SOUTH KOREA Law and Practice Contributed by: Woong-kyu Cho, Ji-eun Kim and Hyun-kyung Kim, Barun Law LLC
5. Wealth Disputes 5.1 Trends Driving Disputes
companies, or mergers with companies owned by the next generation. SMEs and mid-sized enterprises may also benefit from preferential tax regimes, including the family business succession deduction, which pro - vides an inheritance tax deduction of up to KRW60 billion where the statutory requirements are satisfied. Insurance is also widely used to secure funds for inheritance tax payments. The principal legal obstacle to business succession is the statutory reserved portion ( yuryubun ) system. Giv - en that reserved portion rights may be adjusted only after the decedent’s death, they cannot be waived or excluded in advance. Accordingly, pre-death agree - ments cannot prevent future reserved portion claims. In practice, this risk is often addressed through struc - tures such as trusts that separate voting rights from dividend rights and allocate them to different benefi - ciaries, or by imposing burdens on testamentary gifts. 4.3 Transfer of Partial Interest In Korea, property subject to inheritance or gift tax is generally valued at its fair market value, being the value established through arm’s length transactions. Where fair market value cannot be determined, the supplementary valuation methods prescribed under the Inheritance Tax and Gift Tax Act apply. In particular, unlisted shares are valued under the statutory supplementary valuation rules, taking into account factors such as the company’s net asset value and earnings. The same principles generally apply to partial inter - ests and other rights. Korean law does not generally recognise separate valuation discounts for lack of marketability or minority interests. Instead, values are determined under the statutory supplementary valu - ation rules. By contrast, shares held by the largest shareholder and specially related persons are gener - ally subject to a 20% valuation premium, except in cases prescribed by Presidential Decree, including SMEs, certain mid-sized enterprises, and companies with continuing losses.
Inheritance disputes are increasing rapidly in Korea. Where the decedent has not established a succession plan and the heirs cannot reach agreement, the estate is divided through court proceedings. Even where a succession plan exists, heirs may challenge its validity or bring reserved portion ( yuryubun ) claims, resulting in litigation. Korean law adopts a strict formal approach to wills. Testamentary dispositions are limited to matters per - mitted by law, and the statutory formalities for execut - ing a will are strictly enforced. Accordingly, a will may be held invalid even if it reflects the testator’s true intentions where the legal requirements have not been satisfied. As a result, disputes over the validity of wills are common. The sharp increase in real estate values, which account for a substantial proportion of inherited assets, together with greater involvement by adult children in succession planning, has further increased both the value and number of inheritance disputes. 5.2 Mechanism for Compensation The following compensation mechanisms apply. • Trust disputes – If a trustee breaches the duty of care or the duty of loyalty, thereby causing dam - age to the trust property or causing that trustee or a third party to obtain an unjust benefit, the beneficiary or the settlor may claim restoration of the trust property to its original state or damages against the trustee. • Disputes involving foundations and public interest corporations – If a director of a foundation neglects their duties and causes damage to the corporation, the director is liable for damages to the corporation under the Civil Act. • Disputes involving inheritance and other asset succession – If an heir’s legal reserve of inheritance is recognised and there is a shortfall, the heir may claim its return. In addition, an heir who has made a special contribution to, or provided support for, the decedent may have their contributory portion recognised in a claim for return of the legal reserve
585 CHAMBERS.COM
Powered by FlippingBook