Korean Inheritance tax can be a complex issue, particularly for those living abroad. An important ruling by the Korean Supreme Court (Supreme Court, 1994. 11. 11. 94nu5359 Decision) sheds light on whether inheritors residing outside South Korea must pay inheritance tax in Korea when they just inherited foreign assets from a non-resident deceased. This post aims to clarify the key points of the ruling and its implications for foreign heirs.

Case Background

The facts of the Case are as follows:

• Deceased A passed away in Japan, leaving behind assets in both Japan and Korea.
• The heirs included Korean residents (the wife and two children) and non-resident heirs living in Japan (four children).
• No will was left.
• The heirs agreed that the Korean heirs would take the Korean assets, and the Japanese heirs would take the Japanese assets.
• National Tax Service, the Korean tax authority, calculated the inheritance tax based on the Korean estate, and then imposed it to the Japanese heirs as well, pointing out that under Korean inheritance tax law all heirs are obligated to pay the inheritance tax jointly.
• the Japanese heirs filed a petition with the court to declare they have no Korean tax liability on the ground that they did not inherit the Korean estate, but the Japanese estate.

Key Points of the Supreme Court Ruling

Domestic Residency Test: Why It Matters

The residency status of the deceased plays a crucial role in determining the inheritance tax liability in Korea. Here’s why:

• Tax Jurisdiction

  • Domestic Resident: If the deceased was considered a domestic resident of Korea at the time of death, the Korean inheritance tax applies to all worldwide assets of the deceased, regardless of the nationality of the deceased or the residency/nationality of the heirs.
    
    
  • Non-Resident: If the deceased was not a domestic resident at the time of death, Korean inheritance tax only applies to the assets located within Korea.
    
    

• Impact on Heirs
  

  • For heirs, this distinction clearly affects the amount and extent of inheritance tax they are required to pay.  Domestic residency of the deceased means a broader tax liability for heirs, potentially covering assets in multiple countries.  In this court Case, the Japanese estate could be subject to the inheritance tax in Korea, if the Deceased A turned out a Korean resident.
    
    
  • Non-residency limits the tax liability to Korean assets only, relieving heirs from the burden of paying Korean inheritance tax on foreign assets.
    
    

• How to Determine the Domestic Residency

  By comprehensively assessing the following criteria, the tax authority and the court determine whether an individual should be classified as a resident or non-resident.

  • The distinction between residents and non-residents shall be determined by comprehensively considering the presence or absence of a family living in Korea, the current status of jobs and income, assets located in Korea, and domestic economic and legal relations(See Supreme Court Decision 1993. 5. 27. 92nu11695).
    
    
  • According to the Inheritance Tax and Gift Tax Act, a person who has an address in Korea or has resided in Korea for at least one year is considered a resident. 
    
    
  • “Address” shall be determined according to the objective facts of the living relationship, such as the presence or absence of family members living together in Korea and assets located in Korea.  “Residence” shall be a place where the person resides for a considerable period of time.
    
    
  • “Family members living together in Korea” means a close relative who shares living funds or housing places in Korea.
    
    
  • An individual is considered to have an address in Korea if they are expected to stay in Korea for at least 183 days due to their occupation, family ties, or assets managed in Korea.
    
    
  • Conversely, if an individual living abroad with citizenship or permanent residency visa has no family living together in Korea and is unlikely to return to Korea based on their occupation and asset status, they are considered not to have an address in Korea.
    
    
  • Specific situations, such as temporary stays abroad for tourism or medical treatment, do not necessarily change the residency status if the individual maintains significant living relations in Korea.

The court of this Case found that Deceased A was not considered a Korean resident at the time of death.  As a result, the court held that only Korean assets are subject to inheritance tax. 

Joint TAX LIABILITY

• According to the Inheritance Tax and Gift Tax Act of South Korea, when there are multiple heirs, each heir has a distinct liability to pay inheritance tax corresponding to the proportion of the Korean property they have inherited or will inherit. Additionally, each heir is jointly liable for paying inheritance tax of other joint heirs up to the extent of his own inherited or to be inherited Korean property.
  
  
• When calculating the portion of the estate that any heir inherited or will inherit, the intestate share becomes the base, unless there is an agreement among the co-heirs to divide the estate differently. 

In this Case, the court recognized an agreement where the Japanese and Korean heirs agreed to divide the estate such that the assets located in Korea would go to the Korean heirs, while the assets in Japan would be inherited by the Japanese heirs.

As a result, the court ruled that only the Korean heirs were liable to pay inheritance tax, because the inheritance tax is imposed only on the Korean estate, and the Japanese heirs’ proportion taken from the Korean estate was zero, which rendered the Japanese heirs joint tax liability zero.

Implications for Foreign Heirs

This ruling clarifies several important points for foreign heirs who may inherit assets from relatives having estate both in Korea and a foreign country:

• Residency Matters: The key takeaway is that Korean inheritance tax obligations are critically tied to the residency status of the deceased and the location of the estate. 
  
  If the deceased is not a Korean resident and inherited assets are located outside of Korea, there is no inheritance tax liability in Korea. 
  
  If the deceased is not a Korean resident, but the estate is located both in Korea and a foreign country, the heirs who only inherited the foreign estate is not responsible for inheritance tax in Korea.
  
  
• Legal Agreements Among Heirs: The court recognized and upheld the division of the estate agreed upon by the heirs.  This suggests that clear agreements and documentation among heirs can be significant in determining tax obligations.  This agreement should specify which assets each heir will receive, especially distinguishing between domestic and foreign assets.

Conclusion

This Supreme Court ruling provides valuable clarity regarding the Korean inheritance tax liability of foreign heirs.  By understanding and applying those 2 important factors, i.e. the residency of the deceased and the location or the estate, foreign heirs can better manage their inheritance tax obligations in Korea and avoid unnecessary taxation on overseas assets.

If you are facing similar issues and need consultation with a Korean inheritance tax attorney, contact our team to ensure compliance with all relevant tax laws and to make informed decisions about your inheritance.