Court upholds tax office refusal of loss-making shares as inheritance tax payment
In short
A Seoul court ruled that the Seocho District Tax Office was entitled to refuse an heir's request to pay about 8.4 billion won of inheritance tax with shares of a company that had run deficits. The tax office allowed payment in kind with Gangnam real estate but rejected the unlisted shares, and the court found the company's losses were structural and that a minority government stake would be hard to sell. The heir's claim that the tax office missed its processing deadline was also rejected.
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A Seoul court has ruled that tax authorities were entitled to refuse an heir's request to pay inheritance tax with shares of a company that had run deficits. The Seoul Administrative Court's Administrative Division 4, presided over by Judge Kim Young-min, ruled against the heir, identified only as A, in a suit against the head of the Seocho District Tax Office, according to the three reports published on 4 October. [ 1 , 2 , 3 ]
According to Asia Economy and Seoul Economic Daily, A inherited 4,850 shares in the company and real estate in Gangnam, Seoul, in February 2023, and applied in August 2023 to pay 8.58895 billion won of inheritance tax using 1,797 shares of the unlisted company and real estate. Asia Economy reported the shares were valued at about 8.36895 billion won and the real estate at 220 million won. The tax office granted payment in kind for the real estate but refused the shares, citing enforcement decree rules under the Inheritance and Gift Tax Act that allow rejection of securities issued by a company with deficits within two years before the application. [ 1 , 2 , 3 ]
The court found the company's deficits were a structural problem rather than a temporary one. Asia Economy reported operating losses of about 207.3 million won in the 2019 business year and about 13.943 million won in 2020; Yonhap described the same losses as about 200 million won and about 14 million won. The court also cited the Korea Asset Management Corp's assessment, made in a review with the tax office, that the company's net asset value would keep declining. Because the family holds all of the company's shares, the court said the state would acquire only a minority stake that would not be easy to sell. [ 1 , 2 , 3 ]
A argued in court that the company's asset value was high and that cutting excessive executive pay could eliminate the deficit, according to Asia Economy, and also argued that the tax office had missed its legal processing deadline. The court rejected the deadline claim, with Yonhap and Seoul Economic Daily reporting that an extension notice was sent to A's address by registered mail and was not returned, so it was lawfully delivered. Yonhap put the per-share value of the stock at about 4.67 million won, while Seoul Economic Daily said about 4.65 million won. [ 1 , 2 , 3 ]
The enforcement decree lists securities issued by a company that recorded a deficit within two years before the payment-in-kind application among assets that may be refused, though an exception can be granted if the tax office and the Korea Asset Management Corp jointly find the shares suitable. In this case, the documents say, that review produced a negative finding. [ 1 , 2 , 3 ]
Why it matters
The ruling sets a clear limit on using unlisted shares of loss-making family companies to settle inheritance tax, indicating that high asset values alone will not make such shares acceptable as payment in kind. It also confirms tax offices can rely on deficit records and joint reviews with the Korea Asset Management Corp when refusing payment in kind. The effect is confined to inheritance tax procedure in Korea.
Key facts
- The Seoul Administrative Court's Administrative Division 4, presided over by Judge Kim Young-min, ruled against the heir in a suit against the head of the Seocho District Tax Office over the refusal of payment in kind. [ 1 , 2 , 3 ]
- The heir had applied to pay about 8.58895 billion won of inheritance tax with 1,797 unlisted shares and real estate; the tax office allowed the real estate but refused the shares. [ 1 , 2 , 3 ]
- The tax office refused the shares because the issuing company had recorded deficits in the two years before the application, under the enforcement decree of the Inheritance and Gift Tax Act. [ 1 , 2 , 3 ]
- The court said the company's deficits were a structural problem rather than a temporary one, citing operating losses in the 2019 and 2020 business years. [ 1 , 2 , 3 ]
- The Korea Asset Management Corp, which reviewed the suitability of the shares with the tax office, gave an opinion that the company's net asset value would continue to decline. [ 1 , 2 , 3 ]
- The court noted that the family holds all of the company's shares, so the state would acquire only a minority stake that would not be easy to sell. [ 1 , 2 , 3 ]
- The court rejected the heir's argument that the tax office exceeded its legal processing deadline, saying an extension notice was sent by registered mail and was not returned. [ 2 , 3 ]
- Under the enforcement decree, securities issued by a company with a deficit within two years before the application are among assets for which payment in kind may be refused, with an exception possible if a joint review finds the shares suitable. [ 1 , 2 , 3 ]
Confirmed by several sources
- The Seoul Administrative Court's Administrative Division 4 ruled against the heir seeking to overturn the refusal of payment in kind. [ 1 , 2 , 3 ]
- The tax office permitted payment in kind with real estate but refused the unlisted shares. [ 1 , 2 , 3 ]
- The company recorded operating losses in the 2019 and 2020 business years, and the court called the deficits structural rather than temporary. [ 1 , 2 , 3 ]
- The Korea Asset Management Corp gave a negative assessment of the shares' suitability after reviewing the company's finances. [ 1 , 2 , 3 ]
- The court cited the family's full ownership of the company as a reason the state's minority stake would be difficult to dispose of. [ 1 , 2 , 3 ]
- The court found the tax office's processing of the application, including the extension notice sent by registered mail, was lawful. [ 2 , 3 ]
Still unclear
- The per-share valuation of the unlisted stock used in the case. Yonhap put it at about 4.67 million won per share, while Seoul Economic Daily said about 4.65 million won per share.
- The exact size of the 2020 operating loss. Asia Economy reported about 13.943 million won for the 2020 business year, while Yonhap's figure of about 14 million won appears in the form of a typographical error in its text.
- The date the ruling was issued. Seoul Economic Daily says the ruling was made in August, while the other documents only state that the outcome was reported on 4 October; no document gives the exact ruling date.