[Tax Column] 

While attention in commercial real estate transactions is often focused on capital gains tax or acquisition tax, the main culprit causing unexpected tax bombs and cash flow blockages in practice is Value Added Tax (VAT). It is common for clients to face additional VAT liabilities ranging from tens of millions to hundreds of millions of won after signing a contract without reviewing relevant clauses in advance. We examine the key tax-saving points that must be addressed when trading commercial buildings.

Land is tax-exempt, buildings are taxed: Basic structure of Value Added Tax

The supply of land is exempt from value-added tax under Article 26, Paragraph 1, Item 14 of the Value-Added Tax Act, but the building portion is subject to taxation at 10% under Article 4 of the same Act. For example, if a commercial building worth a total of 5 billion won is valued as 4 billion won for land and 1 billion won for building, a value-added tax of 100 million won is incurred on the building portion.

Who pays this amount? Typically, the buyer bears the value-added tax (VAT). However, if it is not clearly determined at the contract stage whether the VAT should be included in the sale price, the seller may not receive the VAT and end up selling at a discount. Therefore, the seller needs to clearly stipulate in the sales contract that the burden of the VAT lies with the buyer.

'Comprehensive business transfer' that eliminates the buyer's cash burden

The most advantageous method in terms of financial burden is the 'comprehensive transfer of business assets' (Article 10, Paragraph 9, Subparagraph 2 of the Value Added Tax Act), which, once established, excludes the transaction itself from taxation and eliminates the need to exchange value-added tax. However, this requires strictly satisfying the requirements for a comprehensive transfer of business assets.

① Matching tax types of transferor and transferee,

② Maintaining the continuity of the business through the succession of existing lease agreements and tenants, and ③ Clearly specifying in the contract that it is a comprehensive transfer of business assets. Merely including a special clause is not sufficient for recognition (as denied in Tax Tribunal Decision 2023-8941 due to tenant eviction or non-fulfillment of requirements), so it is crucial to have a prior review by a tax expert to ensure that the requirements are met before signing the contract.

When a comprehensive transfer of assets and duties is not possible: Early refunds can also be utilized.

If a comprehensive transfer of business assets is not possible because you do not use the assets directly or succeed to the lessee, utilize the 'early refund' option. If you apply by the 25th of the month following the month in which the tax invoice was received, the refund will be processed within 15 days, preventing a large sum of money from being tied up.

However, since input tax incurred prior to the application for business registration is, in principle, non-deductible or non-refundable (Article 39, Paragraph 1, Item 8), it is a rule to complete business registration as a general taxpayer before receiving tax invoices.

Tax Bomb for Ignoring Proportionality: The '30% Rule'

It is risky to arbitrarily understate the value of a building for the purpose of reducing value-added tax (VAT). According to Article 29, Paragraph 9 of the Value-Added Tax Act, if the distinction between the land and building values is unclear, or if the allocated building value differs from the statutory standards (appraisal value or standard market value) by more than 301 TP3T, the tax authorities will deny the claim, recalculate the value, re-collect the VAT, and impose penalties. To prevent the risk of a tax audit, you must obtain an appraisal or issue tax invoices based on the ratio of standard market values and accurate allocation.

Precautions for the Apportionment of Common Input Tax for Commercial Properties Used for Both Taxable and Tax-Exempt Purposes

For mixed-use commercial establishments where tax-exempt businesses (hospitals, clinics, academies, etc.) and taxable businesses (cafes, offices, etc.) are located together, common input tax, such as exterior wall repair costs and elevator maintenance costs, must be allocated based on the area or supply price ratio, and only the taxable portion must be deducted (Articles 81 and 82 of the Enforcement Decree). In particular, when acquiring a building for tax-exempt business purposes, such as a Korean medicine hospital, the input tax credit for the portion directly used for the tax-exempt business is denied (Jeokbu 2026-0006). Therefore, the actual use of the building must be thoroughly reviewed in advance to avoid the collection of the entire deductible amount.