South Korea's Supreme Court has ruled that acquisition tax exemptions must be revoked for a rental property owner who knowingly allowed tenants to operate an unregistered lodging business in officetel units.
According to legal circles on the 15th, the Supreme Court's Second Division (presiding Justice Kwon Young-jun) recently upheld a lower court ruling against plaintiff A, a rental business operator who sued the head of Busan's Suyeong District over acquisition tax assessments.
A purchased two officetel units in Suyeong District, Busan in 2019 and received acquisition tax exemptions under the former Local Tax Special Treatment Limitation Act. Article 31 of the former act stipulates tax reductions for first-time buyers of apartments or officetels measuring 60 square meters or less. A subsequently leased the units to tenants B and C from June 2020 to March 2023. The tenants operated lodging businesses without registering with authorities. B and C were caught running unregistered lodging operations through Airbnb and received summary indictment and suspension of prosecution respectively.
After the tenants faced criminal penalties twice for operating unregistered lodging businesses, Suyeong District Office assessed A a total of 18.84 million won in acquisition tax and local education tax. The office determined A had used the officetels for purposes other than rental. This followed provisions in the former special act requiring clawback of reduced acquisition taxes when rental operators use properties for non-rental purposes within the four-year mandatory rental period. However, A filed suit arguing, "The tenants used the properties for non-residential purposes, but I did not operate an unregistered lodging business myself."
The first and second instance courts reached different conclusions. The first instance court accepted A's argument and overturned the tax assessment. The court stated, "Interpreting the law to allow tax clawback even when tenants fail to use properties for residential purposes constitutes an expansive interpretation not permitted under the principle of tax legalism."
The second instance court ruled the acquisition tax should be assessed against A. While acknowledging the provision applies specifically to rental business operators, the court found A had effectively used the officetels for non-rental purposes because A knew the tenants were operating unregistered lodging businesses.
The Supreme Court found no error in the lower court's judgment and dismissed the appeal. The court stated, "Even if tenants use properties for non-residential purposes, the rental business operator bears responsibility insofar as they recognized and tolerated such use."
