Case Analysis of Family Business Succession : Focusing on The Inequality Capital Reduction
Authors:   KOREAN SOCIETY OF TAX LAW, Lim Kyung-In 
Published: November 2024

If certain reasons fall under certain reasons, such as failure to meet the prerequisites for special provisions for family business succession or unclear compliance with follow-up management requirements, other succession measures other than special cases for family business succession should be considered. In that case, an inequality capital reduction(retirement) plan is discussed as an alternative.
Both paid capital reduction and retirement can be said to be similar in terms of paying consideration to shareholders who dispose of stocks in a corporation, and income tax or gift tax issues generally arise for shareholders who receive consideration in return. However, there are no carryover rules for stocks, so if you gift stocks to your spouse at the market price within the limit of the gifted property deduction and proceed with the capital reduction process, neither gift tax nor income tax will be taxed.
The National Tax Service imposes dividend income tax on these transactions by applying the substantial taxation principle. However, in the Supreme Court's judgment on matters similar to the recently decided argument in the first trial, it is interpreted that the substantial taxation principle is applied only when certain requirements are met. The 2024 tax law amendment also includes the addition of stocks to assets subject to carryover taxation, but this is interpreted as governing cases of capital gains, so it is necessary to expand and regulate the scope so that carryover tax regulations are applied to capital transactions of stocks.
Inequality low-price capital reduction are subject to gift tax because there is room for profits to be transferred between shareholders of related parties due to the transaction. However, if the owner of the profit is a “corporate” rather than an “individual,” gift tax cannot be imposed based on Article 39-2 of the Inheritance Tax and Gift Tax Act and Article 4 of the same Act. Article 45-5 of the same Act regulates the taxation of gift tax when a specific corporation and a related person of the controlling shareholder make a certain transaction stipulated in the enforcement decree. Therefore, it cannot serve as a basis for gift tax on inequalty low-price capital reduction transactions with a corporation controlled by the successor as beneficiary.
In addition, considering the requirements of the parties to the transaction and certain transaction requirements, it will be difficult to impose gift tax on the shareholders of the beneficiary corporation even if the transaction is reorganized by applying the substance over form principle. According to the 2024 tax law amendment, the scope has been expanded to include profit sharing through capital transactions in the application requirements of the gift agenda of profits through transactions with specific corporations, but does not include changes in the requirements of the parties to the transaction.
The requirements of the transaction party under Article 45-5 of the Increased Inheritance Tax and Gift Tax Act are not limited to cases where a specific corporation and a related person of the controlling shareholder makes a transaction, but indirectly include transactions in which special interested parties of the controlling shareholder receive profits, and certain transaction requirements need to be extended to include capital transactions as well as profit and loss transactions.