What are the tax exemption requirements for VAT on real estate transactions?

In South Korea, Value Added Tax (VAT) is generally applicable to real estate transactions. However, certain transactions are exempt from VAT under specific conditions.

Key VAT Exemption Requirements for Real Estate Transactions:

1. Residential Housing (National Housing Scale or smaller):

   • The supply of residential housing that falls within the national housing scale (typically under 85 square meters, or 100 square meters in rural areas) is exempt from VAT.

2. Land:

   • The supply of land is always exempt from VAT.

3. Residential Housing Used for Rental Business:

   • If a business primarily engaged in residential rental business (a VAT-exempt business) sells a residential property that was used for this rental purpose, the sale may be VAT-exempt. The key is that the property must have been used for the exempt rental business.

4. Specific Cases for Financial Institutions:

   • Financial and insurance companies may be exempt from VAT when selling collateral real estate acquired due to a borrower's default, provided the property was not used for taxable business purposes before sale.

Important Considerations:

• Opiestels: Generally, officetels are considered commercial properties and are subject to VAT, even if used for residential purposes. Their VAT exemption status is typically determined by their registered use (office facility) rather than their actual use.
• Mixed-Use Properties: For properties that combine taxable (e.g., commercial space) and exempt (e.g., residential housing) portions, the VAT treatment depends on the specific allocation and use of each part.
• Business Transfer (포괄양도양수): In some cases, a business transfer where all rights and obligations are transferred may be treated as a non-taxable event for VAT purposes, but this is complex and depends on specific conditions, such as the continuity of the business and the transfer of all related assets and liabilities.