02 Review of tax issues and current tax system for each tax item of real estate trust

Basically, major tax issues related to trusts are broadly divided into two categories. First, is whether the actions that occur at each stage of the trust are subject to taxation under tax law, and secondly, if the actions are subject to taxation, who is responsible for paying taxes? In light of these two perspectives, the current tax system related to real estate trusts is reviewed for each detail as follows.

Corporate tax, income tax: Taxpayer on income generated from trust property

Korean tax law basically takes the position of “conduit theory,” which views the trustee as simply a conduit for distributing profits to beneficiaries rather than as an independent taxing entity. Therefore, the principle is that the person to whom the trust income actually belongs, that is, the beneficiary, is responsible for paying taxes on the income generated from the trust property.
However, in exceptional cases, the consignor or trustee may be responsible for paying taxes. If the beneficiary is not identified or the trustor continues to substantially control the trust property (the trustor designates a specially related person (spouse and immediate descendants) as the beneficiary, etc., the trustor is responsible for income tax or corporate tax. Meanwhile, in the case of trusts that meet specific requirements set by tax laws, such as purpose trusts, it is possible for the trustee to choose to bear corporate tax liability.

Value-added tax: Activities subject to value-added tax by trust stage and taxpayers

The current Value-Added Tax Act does not impose value-added tax when real estate ownership is transferred (trustee → trustee/trustee → trustee) following the establishment or termination of a trust.
However, value-added tax is levied when goods or services related to trust property are supplied. In other words, if the trustee disposes of the entrusted real estate and supplies real estate to a third party, or holds the entrusted real estate and provides real estate rental services to a third party, the obligation to report and pay value-added tax arises.
So who should bear this value-added tax payment obligation? The current tax law requires trustees to bear value-added tax liability in order to rationalize the trust-related value-added tax system. This is because a trustee is a person who acts on behalf of the trustor to achieve the purpose of the trust.
However, if goods or services are supplied directly in the name of the consignor or the trustee does not bear the obligation to procure project costs as a management land trust under the Capital Markets Act, it is considered that the goods or services were supplied directly by the consignor rather than through the trustee. Boa, the consignor is responsible for paying value-added tax.

Transfer tax, acquisition tax: Whether the step-by-step transfer of real estate trust is subject to taxation and
Taxpayer

Real estate trusts have characteristics that distinguish them from other property trusts in that transfers of ownership of property that require registration occur throughout the trust, including establishment, maintenance, and termination of the trust. The following is a look at whether transfers, etc. that occur in each stage of a real estate trust are subject to transfer tax and acquisition tax, and who is liable for tax payment.

– Transfer tax and acquisition tax on transfer of real estate ownership due to establishment and termination of trust
As the trust-related tax laws were generally revised in 2020, the tax base for trust-related transfer tax, which was insufficient in the past, was also clarified. According to the revised article, it is stated that the trust property is deemed to have been transferred only when the trustor transfers the right to terminate the trust contract, etc. to the trustee when concluding the trust agreement, thereby leaving the trust property in effect out of the hands of the trustor and going to the trustee. This means that, except in exceptional cases, even if a trust contract is entered into, the property will be viewed as property that the trustor continues to hold, rather than being transferred to the trustee. Therefore, if real estate is disposed of to a third party through a trust act by a trustee, the trustor, not the trustee, is deemed to have transferred the property and is liable for tax. Likewise, although ownership of real estate is transferred when a trust is established or terminated, since the trustor continues to have authority over the trust property, no acquisition tax is assessed as no actual transfer or acquisition of property has occurred.

– If transfer of trust beneficiary rights occurs through a trust act, transfer tax and acquisition tax are imposed.
Before December 31, 2020, transfer of trust beneficial rights was not listed as subject to transfer tax according to authoritative interpretation, so no capital gains tax was levied. However, in the 2020 revision, the right to receive the benefits of the trust is specified in the article related to the subject of transfer tax, so capital gains tax is also imposed upon the transfer of the trust beneficiary rights. However, transfer of trust beneficiary rights is not subject to acquisition tax because registration is not transferred. On the other hand, when the right to dominate or control the trust property is actually transferred, transfer tax is imposed as it is considered a transfer of the trust property itself rather than the trust beneficiary rights.

– If “transfer of trustee status” occurs due to a trust act, transfer tax and acquisition tax are imposed.
At the time of tax law revision, it was not clearly stipulated in the provisions of the Income Tax Act, but according to existing precedents and authoritative interpretation, the position is that transfer of consignor status does not constitute a transfer subject to capital gains tax. Meanwhile, unlike the Income Tax Act, the Local Tax Act clarifies in its legal provisions that acquisition tax on transfer of trustor status is, in principle, deemed to have been acquired by a new trustor.

Property tax, comprehensive real estate tax: Taxpayer for real estate ownership

The person liable to pay real estate property tax and comprehensive real estate tax due to real estate trust has been revised over the years, but under the current tax law, the person liable to pay property tax and comprehensive real estate tax on trust property is defined as the trustor. As seen earlier, the current tax law does not impose acquisition tax because it is considered that no actual transfer of property has occurred even if real estate ownership is transferred to the trustee through the establishment of a trust. However, imposing taxes on real estate holdings on the trustee, who is the registered holder, not only violates the principle of substantive taxation, but also allows the trustee to intentionally avoid heavy and progressive taxes, such as comprehensive real estate tax, through a trust.

Inheritance and gift tax: Whether or not trust property is subject to inheritance and gift tax

Basically, if the trustor dies after entering into a trust contract for real estate, the real estate is considered the trustor's inherited property and is subject to inheritance tax, and a third party designated as a beneficiary of the real estate trust pays all or part of the profits generated from the real estate. If received, gift tax is levied on the profits received. (On the other hand, if a third party designated as a beneficiary dies, the right to the profits is included in the beneficiary's inherited property.)
At the time of the comprehensive revision of the tax law in 2020, it was clarified that testamentary trusts, etc., in which the original and profits belong to the beneficiary due to the death of the trustor, are considered subject to inheritance tax because their substance is similar to acquiring property through a bequest or gift of signature. . However, regulations on whether various trust structures, such as designating the original beneficial owner and the beneficial owner of the trust property differently, are subject to taxation, property value assessment methods, taxation timing, etc. are still insufficient, and there are not enough related rules and cases. As it is not, there is a lot of potential for controversy.