Supreme Court: Business-Registered Officetels, Even If Suitable for Residence, Are Not Exempt from VAT

Supreme Court, Seocho-dong, Seoul / Photo by Honam Moon munonam@

[Asia Economy Reporter Kim Daehyun] The Supreme Court has ruled that officetels, which are effectively used as residential units, are not exempt from value-added tax (VAT) if they were registered as office facilities at the time of their initial supply.

On the 19th, the Second Division of the Supreme Court (Presiding Justice Ahn Cheolsang) announced that it overturned the lower court's ruling in favor of Mr. A, an officetel sales and distribution business operator, who filed a lawsuit against the Buk Incheon Tax Office seeking cancellation of a VAT imposition order, and remanded the case to the Seoul High Court.

The court stated, "The officetels in question were registered as office facilities at the time of supply," and added, "Regardless of whether their size is below the national housing standard under the Housing Act or whether they are effectively used for residential purposes, they cannot be considered 'national housing' exempt from VAT."

In 2014, Mr. A constructed and sold a mixed-use building with 14 floors above ground in Bupyeong-gu, Incheon. While reporting and paying VAT, he did not declare 36 officetel units registered as office use within the building, judging that since the officetels were under 85㎡ in area and equipped with ondol heating, they were effectively residential and thus VAT-exempt.

However, the Buk Incheon Tax Office imposed approximately 450 million KRW in taxes on Mr. A, stating that VAT was applicable under the Restriction of Special Taxation Act.

The first trial court ruled that the officetels were not exempt from VAT. The court reasoned, "Even if occupants use the officetels for residential purposes, this is a circumstance arising after the supply, and owners can at any time use them as general office facilities according to their original purpose," dismissing Mr. A's claim.

On the other hand, the second trial court ruled in favor of the plaintiff. The court stated, "Each unit was sold with the structure of a residence and is actually used for residential purposes," and "It is reasonable to regard the officetels as housing since they were designed, constructed, and sold as substantial residences from the beginning." This meant Mr. A's officetels were VAT-exempt.

However, the Supreme Court ruled, "The lower court erred in interpreting and applying the exemption provisions, which affected the judgment," and remanded the case.

This content was produced with the assistance of AI translation services.