The Lee & Ko Tax Practice Group has successfully obtained a favorable ruling at the Seoul High Court, that the supply of a certain type of dual-purpose building commonly used for both commercial and residential purposes (colloquially known as an officetel in Korea), if it is built and used solely for residential purposes, is exempt from value-added tax (“VAT”) under the Restriction of Special Taxation Act (“RSTA”).
The RSTA provides that the supply of housing under a certain size and the construction service thereof is exempt from VAT. Divergent interpretations have existed as to whether an officetel, which appears as an “officetel” on the official public register but is built and used only for residential purposes, falls within housing in respect of the VAT exemption purposes. The construction industry has not, as a common practice, levied VAT when they have sold small-sized officetels built for residential use, believing that since the officetels were built exactly like conventional houses in compliance with the relevant construction regulation, the sales of those officetels shall be exempt from VAT. In 2018, however, the National Tax Service (“NTS”) unexpectedly launched tax audits focused on officetels built for residential purposes, specifically on the issue of whether VAT was due on such sales (the NTS believing that it was due). Consequently, VAT was imposed on a number of construction businesses for selling officetels which were built and used for residential purposes.
Lee & Ko has represented taxpayers in several high-stake cases on this particular issue, arguing that the levy of VAT on the supply of officetels built for residential use is illegitimate. The experienced tax litigators in the Lee & Ko Tax Practice Group presented their arguments at the district and appellate courts, providing a thorough analysis based on the language and legislative intent of the relevant legal provisions. Through their effective representation, Lee & Ko successfully led the appellate court to reverse the lower court’s decision and cancel the imposition of VAT.
This case has significant value and drew a lot of attention form the industry as the seminal case where a court, for the first time, decided that officetels built for residential purposes were exempt from VAT. If the decision of this case is confirmed at the Supreme Court, it will lead to enormous VAT refunds to the taxpayers.