Since the onset of the Korean economic crisis and subsequent IMF intervention, the government has actively   pursued the abolition of barriers to corporate restructuring and friendly M&A. The prospect of a heavy tax burden following corporate restructuring was one such barrier. To alleviate this burden, the government has prepared various tax incentives to better encourage and facilitate the process of corporate restructuring.  

The conditions under which tax incentives were granted for corporate restructuring have changed compared with those of the past. Previously, tax incentives were granted to specific corporations or industries. Moreover, incentives were permanent.

In contrast, the tax incentives recently prepared in connection with corporate restructuring will be granted to corporations that meet certain criteria, regardless of industry except for businesses relating to real estate or those services oriented purely toward consumption, such as restaurants, lodging, and entertainment. Also, to avoid the opportunity for moral hazard, current tax incentives are now only granted on a temporary basis. Specifically, the government will withhold the imposition of taxes associated with corporate restructuring for certain periods and will not levy the said taxes until prescribed conditions are met.

Current tax incentives for corporate restructuring can be categorized into several groups. Set forth below is a  brief summary of certain types of corporate restructuring tax incentives which currently obtain under the Tax Incentives Limitation Law.

1. Workout

According to the Corporate Restructuring Agreement ("CRA") agreed to by 208 financial institutions June 25th  1998, "corporate workout" is defined as a debt restructuring process that includes rationalizing a corporation's financial structure through debt-equity swaps, conversion of short-term loans into mid-term to long-term loans, granting a grace period for the repayment of loans, granting interest payment reductions, and a process that rationalizes the corporation's financial structure through the support of   capital, elimination of cross-loan payments, layoffs, selecting core businesses, and attracting foreign capital.

Under the CRA, when financial institutions choose to reduce the debt obligations of a corporation, the government will not impose tax on the gain from the reduction of loan obligations within the range of the subject corporation's carry-over loss, but for that amount of the debt  reduction which exceeds the carry-over loss, corporate tax will be imposed for three years after a three-year grace  period. Furthermore, financial institutions will be allowed to use the entire debt write-off amount as a loss for corporate tax purposes.

2. Enhancement of financial structure

According to the provisions for the "enhancement of financial structure" under the above law, when a corporation sells real estate and the proceeds are used to pay debts owed to financial institutions, the corporation is exempted from a special surtax that is normally imposed on the sale of real estate.

Also, if a corporation sells redundant real estate that was acquired through an M&A or business transfer, the special surtax shall be reduced to 50 percent of the original tax amount, provided it uses the sale proceeds under a corporate restructuring plan to redeem debts owed to financial institutions.

3. Business swaps

The "Big Deal" is an integral part of the effort by government to force major chaebol to realign their overgrown industrial conglomerates. Specifically, it refers to that  part of the restructuring process where two or more corporations conduct business swaps or exchange shares of specific subsidiary companies with the intention of realigning core business lines among big business groups.

When corporations exchange businesses through the transfer of shares, the tax on the difference after the   transfer of corporate shares will be deferred until the newly acquired shares are sold off. Additionally, when corporate owners donate their real estate properties to make up for price shortfalls in intended business swaps, the corporation that receives the donation will not be obliged to pay acquisition tax and registration tax on  the donated real estate properties.

4. Donations from shareholders

Samsung Group Chairman Lee Kun-Hee's decision  to donate part of his personal wealth to cover the debts  of Samsung Motors sent shock waves throughout the Korean business establishment to which such practices are generally alien. Mr. Lee put up four million shares of Samsung Life Insurance, worth 2.8 trillion won, to help expedite the disposal of debt-laden Samsung Motors.

Upon the fulfillment of certain conditions, tax incentives may apply to this kind of donation. A shareholder's capital gain tax, which may be incurred through the disposal of  the holder's properties, shall be reduced or exempted altogether, comensurate with the amount of the donation  so made. Meanwhile, as for the corporation receiving the donation, the donated amount shall not be included in its gross  income for corporate tax purposes.

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