Nominee shareholdings in Korea: When does the deemed gift tax apply?

Concept of nominee shareholding

A nominee shareholding refers to a situation where the registered shareholder of shares differs from the beneficial owner. Since such discrepancies between the registered shareholder and the actual beneficial owner may be used for tax avoidance purposes, Korean tax law provides rules under which shares held under a nominee arrangement may be treated as deemed gifts for gift tax purposes.
 

History of taxation

The deemed gift taxation regime for nominee shareholdings was introduced in 1974, resulting in numerous disputes between tax authorities and taxpayers. In 1989, the Constitutional Court ruled that the regime was constitutional only when there was a purpose of tax avoidance. Following the introduction of Korea’s real-name real estate ownership system in 1995, deemed gift treatment no longer applied to nominee arrangements involving land and buildings. As a result, the rules have since applied only to nominee shareholdings. Until 2018, gift tax was imposed on the nominee shareholder, and both the beneficial owner and the nominee shareholder were jointly and severally liable for payment of the tax. From 2019 onward, however, the beneficial owner became the taxpayer, while the nominee shareholder was excluded from tax liability. Accordingly, individuals who merely lent their names as registered shareholders are no longer unfairly burdened with gift tax obligations.
 

Purpose of tax avoidance

The burden of proving that there was no purpose of tax avoidance lies with the registered shareholder. To establish that no such purpose existed, the registered shareholder must demonstrate that the nominee arrangement was created for reasons other than tax avoidance. Court precedents have held that the determination of whether a tax avoidance purpose exists is not limited to cases where an actual reduction in tax liability occurred. It also includes cases where there was a possibility or potential for tax avoidance.

Representative examples identified by the Constitutional Court as involving potential tax avoidance include:

• Avoidance of acquisition tax by avoiding the status of a controlling shareholder
• Avoidance of regulations applicable to related parties by terminating a related-party relationship
• Avoidance of classification as certain shares subject to special capital gains tax rules
• Avoidance of secondary tax liability imposed on controlling shareholders

A purpose of tax avoidance is not presumed in the following cases:

• Where ownership is acquired through a sale and the previous owner has filed the relevant capital gains tax return and securities transaction tax return
• Where ownership is acquired through inheritance and the heir has included the nominee-held shares in the inheritance tax base and filed the inheritance tax return
• Where bonus shares are allocated to existing nominee-held shares through capitalization of surplus

If the shares are returned within the three-month gift tax filing period, such return is treated as cancellation of the gift. However, where nominee-held shares are sold and returned in cash, the gift cancellation provisions do not apply.
 

Deemed gift value

The value deemed as a gift is the value assessed under the Inheritance Tax and Gift Tax Act as of the date on which the shares were registered under another person’s name. For shares that have not been transferred into the beneficial owner’s name for an extended period, the assessed value as of the date of acquisition of ownership is applied. From February 5, 2016 onward, premium valuation for controlling shareholders does not apply, even if the shareholder qualifies as a controlling shareholder. The taxable base is calculated based on the value of the nominee-held shares less appraisal fees, and the gift tax deduction does not apply. In addition, from January 1, 2019, the deemed gift amount is not aggregated with other gifted property received from the same donor within the ten years preceding the gift date.
 

Termination of nominee shareholding

Returning shares to the beneficial owner’s name following the termination of a nominee shareholding arrangement is not subject to gift tax. In addition, deemed acquisition tax and securities transaction tax are not imposed on the return of shares resulting from the termination of a nominee arrangement. Whether a nominee shareholding arrangement exists and whether the return of shares constitutes a return following termination of such arrangement must be determined based on specific factual verification using objective evidence, including: A nominee shareholding agreement, records of dividend receipts, evidence of payment for the shares, and the source of funds used for capital increases. Historically, the Korean Commercial Act required a certain number of promoters for the incorporation of a stock corporation. In cases where another person was registered as a shareholder solely to satisfy the required number of promoters, a system was introduced that allows the beneficial owner to be confirmed through a simplified procedure if certain requirements are met, without undergoing complex and strict verification procedures.
 

Beneficial ownership confirmation system

The beneficial ownership confirmation system is a procedure that allows the beneficial owner to be confirmed through a simplified process without complex and strict verification procedures, such as a tax audit, provided that certain requirements are satisfied.

Requirements for applicants for confirmation

All of the following requirements must be satisfied:

• The company issuing the shares must have been incorporated on or before July 23, 2001, and must qualify as a small or medium-sized enterprise under Korean regulations as of the date of conversion to real-name ownership.
• Both the beneficial owner and the nominee shareholder must have been promoters at the time of incorporation, and the shares held under the nominee arrangement at the time of incorporation must be returned to the beneficial owner.

Confirmation application procedure

The step-by-step procedure for applying for beneficial ownership confirmation consists of prior consultation with the tax office, if necessary, submission of the applicant’s confirmation application to the tax office, the tax office’s verification process for confirming the beneficial owner, and notification of the result. If the value of the shares converted to real-name ownership is KRW 2 billion or more, or if it is unclear whether the applicant is the beneficial owner, the matter is reviewed with advice from the Advisory Committee on Real-Name Conversion of Nominee Shares. If the beneficial owner cannot be confirmed even after the committee’s review, additional verification procedures, such as written inquiries or on-site confirmation, may be conducted.

Tax obligations based on confirmation results

• Even if the applicant is recognized as the beneficial owner, gift tax arising from the original nominee shareholding arrangement and global income tax arising from dividends may still apply.
• If the applicant is not recognized as the beneficial owner, taxes may arise depending on the substance of the transaction:
  • For transactions involving consideration, capital gains tax and securities transaction tax may apply.
  • For gratuitous transfers, gift tax may apply.