When receiving gifts of money or other property, we should check any tax issues involved. When the gifts cross the national borders or involve foreign parties, it becomes more complicated. It could entail an additional filing with a government of the foreign country where the foreign party resides. And even further, foreign tax liability could arise. Today, we are going to introduce what report and tax liability the parties should take care of and under what condition, when a U.S. resident receives a U.S located house as a gift from his Korean resident parent.
Report to the Bank of Korea
According to Article 7-46 and 7-44 of Foreign Exchange Transaction Regulation(FETR), when a resident of Korea gifts a real property, which is even located abroad, to any non-resident, the resident(devisor) should report the transaction in advance to the Bank of Korea.
The nationality of the parties doesn’t matter here. What does matter is the place of residence of each party. The Korean Tax authority (National Tax Service) has an internal rule to apply when deciding who is a resident and who is not.
Where the property is located doesn’t matter, either. As in our example, even though the gifted property is located in the U.S. the transaction must be reported to the Bank of Korea.
The burden of report is on the Korean resident, not the foreign resident.
Violation of this rule results in fine which could amount up to 2% of transaction value, which could be huge depending on the value of the gifts.
One exception to this report obligation is when the gift is written on the will. The FETR clearly provides that, when the resident gives the real property to non-resident by will, the report obligation is waived.
Please make sure that this report must be filed in advance. We see many foreigners fail to make this report due to pure oversight. They didn’t have any idea of this FETR rule. They were informed by the Bank of Korea of their violation of this rule only after the transaction was completed. And this causes unexpected issues between the parties regarding who shall bear the loss caused by the fine. Our office often represents foreign clients in such situation and succeeded to lower the fine by contacting and persuading the Korean authority.
Gift Tax Liability in Korea
Under the Article 4(2) of the Inheritance Tax and Gift Tax Act, when a devisee is a non-resident, a gift tax is imposed by the Korean tax authority only on the real property which is located in Korea. That said, it seems like a non-Korean resident devisee has no Korean gift tax liability for the property located outside Korea.
However, there is a special clause to this general rule. That is the article 21 of Adjustment of International Taxes Act(AIT). According to this article, when a Korean resident gives as gift any property located abroad to a non-resident, the resident(devisor) shall be obligated to pay the gift tax to the Korean tax authority, notwithstanding Article 4(2) of the Inheritance Tax and Gift Tax Act. This AIT clause extends the Korean gift tax liability in case of an international gifts.
The AIT further provides that, when the parties are not in a special relationship such as family members, and a gift tax was paid to a foreign tax authority, the resident(devisor) shall be exempted from the Korean gift tax liability.
In our example, the father gives away his house to this child. The father is a Korean resident and the child is a foreign resident. The gifted property located in the U.S. That said, aforesaid AIT applies, and the father is liable to pay the gift tax to the Korean tax authority. As the parties are in a family member relationship, the chances are that the father cannot claim that he is exempted from the tax liability.
Then what happened to any taxes already paid to the foreign government? If any tax was paid to the US government in connection with this gift, the father will be able to claim that amount to be applied as a tax deduction when calculating and paying the Korean gift tax.
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Also You can find more articles about the Korean Tax law and cases here.
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