SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
including purpose trusts, beneficiary certificate issu - ance trusts, and limited liability trusts, are treated as separate domestic corporations for each trust prop - erty, in which case the trustee may become liable for corporate income tax. In recent years, reform of Korea’s inheritance tax system has been actively discussed in response to population ageing and growing demand for business succession. In particular, proposals have been made to replace the current estate tax system with an inher - itance acquisition tax system, under which tax would be based on the amount received by each beneficiary rather than the decedent’s total estate. If adopted, the reform is expected to significantly affect Korea’s wealth succession and inheritance tax regime. 1.2 Exemptions For inheritance tax purposes, if the decedent is a Korean resident, all worldwide inherited property is subject to Korean inheritance tax. If the decedent is a non-resident, only property located in Korea is tax - able. Korea’s inheritance tax system provides various deductions. A basic deduction of KRW200 million is available regardless of the decedent’s residency. Where the decedent is a Korean resident, both the spousal inheritance deduction and the lump-sum deduction are available. The spousal inheritance deduction is intended to protect the surviving spouse’s financial security and property rights. Based on the amount actually inherited, a deduction of between KRW500 million and KRW3 billion is available, making it one of the most important inheritance tax planning tools. Although the decedent must have been a Kore - an resident, the surviving spouse need not be. The lump-sum deduction reduces disparities arising from differences in family composition. Heirs may deduct the greater of (i) the aggregate of the basic deduction and other personal deductions or (ii) KRW500 million. Additional deductions, including the financial asset inheritance deduction and the family business or farm - ing business succession deduction, are also available where the decedent is a Korean resident. In particular, the family business succession deduction, intended
to facilitate the succession of SMEs and mid-sized enterprises, allows a deduction of up to KRW60 billion for qualifying business assets. For gift tax purposes, if the donee is a Korean resi - dent, all gifted property worldwide is subject to Kore - an gift tax. If the donee is a non-resident, only property located in Korea is taxable. Where the donee is a Korean resident, the following deductions apply: • KRW600 million for gifts from a spouse; • KRW50 million for gifts from a lineal ascendant; • KRW50 million for gifts from a lineal descendant; and • KRW10 million for gifts from relatives within the fourth degree of consanguinity or the third degree of affinity, other than lineal ascendants or descend - ants. These deductions apply on a cumulative basis over a ten-year period. Accordingly, high net worth individu - als often structure the timing and amount of gifts as part of long-term succession planning. In addition, living, educational and medical expenses provided to dependants may be excluded from gift tax if they are reasonable under generally accepted social standards and are actually used for their intended pur - pose. Mere transfers of funds may instead be treated as taxable gifts. Under a recent amendment, an additional deduction of up to KRW100 million is available where a Korean resident receives a gift from a lineal ascendant within two years before or after marriage registration, or within two years of the birth or adoption of a child. 1.3 Income Tax Planning Tax planning in the Republic of Korea extends beyond taking advantage of differences in tax rates. It gener - ally involves determining how assets should be held, managed, disposed of, and transferred to the next generation. High net worth individuals typically adopt a long-term approach, considering multiple taxes in relation to real estate, unlisted shares, financial invest - ments and family-owned businesses.
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