SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
For capital gains tax, there are three principal tax plan - ning strategies. First, taxpayers seek to minimise the tax base by maximising recognised acquisition costs and deductible expenses. Comprehensive documen - tation, including purchase agreements, receipts, tax invoices, evidence of capital expenditures, and bro - kerage fee records, is therefore essential. Second, related-party transactions require careful planning because issues such as the denial of tax benefits under the unfair transaction adjustment rules, sub - stitution of fair market value, and deemed transac - tion rules may apply. Third, asset disposals should be co-ordinated with inheritance or gifting while avoiding factors that could be regarded as tax avoidance and ensuring a genuine commercial purpose supported by appropriate documentation. For inherited or gifted assets, the acquisition cost for capital gains tax purposes is generally the fair market value determined under the Inheritance and Gift Tax Act as of the date of inheritance or gift. Accordingly, where such assets are subsequently sold, the acquisi - tion cost is effectively stepped up to that fair market value. However, a carryover basis rule may apply where assets gifted between certain related parties, such as spouses or lineal ascendants and descendants, are disposed of within the prescribed period. If a Korean resident disposes of real estate or certain other gifted assets within ten years after receiving them from a spouse (including a former spouse where the marriage ended other than by death) or a lineal ascendant or descendant (unless the relationship ended by death), the donor’s acquisition cost, rather than the donee’s, is generally used to calculate the capital gain. Where this rule applies, gift tax paid by the donee may be deducted, up to the amount of the capital gain. Although exceptions exist, including where the one- household, one-home capital gains tax exemption applies, the anti-avoidance rules may still operate. In particular, if application of the carryover basis rule enables the donee to qualify for the exemption, the tax authorities may invoke the unfair transaction adjust - ment provisions.
In addition, where property is gifted to a related party and the donee transfers it to a third party within a prescribed period, reducing the overall tax burden, the transaction may be treated as a direct disposal by the donor. Likewise, transfers between related parties at below-market value or acquisitions at above-market value may be adjusted to fair market value for tax purposes. Accordingly, family transactions, including those involving family-controlled companies, should be supported by documentation establishing both the fair market value of the property and the commercial purpose of the transaction. 1.4 Pre-Immigration and Exit Planning Once an individual becomes a Korean tax resident, they are subject to Korean income tax on their world - wide income, including income from overseas assets and foreign investments. They may also become subject to reporting obligations for overseas assets, including foreign financial account reporting. Accord - ingly, it is advisable to review asset holding struc - tures and related tax implications before establishing Korean tax residency. Where possible, succession of overseas assets should also be completed before residency is established. By contrast, non-residents are taxed only on Korean- source income. However, where a Korean tax resi - dent emigrates, the Korean exit tax regime may apply. Under this regime, a resident who is a major share - holder and emigrates is deemed to have realised capi - tal gains on certain Korean shares and similar assets held at the time of departure and must report and pay the corresponding capital gains tax. Business found - ers, family business shareholders and high net worth individuals should therefore review their sharehold- ing structures and succession plans carefully before relocating abroad. 1.5 Taxation of Real Estate Owned by Non- Residents and Non-Citizens Real property located in Korea is generally subject to Korean taxation regardless of the owner’s nationality or residence. Accordingly, non-residents and foreign nationals acquiring Korean real estate may be subject to acquisition tax, property tax (and, where applicable, the Comprehensive Real Estate Holding Tax), income tax on rental income, and capital gains tax on dispos -
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