[Practical Finance] Reducing Ownership and Transaction Taxes... The Boom in Establishing Real Estate Corporations

Over 12,000 Corporate Apartment Purchases in Q1... Five Times Last Year
Comprehensive Real Estate Tax Rate Only 0.7%... Absolutely Advantageous Compared to Individuals

Corporate Tax Rate Up to 35% When Selling, Lower Than Capital Gains Tax
Purchasing for Actual Residence or Long-Term Holding May Actually Result in Loss

Panoramic view of the Resentz Apartment Complex in Jamsil-dong, Songpa-gu, Seoul.

[Asia Economy Reporter Lee Chun-hee] There were two real estate transactions that caused a stir in the market earlier last month. An 84㎡ (exclusive area) apartment in 'Risence' located in Jamsil-dong, Songpa-gu, Seoul, was sold at actual transaction prices ranging from 1.6 billion KRW to 2.2 billion KRW within a month, showing a gap of 600 million KRW. However, according to Asia Economy's investigation, the highest price transaction was revealed to be a gift-type transaction sold to a corporation where the previous owners were registered executives. Mr. A and Ms. B, a married couple, sold the jointly owned apartment to a corporation where they were registered as an internal director and auditor, respectively.

Recently, methods of real estate tax saving through corporations have gained significant attention, especially after celebrities publicly disclosed such strategies on major broadcast channels. In fact, in March alone, there were as many as 5,171 apartment sales from individuals to corporate buyers, marking the highest number in 14 years since the Korea Appraisal Board began this survey in 2006. Even in the first quarter, there were a total of 12,002 corporate purchases, nearly five times the 1,909 cases recorded in the same period last year.

The number of corporations presumed to be established for the purpose of holding real estate has also increased significantly. According to the National Tax Service last month, there were 6,754 real estate corporations owned by single shareholders and their families. These corporations owned approximately 20,000 apartments, averaging about 3.2 apartments per corporation.

Photo by Mun Ho-nam munonam@

The popularity of real estate transactions through corporations is inevitable because cost savings are possible throughout the entire process from purchase to holding and sale. Currently, the comprehensive real estate holding tax rate imposed on personally owned houses is up to 2.7%. For multi-homeowners, it can be increased up to 3.2%. However, the comprehensive real estate holding tax rate for apartments under corporate names is only 0.7%.

According to current tax laws, individuals are subject to capital gains tax of up to 62% when selling apartments depending on the gain. However, corporations only pay a corporate tax of up to 35% by combining the gain with other income, making it much more advantageous for tax savings.

Although currently blocked due to government policies, loan limits were higher when using corporations for real estate transactions. When individuals purchase houses priced over 900 million KRW, the loan-to-value ratio (LTV) for mortgage loans was limited to 40%, but corporations could borrow up to 80%, double the LTV. Following concerns raised about this, the 9.13 measures in 2018 regulated the LTV for rental businesses to 40%, and the 10.1 measures announced last year also limited the LTV for housing sales businesses to 40%.

However, there are also precautions when holding apartments through corporations. If the apartment is purchased for actual residence or long-term holding purposes, holding it through a corporation may actually be disadvantageous. Currently, individual owners of a single house receive benefits such as tax deductions or lower tax rates if they meet conditions like long-term holding and actual residence. During last month's general election, proposals to reduce comprehensive real estate holding tax for single homeowners were raised, mainly by ruling party candidates in the Gangnam area. Such tax-saving benefits are almost nonexistent when holding through corporations.

The process of obtaining profits through sales is also complicated. In this case, to legally obtain profits, one must receive them through dividends from the corporation. Since this income is subject to comprehensive income taxation, additional income tax may be incurred.

Im Kwang-hyun, Director of the National Tax Service Investigation Bureau, is briefing on the comprehensive verification of real estate corporations purchasing high-priced apartments and the immediate tax investigation in case of evasion allegations on the morning of the 23rd of last month at the Sejong Government Complex.
[Photo by Yonhap News]

The government's response should also be noted. Recently, the National Tax Service took direct action. On the 23rd of last month, the National Tax Service announced plans to start tax audits on real estate corporations that purchased high-priced houses. The National Tax Service views that real estate corporations owned by single shareholders or families have no reason to be established unless the purpose is to evade real estate-related taxes. Furthermore, they have expressed intentions to consider mandatory disclosure of funding sources when corporations purchase real estate. Although currently limited to investigating illegal activities such as tax audits or funding source investigations, the possibility of additional regulations through legislation remains open, so the associated risks must also be considered.