ATJ Asian Tax Journal

Asian Tax Journal

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A Study on the Imposition of Value Added Tax on the Cases of Business Transfer without Real Estate

  • Chung, Ji-Sun University of Seoul Graduate School of Taxation

Asian Tax Journal Vol. 14 No. 5 (2013), pp. 41-65

Abstract

In South Korea, the value added tax(VAT) is imposed on supply of goods and services as well as importation of goods. However, VAT is not charged on goods provided as collateral, taxes paid in kind, transfer of business and some other specific transactions. In particular, there is interpretative controversy about the transfer of business；especially, relating to cases where a transferee does not take over real estate to be used directly for business but leases it from the transferor. In the event that the case is regarded as business transfer in a broad sense, it may be problematic to impose VAT. On the other hand, it may be reasonable to impose VAT in case it is interpreted that the ownership of real estate was not transferred. In case the transferee can maintain the identity and continuity of business without taking over the ownership of real estate, it may be interpreted to meet requirements for business transfer. In South Korea, however, VAT is imposed on such transferees because it is considered as incomplete transfer of business. In contrast, Germany, UK and Australia do not impose VAT on transferees who maintain the continuity of business without taking over the ownership of real estate. The same needs to apply to South Korea. The present VAT system needs to be readjusted realistically, in terms of substance－over－form principles. There is the need to extend VAT exemption even into cases where real estate is excluded from transferred assets unless it is indispensable to business. In the case of real estate indispensable to business, in principle, VAT exemption should be applied only to cases where it is included in transferred assets. Realistically, however, it may be advisable to apply VAT exemption to cases where a transferee did not take over real estate but maintains the identity of business by leasing it. Lastly, it requires that the legal standard of business transfer should be complemented more concretely, and that more detailed guidelines should be given to taxpayers in order that their misjudgment and tax disputes can be minimized.

Keywords

  • Value Added Tax
  • Business Transfer
  • Real Estate
  • Lease
  • Tax Exemption

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