SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
Upon termination of the marriage, however, the prop - erty division system supplements the separate prop - erty regime. Property registered in one spouse’s name may nevertheless be divided if the other spouse con - tributed to its acquisition or maintenance. The court determines each spouse’s entitlement according to their actual contribution rather than legal title alone. The Civil Act also permits prospective spouses to enter into a marital property agreement before mar - riage registration, but agreements executed after - wards are ineffective. Although such agreements may be oral, they must be registered before the marriage to be enforceable against third parties. Given that they are intended to govern property relations during mar - riage rather than upon divorce, provisions concern - ing property division on dissolution are generally not recognised. As a result, marital property agreements When assets are transferred without consideration in Korea, inheritance tax or gift tax is generally imposed based on their fair market value at the time of trans- fer. Once the tax has been paid, that value generally becomes the recipient’s tax basis. However, where a Korean resident disposes of real estate or certain other assets received by gift 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) within ten years, the donor’s acquisition cost, rather than the donee’s, is generally used to calculate the capital gain. Where this carryover basis rule applies, gift tax paid by the donee may be deducted up to the amount of the capital gain. are rarely used in practice. 2.5 Transfer of Property Although exceptions exist, including where the one- household, one-home capital gains tax exemption applies, caution is still required. If the carryover basis rule enables the donee to qualify for that exemption, the Korean tax authorities may apply the anti-avoid - ance rules to deny the intended tax benefit. In addition, where inheritance tax has been reduced under the family business succession deduction, a special basis rule applies to the subsequent disposal
of the qualifying shares. In such cases, capital gains are calculated using the decedent’s original acquisi - tion cost rather than the heir’s stepped-up basis. 2.6 Transfer of Assets: Vehicle and Planning Mechanisms Where, after applying the basic deduction, personal deductions, the spousal deduction and other avail - able deductions under the Korean Inheritance and Gift Tax Act, the taxable estate is reduced to zero or falls below the applicable threshold, no inheritance tax is payable. Otherwise, inheritance tax generally cannot be avoided. Accordingly, tax-efficient succession planning often relies on the gift tax exemptions available on a rolling ten-year basis. As these exemptions renew every ten years, lifetime gifting should generally begin as early as practicable and follow a long-term gifting strategy. However, gifts made to an heir within ten years before the commencement of inheritance are added back to the taxable estate. As a result, property that has already been subject to gift tax may also increase the inheritance tax liability. Special tax benefits are available where the statutory requirements for family business succession or gifts for business start-ups are satisfied. Under the special regime for family business succes - sion, where (i) a parent aged 60 or older who has oper - ated a qualifying family business for at least ten years (an SME or a company with average annual sales below KRW500 billion) transfers business shares to a resident child aged 18 or older, and (ii) the child becomes the representative director within the pre - scribed period and satisfies the post-transfer man - agement requirements, the first KRW1 billion of the tax base is deducted and gift tax is imposed at preferen - tial rates of 10% on the next KRW12 billion and 20% on the excess. The regime is intended to facilitate the lifetime transfer of business control. Similarly, under the special regime for start-up fund - ing, where a resident child aged 18 or older receives funds from a parent aged 60 or older to establish a business, commences the business within two years,
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