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Lotte Signiel Residences Wins Appeal Against Luxury Housing Heavy Acquisition Tax

[비즈한국] Lotte Property & Development has won an appeal against the Songpa-gu Office regarding a lawsuit filed to cancel the imposition of heavy acquisition taxes on its Signiel Residences officetel units, overturning a previous district court ruling. The disputed tax amount, including acquisition tax, local education tax, and special rural development tax for two units, totaled approximately 700 million KRW. However, as the Songpa-gu Office has appealed the decision, the case will now head to the Supreme Court. Depending on the final outcome, Lotte Property & Development is expected to seek refunds for the remaining units on which heavy taxes were previously paid.

On August 20, the 1-1 Administrative Division of the Seoul High Court (Presiding Judge Shim Joon-bo) ruled in favor of Lotte Property & Development, overturning the first-instance decision in the lawsuit filed against the Songpa-gu Office to cancel the heavy acquisition tax imposed on two units of the Signiel Residences officetel. The court stated, "The imposition of acquisition tax, local education tax, and special rural development tax (including surcharges) totaling 681.16 million KRW, which the Songpa-gu Office levied on Lotte Property & Development in March 2021, is hereby canceled."

Signiel Residences is a luxury officetel located between the 42nd and 71st floors of Lotte World Tower. In January 2017, Lotte Property & Development completed construction of the 123-story (555m tall) Lotte World Tower near Seokchon Lake in Songpa-gu, Seoul. In April of the same year, the company acquired all 223 units of the Signiel Residences and began sales. The average sale price was around 70 million KRW per 3.3㎡. In January 2022, one unit on the 70th floor with a dedicated area of 795㎡ (240 pyeong) was sold for 33.4 billion KRW, marking the highest sale price in the history of officetels in Korea.

Paid heavy taxes on 38 units, received refunds for 25

Initially, Lotte Property & Development reported and paid heavy acquisition taxes for 38 units at Signiel Residences. This was because they had determined that these units, which exceeded 245㎡ in dedicated area, were "luxury housing" subject to heavy tax rates under the Local Tax Act. Lotte also paid local education and special rural development taxes at the higher rates along with the acquisition tax.

Acquiring luxury housing involves heavy taxes. Under the Local Tax Act in effect at the time of the acquisition, residential buildings or their annexed land are classified as luxury housing—subject to higher taxes—if they exceed the area and price thresholds set by presidential decree or include facilities such as a swimming pool of 67㎡ or larger. According to the decree, apartment units exceeding 245㎡ in dedicated area are considered luxury housing. Properties that become luxury housing within five years of acquisition are also subject to heavy taxation.

Among the 38 units where heavy taxes were paid, Lotte processed refunds for 25 of them. In December 2019, Lotte filed for a tax correction, arguing that these units did not qualify as luxury housing and requested the application of standard tax rates. The justification was that these 25 units were registered as "business facilities" in official records, such as building ledgers, and had not been used as residences as of December 2019, but were either leased as offices or left vacant. The Songpa-gu Office accepted this, reduced the acquisition tax, and refunded the difference.

Songpa-gu Office claims "tenants exist," sparks conflict over 2 units

Later, the Songpa-gu Office decided to re-apply the heavy tax to two of the 25 units that had been refunded. Upon inspection after the refund, it was discovered that Lotte had signed lease agreements for these two units and the tenants had even completed moving-in notifications. In March 2021, the Songpa-gu Office imposed 681.16 million KRW in heavy acquisition taxes, local education taxes, and special rural development taxes (including surcharges) on Lotte Property & Development.

Lotte contested this, first filing a request for adjudication with the Tax Tribunal. After the request was rejected in October 2022, the company filed a lawsuit in the Seoul Administrative Court in January of the following year to cancel the tax imposition. Their argument was that since the Signiel Residences officetel is officially a business facility, it is not a "home" and therefore cannot be a luxury residence subject to heavy taxes. They further argued that changing the tax status based on the subsequent behavior of tenants violates the principle of self-responsibility in tax law.

1st instance court: "It is luxury housing"; 2nd instance: "No basis for price judgment"

The first-instance court ruled against Lotte last December, judging the units to be luxury housing. The court at the time stated, "Under the Local Tax Act, a residential building is one that can be used for actual residential purposes, regardless of its official designation," adding, "These officetel units exceed 245㎡ and were designed and constructed as residential buildings (apartment housing) where multiple households can live independently, and since they were actually used for residential purposes, it is reasonable to classify them as luxury housing."

However, the second-instance court overturned the ruling, citing that there was no basis to prove the units met the price criteria for luxury housing. The local tax decree in effect at the time limited the classification of luxury housing to properties "where the standard market value at the time of acquisition exceeded 600 million KRW." The standard market value is either the publicly announced price or a price calculated by the head of the local government (for non-publicly announced apartment prices); at the time, neither price existed for these units.

There was a reason the standard market value for the Signiel Residences did not exist: because they were officially business facilities, they were not recognized as apartment housing under the Housing Act, and therefore, an official apartment price could not be established. For the heavy tax to apply, the value calculated by the district head according to Ministry of the Interior and Safety standards had to exceed 600 million KRW. The Ministry only enacted and implemented the "Criteria for Investigating and Calculating Standard Market Value for Non-Publicly Announced Apartments" in May 2023, two years after the tax was imposed.

The court concluded, "There is no way to calculate the standard market value at the time of acquisition for these officetels according to the relevant laws and administrative rules, such as the Local Tax Act, the Real Estate Price Disclosure Act, and Ministry of the Interior and Safety criteria. Therefore, the decision by the Songpa-gu Office, which presupposed that these units were subject to heavy taxes, is illegal."

The Songpa-gu Office appealed the ruling on the 5th of last month. A spokesperson for the office stated, "We submitted our reasons for the appeal on the 30th and the process is underway. Since the case is still in court, it is difficult to discuss specific details." If this ruling is finalized, it is expected that Lotte Property & Development will seek refunds for the remaining 13 units of the Signiel Residences on which heavy taxes were paid and not yet recovered.