Premiums on shops could be taxed

After the government decided on Wednesday to guarantee premiums paid on borrowed properties be returned to tenants who run mom-and-pop stores, questions are arising about whether or not the payment will be taxed.

The government’s decision was welcomed by people who own and struggle to maintain their own businesses, since it would protect premiums as part of their personal assets.

Premiums for units in commercial buildings in Seoul averaged 127 million won ($121,000) last year. The price of premiums varies based on a store’s sales, number of customers and the quality of the building.

There have been many conflicts over landlords keeping the premiums instead of giving them to the renter.

The government said on Wednesday it would amend the Commercial Building Lease Protection Act to legally define building premiums as tenants’ assets this year after the revision is approved by the National Assembly.

Under the amendment, landlords must make sure their tenants receive the premium they paid to a previous tenant from the incoming tenant.

The Ministry of Strategy and Finance said in its report that under the national income tax law, premiums are categorized as “other income,” and are subject to taxation.

But the ministry yesterday denied the possibility that it would tax the premiums, saying “the latest decision was not made based on the intention of increasing tax revenue.”

“Since the general perception is that premiums are costs rather than income, most people do not report the amount of premiums to the tax authority, nor does the government keep track of it,” said an official at the National Tax Service.

However, if the government moves to require that premiums be reported the future, small merchants will have to pay additional income taxes.

According to a possible plan by the government included in Wednesday’s protection measures, the income tax on premiums will have a different rate from other income based on a 15 million won standard. If a tenant receives 15 million won or less as a premium, the tax rate will be fixed at four percent.

If the amount is more than 15 million won, the premium will be added to the annual income and taxed under the existing system of income tax rate ranging from six percent to 38 percent.

Therefore, the total income tax that must be paid by those who run restaurants or grocery stores could go up by at least 600,000 won.

If premiums are more than 50 million won, the additional tax could be about 2.4 million won.

Critics of the plan to protect premiums say the government might have been part of its goal to raise tax revenue in the near future.

“I agree with the government’s plan to protect the rights of tenants, but if taxation is enforced before the policy has settled down, there may be huge backlash,” said Kim Woo-cheol, professor at the Graduate School of Science in Taxation at the University of Seoul.

BY SONG SU-HYUN and CHOI SEON-WOOK [ssh@joongang.co.kr]