Recent Korean tax law changes will increase tax burdens for investors in Korean residential real estate
Lee & Ko, Seoul
Song Hee Oh
Lee & Ko, Seoul
Jae Woo Kim
Lee & Ko, Seoul
In August 2020, Korea enacted a number of notable tax law changes that are expected to significantly increase the tax burden in relation to the acquisition, holding and disposition of residential real estate in Korea. These changes are expected to have a significant impact for Korean and foreign investors in Korean residential real property.
Rising residential real estate prices and concerns over real estate speculation by investors have been perennial concerns in Korea. President Moon Jae-in’s administration (the current administration) vowed to tackle these problems upon taking office in 2017. However, residential real estate prices have continued to surge, even though the administration has enacted over 20 real estate market stabilisation measures since 2017 to regulate the residential real estate market. In some parts of the Seoul Metropolitan Area (SMA), such as the popular Gangnam District, average apartment prices have increased by over 100 per cent since 2017.
In August 2020, as part of additional residential real estate stabilisation measures, the Korean National Assembly enacted tax law amendments that will significantly increase the tax burdens for both Korean and foreign persons investing in residential real estate.
This article briefly summarises some of these key tax law amendments (2020 Tax Law Amendments).
Increase in comprehensive real estate tax rates
One of the key thrusts of the 2020 Tax Law Amendments are the significant changes to the comprehensive real estate tax (CRET) regime. Generally, Korea imposes two types of taxes on the holding of real property:
• property tax;
Property tax is imposed by the local municipality, whereas CRET is imposed by the national government. Both property tax and CRET are imposed annually.
Under the 2020 Tax Law Amendments, the CRET tax rates and calculation methodology have been revised to increase the CRET tax burden on taxpayers holding one or more residential real estate units that exceed a certain value. The increases will be significant, especially for taxpayers holding multiple residential estate units. These amendments will apply to residential real estate starting from the 2021 tax year.
Higher capital gains tax rates on sale of residential real estate
The 2020 Tax Law Amendments also raised short-term capital gains tax rates on the transfer of residential real estate in order to prevent short-term speculation in the market. As an example, for an individual, the capital gains tax rate on the sale of residential real estate will increase to 77 per cent (including local income tax) if the holding period is one year or less.
These new short term capital gains tax rates will become effective on transactions from 1 June 2021.
Higher tax burdens on real estate holding companies
For regulatory and tax reasons, many investors opt to use holding company structures to invest in real estate in Korea. The 2020 Tax Law Amendments also address the perceived unfair tax benefits of using holding companies to acquire and hold residential real estate by some investors.
Some of the key prongs of the changes include:
• higher CRET rates on companies holding residential real estate;
• elimination of tax deductions from CRET base for companies holding residential real estate; and
• increase in corporate income tax rates (if applicable) on holding companies on the gain from sale of residential real estate (ie, from 11 per cent to 22 per cent (including local income tax)).
These amendments should also impact investors holding residential real estate through collective investment vehicle structures, such as real estate investment trusts (REITs), real estate funds (REFs), etc.
Amendments relating to CRET will apply to the residential real estate from the 2021 tax year. The increase to the capital gains tax rate is effective on transactions from 1 January 2021.
Increase in acquisition tax rates
Generally, the standard acquisition tax rates imposed on purchase of residential real estate is one per cent to four per cent, depending on the region where the property is located. The 2020 Tax Law Amendments substantially increase the acquisition tax rates in certain cases. As an example, for individual taxpayers holding three or more residential real estate units, the rate can increase up to 12 per cent (not including surtax) if the individual acquires an additional unit in certain regions of the country.
These amendments are effective for acquisitions of residential real estate on or after 1 January 2021.
Elimination of preferential tax treatment of rental business
Finally, the 2020 Tax Law Amendments have reduced the tax benefits related to residential real estate held as rental business property. Historically, investors who register and hold real estate for rental business purposes obtained certain preferential tax treatment, such as partial exemption from acquisition tax, reduced property tax rates, exemption from CRET, etc. The previous administration had provided these tax benefits in order to incentivise taxpayers to register and report rental income.
However, many of these tax benefits for residential real estate held as rental business property will be clawed back, effective from 1 January 2021.
The recent real estate market stabilisation measures, including the 2020 Tax Law Amendments, have unleashed strong criticism. Many critics have pointed out that these stabilisation measures are complex and confusing, and that they were enacted too quickly without properly being thought through by the policymakers. In particular, some real estate experts have noted that many of these measures are not in line with market principles and do not address the fundamental reasons for the rapid rise in residential real estate prices, such as the shortage of residential housing units in the SMA.
Despite of the criticisms, the National Assembly enacted most of the tax-related stabilisation measures proposed by the Moon Jae-in administration in August 2020. However, we do not expect the 2020 Tax Law Amendments to be the final word, as the current administration is likely to propose additional tax law changes in the near future.
The 2020 Tax Law Amendments could have a significant impact on foreign investors who acquire, hold or dispose Korean residential real estate, including investors who currently hold Korean residential real estate through collective investment vehicle structures such as REITs, REFs, etc. Such investors should revisit their investments to assess future tax impact.
 The National Assembly is the unicameral national legislature of Korea.
 Although it is beyond the scope of this article, the 2020 Tax Law Amendments will also have an impact on investors in commercial real estate, but the impact is not expected to be as significant as that for residential real estate.
 Lee Kyung-min, ‘Korea’s real estate policy “counterproductive”: OECD’ (6 September 2020), www.koreatimes.co.kr/www/biz/2020/09/367_295525.html; Lee Kyung-min, ‘Korea’s real estate policy fiasco’, The Korea Times (13 July 2020), www.koreatimes.co.kr/www/biz/2020/07/175_292744.html; Lee Ho-Jeong, ‘Gov’t slammed for adding fuel to overheated real estate market’ Korea JoongAng Daily (2 July 2020), https://koreajoongangdaily.joins.com/2020/07/05/business/economy/apartment-prices-rising-prices-realestate/20200705180100426.html.