investment and tax credit and tax reduction or exemption for other businesses can both apply
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Such a foreign-invested company should keep the accounting records for the business eligible for tax reduction separately from the business that is not. The tax reduction amount is calculated by multiplying the assessed corporate tax amount by a ratio of the tax base from the eligible business to the total corporate tax base and then by the reduction rate.
◎ The calculation formula is as follows:
– Tax reduction amount = Assessed corporate tax amount × (Tax base from the business eligible for tax reduction ÷ Total corporate tax base) × Reduction rate
– Reduction rate = Ratio of foreign investment × reduction rate (100%, 50%)
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Even if an FIZ is designated and publicly announced as an individual-type FIZ, companies in the FIZ shall make a separate application for tax reduction and exemption to the Minister of Economy and Finance. Tax reduction will not be granted without such an application.
◎ Required documents when applying for tax reduction and exemption (for submission to the International Economic Affairs Division of the Ministry of Economy and Finance)
– The tax reduction and exemption application form
– Notification of foreign investment by acquisition of stocks or contribution
– Documents that prove the FIZ has been designated as an individualtype FIZ (e.g., an official announcement of the local government)
– Documents demonstrating the business sector (e.g., project plan)
– Documents proving the installation of new production facilities
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The company is exempt from customs duty on capital goods whose import declaration is completed within five years from the date of foreign investment notification. It should be noted that the starting date of the five years is not the date of the decision to grant tax reduction or exemption nor the first day of commencing business operation, but the date of the foreign investment notification. Therefore, it is safe for foreign-invested companies such as general resort complex businesses which require a long time to obtain licenses to put off the foreign investment notification as long as possible.
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The general reasons for the additional collection are listed below. More details can be found in Article 121-5 of the Restriction of Special Taxation Act. Corporate tax exemption for foreign investment was repealed on January 1, 2019. However, additional collection is still applicable to the corporate tax that had been exempted before the abovementioned date.
– In case of cancellation of registration or business closure
– Where the company fails to meet the requirements for tax reduction or/and exemption for foreign-invested companies prescribed in the Restriction of Special Taxation Act
– Where a person, who has received a corrective order due to nonfulfillment of notification, fails to comply with it
– Where a foreign investor transfers the stocks which he/she owns to a Korean national or a Korean corporation
– Where the foreign-invested company fails to meet the requirements within five years (or three years for requirements for tax reduction or/and exemption relating to employment) from the date it notified foreign investment, in terms of payment of the object of investment, acquisition of loans, or the number of workers it has employed
– The object of investment is disposed of or used for purposes other than those notified
– The foreign investor's ratio of stocks, etc. falls short of the ratio of stocks, etc., at the time of reduction or/and exemption