New tax applies to business property

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New tax applies to business property

Real estate investments by local companies will be subject to a new tax policy on internal corporate cash, the Ministry of Strategy and Finance said Monday.

The so-called recirculation tax that will slap levies on companies for as much as 80 percent of net income, which is accumulated as internal savings, is aimed at getting businesses to spend more on new equipment, facilities, new office buildings and factories.

Companies that have more than 50 billion won ($45 million) in internal corporate cash will pay the new tax. As many as 3,300 companies could be affected.

Starting this year, a 10 percent tax will be imposed on companies that use less than 80 percent of annual revenues for investment, wages and dividends.

Major Korean companies are accruing more cash than ever as they remain reluctant to boost investment and dividends, according to data from the Bank of Korea.

Cashable assets held by the nation’s top 500 companies hit a record of 158 trillion won as of September, up nearly 8 trillion won from the end of 2013.

Although the government cut the corporate tax rate to 22 percent in 2008 to encourage investment, major companies have been saving extra cash rather than spending it amid a slowing economy.

Under executive rules of the new tax policy, the value of buildings will be counted as taxable assets. If companies receive income by renting out some portions of their buildings, that income will be taxed as non-business related, the ministry said. A company must use at least 90 percent of the land itself to get tax benefits. Land that exceeds three times the footprint of structures will be taxed.

Companies that buy land for business purposes must start construction by the end of the calendar year after acquisition. A maximum of two years can be given as a waiver if extra time is needed to get administrative permission in such areas as the environment, traffic impact and land alteration.

Hyundai Motor Group’s 11-trillion-won land acquisition in Samseong-dong, southern Seoul, has been recognized as a business investment and is eligible for tax benefits, according to ministry officials.

Hyundai agreed to make its final payment this fall. If the automaker fails to do so or if construction is halted for more than six months for no apparent reason, it could face taxes. Renting out office space or selling it two years after the building is completed also could result in taxes owed.

The land Hyundai purchased from the Korea Electric Power Corporation in September last year can be classified as space for a corporate office building, according to the ministry.

That will exempt the money used to buy the land and build office towers, convention centers and showrooms from the new corporate income recirculation tax.

Hyundai Motor plans to build a 571-meter (1,873-foot), 115-story office building, as well as a convention center and other facilities on the site.

“The land Hyundai Motor Group bought from Kepco can be viewed as a business acquisition,” said a director general of tax policy at the ministry.

The official added that any convention centers used by Hyundai Motor could be viewed as part of a business building. A new hotel also is included as part of the company’s business operations within its article of association, so it could also be considered as a business investment, he said.

The official, however, said that if Hyundai builds and operates a department store at the site, that would require more reviews.

“According to our plans for dividends and investment this year, Hyundai Motor will not need to pay the corporate income recirculation tax regardless of the land acquisition,” the automaker said in a statement on Monday.

The automaker estimates its income will reach 4.6 trillion won this year. Under the tax rule, about 3.7 trillion won, or 80 percent of total income, would be taxable. But the automaker plans to dole out about 820 billion won as dividends this year, as well as investment and wage increases of more than 4 trillion won, it said.

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