SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
externally, the property of the trustee. At the same time, by virtue of the segregation of trust property, the trust assets remain separate from the trustee’s own assets. Furthermore, the trustee owes fiduciary duties and is obligated to administer the trust and make dis - tributions to the beneficiaries in accordance with the terms of the trust. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions Korea generally recognises asset management and succession structures using foreign trusts, founda - tions and other offshore holding arrangements. How - ever, Korean taxation is determined by the substantive ownership of assets and income rather than the legal form of the structure. Accordingly, where a Korean national or tax resident is involved in an offshore trust, it is generally taxed in the same manner as a domes - tic trust, and no special tax advantages arise solely because the trust is established offshore. Korean tax residents are subject to income tax on their worldwide income and, as a result, income derived through foreign trusts or foundations may also be tax - able in Korea. Korea also participates in the Common Report - ing Standard (CRS) and operates a foreign financial account reporting regime, increasing tax transpar - ency for overseas assets and offshore structures. Accordingly, anyone using foreign trusts or founda - tions should carefully consider the applicable report - ing obligations and Korean tax consequences. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles When determining the tax treatment of trusts and similar asset management structures, Korean law emphasises the substantive ownership of assets and income rather than their legal form. Accordingly, the key consideration is who ultimately controls and enjoys the economic benefits of the trust property, regardless of whether the contributor also serves as trustee or manager. The tax consequences of a trust depend on its struc - ture, the trust agreement, and the parties’ legal rights and obligations. In particular, income tax, inheritance
tax and gift tax issues may arise depending on the attribution of trust income, the nature of the beneficial interests and the distribution of trust property. As a general rule, trust income is attributed to the beneficiary entitled to receive the trust benefits. How - ever, where the settlor effectively retains control over the trust property, such as by retaining the power to revoke the trust, change the beneficiary or receive the remaining trust property on termination, the income may instead be attributed to the settlor. Where trust benefits are designated for another ben - eficiary, gift tax may apply, with the gift generally deemed to occur when the trust principal or income is distributed. If no beneficiary has been identified or exists, the settlor or the settlor’s heirs are treated as the beneficiaries. Once a beneficiary is identified or comes into existence, a new trust is deemed to arise, and the resulting transfer of beneficial interests may be subject to gift tax. In Korea, a trust is generally the most effective asset protection vehicle. Assets held in an irrevocable trust are treated as separate from both the settlor and the trustee and are administered in accordance with the trust terms. However, trusts established for improper purposes, such as defrauding creditors, remain sub - ject to legal remedies, including fraudulent trust and creditor revocation claims. The Korean trust regime is still developing, particularly in the area of taxation, so corporations remain the vehicle most commonly used in practice for asset pro - tection and succession. However, their use requires caution, as shareholder liability varies by corporate form and corporate financing often requires personal guarantees from representative directors, potentially expanding their liability. 4.2 Succession Planning In Korea, most family businesses operate as stock companies. Business succession commonly involves phased share transfers, the establishment of holding 4. Family Business Planning 4.1 Asset Protection
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