Key tax issues that may arise when redeeming trust stocks

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A stock nominal trust is an act in which a beneficial owner acquires stocks in the name of another person. In the past, it was commonly used to meet the requirements of the Commercial Act when establishing a corporation, but recently, it has also been used as a means of tax saving through equity distribution. However, if a nominal trust status different from the actual status continues, it can become an obstacle in the process of reorganizing the corporate governance structure or preparing for an IPO, and when it is converted, it can actually result in a greater tax burden than the initial tax saving effect.

The main tax issues that may arise when redeeming trust stocks are as follows:

1. Gift tax

A nominal trust of stocks may be considered as a gift from the beneficial owner to the nominal owner, and thus may be subject to gift tax (Article 45-2 of the Inheritance Tax and Gift Tax Act). In this case, the time of the nominal trust is considered the time of the gift, and although the return of the title itself is not, in principle, a gift, the requirements for proof must be met. Accordingly, a gift tax payment obligation may arise based on the stock value at the time of the nominal trust.

2. Comprehensive income tax based on dividend income

If dividends are paid during the nominal trust period, the dividend income is considered to belong to the actual owner, not the nominal owner, and accordingly, the actual owner may need to amend his/her past comprehensive income tax return.

3. Period for imposition of tax

The statute of limitations for non-reporting gift tax is 15 years, but if the value of the property in the trust exceeds 5 billion won, the tax authorities can impose gift tax within 1 year from the date they become aware of the fact. In the case of comprehensive income tax, the statute of limitations for underreporting is generally 5 years, and for non-reporting, 7 years, but if it is deemed that national taxes have been evaded through fraudulent acts, the statute of limitations for imposition is 10 years (Article 26-2 of the National Tax Basic Act).

Considering the above items comprehensively, the review of tax issues arising from the return of a nominal trust proceeds in the following order.

1) Whether there is a trust in the name of a person: Confirm whether there are shares whose actual owner and the name of the person do not match by verifying the facts of the trust in the name of a person, the flow of funds, etc.

2) Time of trust: Check whether the statutory statute of limitations has passed

3) Gift tax burden: If necessary, report and pay gift tax after stock evaluation

4) Dividend income attribution: Income tax correction report and additional tax payment based on actual attribution

5) Review of other tax issues: Review whether additional gift tax is imposed, whether acquisition tax is deemed to be imposed on majority shareholders, etc. based on capital increase details and company asset acquisition details.

Stock trusts carry various tax risks, such as gift tax and income tax, at the time of redemption. In general, redemption of trusts is often done after a considerable period of time has passed, and the statute of limitations for taxation is long, so a larger tax burden than expected may occur. In addition, in practice, there is a risk that the redemption process may become complicated due to insufficient evidence to prove the fact of trust or the death of the nominal owner or actual owner.

Therefore, it is advisable to register stocks in their proper names from the beginning, and in the case of stocks that have already been registered in a trust, it is necessary to carefully proceed with the redemption process after a prior risk review with an expert.

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