ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Problems with and Remedies for Treatment of Certain Corporations as Pass－Through Entities

  • Junkyu Lee Kyung Hee University
  • Chan Woong Park Kyung Hee University

Asian Tax Journal Vol. 9 No. 4 (2008), pp. 9-27

Abstract

This study evaluates and seeks remedies to improve the pass－through treatments for corporations and their shareholders under the Tax Incentives Limitation Law as follows; First, since the pass－through treatments under the Law were modeled on partnership taxation of the United States, but apply to both partnerships and corporations, necessary provisions for corporations are omitted. It is advisable that two sets of provisions for pass－through treatments should be provided; one set for partnerships in Income Tax Law, the other for corporations in Corporate Tax Law in the long run. Second, retained earnings of a corporation which elects pass－through treatments should be divided into two parts; one arising before the election which would be taxable when distributed to shareholders and the other arising after the election which should not be taxable. For this, it is desirable to maintain accumulated adjustments accounts to determine taxable distributions. Moreover, first－in first－out method is suitable to Korean tax laws where there are balance of both untaxed retained earnings to shareholders and accumulated adjustments accounts. Third, there are no provisions for taxing built－in gain which exists at the election of pass－through treatments, even if the Ministry of Planning and Finance proposes to introduce the tax on built－in gain. However, the proposal should be lessened since it treats unrealized built－in gain as realized.

Keywords

  • Partnership
  • S Corporation
  • Accumulated Adjustments Account
  • Built－in Gain

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Asian Tax Journal

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