Background
A corporation with its head office outside the greater Seoul area built and acquired a rental income building in central Seoul. The tax authority then opened an audit, suggesting that "the head office exists in form only and the company is in substance a 'paper company' operated inside the metropolitan area (Seoul)," with a view to imposing the heavy acquisition tax (aggravated taxation) applicable to metropolitan corporations.
What Was at Stake
Under the Local Tax Act, acquisition tax is imposed at an aggravated rate where a "corporation established and operated in a metropolitan area (an overconcentration control region)" acquires real property within that area. The central question was whether this corporation's "substantive head office" could be regarded as located inside the metropolitan area. If the aggravated rate applied, the tax could multiply several times over.
How Changchun Helped
Changchun (attorney Jaesun Yoon) made a point-by-point showing, supported by documentary evidence, that ① the corporation's head office had been located outside the metropolitan area (in the outer greater Seoul region) continuously since incorporation; ② work on constructing a building must by its nature be carried out externally — at design offices, construction sites, financial institutions and the like — so those locations are not "offices of the corporation"; and ③ the corporation had never leased an office or stationed employees inside the metropolitan area. We also made clear the principle that, to apply the aggravated rate, the tax authority bears the burden of proving that "the substantive head office was in the metropolitan area."
As a result, an improper aggravated acquisition tax was avoided. Local tax audits proceeding on the logic that "a corporation headquartered in the provinces that acquires Seoul real estate is a paper company and should be taxed at the aggravated rate" have been increasing of late, and this case shows how important it is to explain precisely the substance of head office operations and the nature of the work involved. (Outcomes depend on the facts of each case and may differ.)