This article aims to review a few tax issues regarding reinsurance transactions and to find some legal implications in terms of practical or legislative approaches to improve tax practices related to reinsurance transactions. The essential points of this article are as follows;
First, the decision of the National Tax Tribunal (hereinafter ‘NTT’), Josim 2008 Seo 3603 is appropriate, because it acknowledged the substance of a reinsurance transaction relying on concrete facts and circumstances. Additionally, another tax issue of Josim 2008 Seo 3603 is the limit of the recast of transactions. For the present, the position of the Korean Supreme Court has still been uncertain, which increases the tax risks of taxpayers. In order to reduce this uncertainty, it is necessary to set up more definite standards after careful consideration.
Second, premium reserves are not loans, but premiums to be paid in two installments. The NTT’s decision, Josim 2011 Seo 23, also rejected the argument of the National Tax Service (hereinafter ‘NTS’) that premium reserves should be treated as loans under the Corporate Tax Act §28. From a legislative viewpoint, there is no definition of loans in the Corporate Tax Act §28, which causes disputes between taxpayers and the NTS about the scope of loans. Some legislative measures should be taken in order to clarify the coverage of loans for the purpose of judging whether transactions in various situations should be classified as loans.
Third, if foreign reinsurers without permanent establishments in Korea receive reinsurance premiums and interest on premium reserves from domestic companies, reinsurance premiums are usually treated as business profits of domestic source income and not to be included in taxable income. On the other hand, the NTS’s position is that interest on premium reserves is taxable as domestic source income, especially interest, since the substance of premium reserves is a loan. However, like usance interest paid to non-residents without permanent establishments, interest on premium reserves is just an additional expense of reinsurance premiums, not interest on loans. Therefore the NTS’s position is inappropriate and interest on premium reserves, a kind of business profit should be ruled out from taxable domestic source income.