When is inherited property excluded from Inheritance Tax?

Many individuals seek to give back to society by supporting public-interest activities through a public interest corporation. They may either make a contribution to an existing public interest corporation or establish one themselves. To encourage such public-interest activities, the Inheritance Tax and Gift Tax Act provides that inherited property contributed to a public interest corporation may be excluded from the inheritance taxable estate, subject to certain requirements. At the same time, strict post-contribution rules apply to prevent the use of public interest corporations for tax avoidance or indirect wealth transfers.
 

Inherited property contributed to a public interest corporation

Where a decedent or an heir contributes inherited property, by the inheritance tax return filing deadline, to an entity conducting religious, charitable, academic, or other public-interest activities prescribed by Presidential Decree (a “public interest corporation, etc.”), the value of the contributed property is excluded from the inheritance taxable amounts. (Article 16 of the Inheritance Tax and Gift Tax Act)

For example, assume that a decedent provides by will that KRW 10 billion of the estate is to be contributed to a university scholarship foundation qualifying as a public interest corporation, and the heir completes the contribution by the inheritance tax return filing deadline following the commencement of inheritance. The KRW 10 billion is excluded from the inheritance taxable estate and is therefore not subject to inheritance tax. The scholarship foundation is likewise not subject to gift tax on the property received.
 

Tax benefits: Lifetime giving vs. testamentary contribution

The tax treatment of an inter vivos contribution and a testamentary contribution may be summarized from the perspectives of the contributor and the public interest corporation, etc. as follows.

• Contributor:
  • Inter vivos contribution: charitable contribution deduction
  • Testamentary contribution: exclusion from the inheritance taxable estate
• Recipient public interest corporation, etc.:
  • No gift tax is imposed on the contributed property

Strict post-contribution monitoring

The tax authorities strictly monitor contributed property after the contribution to prevent public interest corporations from being used as vehicles for an improper transfer of wealth or tax avoidance.

Inheritance tax is imposed on property contributed to a public interest corporation, etc. if an heir becomes a director in excess of one-fifth of the incumbent directors of the recipient entity or holds authority to decide material matters concerning its operations, including the appointment of directors. (Article 13 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act)

Where voting shares or equity interests in a domestic corporation are contributed to a public interest corporation, etc., any value exceeding 10% of the domestic corporation’s total issued voting shares or total capital contributions (excluding treasury shares and treasury equity interests) is included in the inheritance taxable estate. For this purpose, the contributed shares or equity interests are aggregated with those listed below. The applicable ceiling is 20% for a public interest corporation engaged in charitable, scholarship, or social welfare activities that does not exercise voting rights, and 5% for a public interest corporation related to a business group subject to limitations on cross-shareholding. (Article 16(2) of the Inheritance Tax and Gift Tax Act)

1. Shares or equity interests in the same domestic corporation already held by the public interest corporation, etc. at the time of contribution
2. Shares or equity interests in the same domestic corporation contributed by the contributor or a related party to another public interest corporation, etc.
3. Shares or equity interests in the same domestic corporation held by another public interest corporation, etc. to which the heir or a related party has contributed property
    

When the tax benefit may be lost

Even where property contributed to a public interest corporation, etc. was initially excluded from the inheritance taxable estate, the amount prescribed by Presidential Decree is added back to the inheritance taxable estate if either of the following applies. (Article 16(4) of the Inheritance Tax and Gift Tax Act)

• All or part of the property excluded from the inheritance taxable estate, or the income or gains derived from that property, accrues to an heir, including a related party of the heir.
• The case falls under Article 16(3)2 of the Inheritance Tax and Gift Tax Act, and the shares or equity interests received in excess of 10% of the total issued shares, etc. are not disposed of within three years from the date on which the excess holding arose. A transfer to the contributor or a related party is not treated as a disposal for this purpose.

What qualifies as a public interest corporation?

A “public interest corporation, etc.” means an entity conducting any of the following activities. (Article 12 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act)

• Activities conducted by a resident or a domestic nonprofit corporation for the purpose of making a substantial contribution to the propagation of religion or other forms of edification
• Establishment and operation of a school under the Elementary and Secondary Education Act or the Higher Education Act, or a kindergarten under the Early Childhood Education Act
• Activities conducted by a social welfare corporation under the Social Welfare Services Act
• Activities conducted by a medical corporation under the Medical Service Act
• Activities conducted with qualifying special donations by a recipient specified in Article 24(2)1 of the Corporate Income Tax Act
• Activities undertaken for an entity’s designated non-profit purpose by a public interest corporation, etc. falling under any item of Article 39(1)1 of the Enforcement Decree of the Corporate Income Tax Act or by a public interest organization under Article 80(1)5 of the Enforcement Decree of the Income Tax Act. Activities with limited public-interest character, including those intended to promote fellowship or the interests of members or those conducted for consideration for profit, are excluded.
• Activities conducted with donations by a recipient specified in Article 39(1)2(c) of the Enforcement Decree of the Corporate Income Tax Act. Activities with limited public-interest character, including those intended to promote fellowship or the interests of members or those conducted for consideration for profit, are excluded.
   

Contributing inherited property to a public interest corporation can provide significant inheritance tax benefits when the statutory requirements are satisfied. The regime is designed to encourage charitable giving and support public-interest activities. However, the tax benefit is accompanied by strict rules regarding governance, director appointments, shareholding limits, and ongoing compliance obligations. Accordingly, individuals considering the establishment of or contributions to a public interest corporation should carefully review the applicable requirements and seek professional advice in advance.