Korea: Transfer of shares subject to capital gains tax at arm’s length fair market value (Tax Tribunal decision)

Tax Tribunal decision

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January 28, 2025

The Tax Tribunal on November 19, 2024, held (2023 Seo 3145) that the taxpayer was subject to capital gains tax on its transfer of shares in the Korean company and that such shares must be valued based on their arm’s length fair market value.

Summary

The taxpayer, a French corporation, entered into a transaction under French law in which all of the assets of its wholly owned subsidiary, which included 44% of the shares in a Korean corporation, were transferred. Because under French law, the transferee succeeded to the book value of the assets of the subsidiary, the taxpayer took the position that the transfer did not result in the recognition of capital gains for Korean tax purposes. The tax authority argued, however, that the exemption from capital gains tax only applied to domestic corporations, and thus that the taxpayer was subject to capital gains tax on the transfer of the shares in the Korean corporation. Moreover, the tax authority argued that in determining the amount of the taxpayer’s capital gain, the value of the shares in the Korean corporation must be determined based on their arm’s length fair market value, and not based on a discounted cash flow (DCF) method as argued by the taxpayer.

The Tax Tribunal held in the tax authority’s favor that the taxpayer was subject to capital gains tax on the transfer of the shares in the Korean company and that such shares must be valued based on their arm’s length fair market value, which would reflect a premium beyond the value determined based under a DCF method.

Read a January 2025 report prepared by the KPMG member firm in Korea

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