- Issues Relating to the Withholding of Income Tax in Civil Suits for Payment of Remuneration
When a court, in litigation, rules in favor of the plaintiff and orders the defendant to make payment of severance pay without deduction of withholding tax, although the defendant is obligated to withhold the relevant income tax, the defendant may withhold income tax at the time of severance payment after the court judgment has become final. If the plaintiff refuses to accept the severance pay from which withholding tax was deducted, the defendant may be discharged of its obligation by making a deposit as payment of debt (byun-je-gong-tak, in Korean) (Supreme Court decision on case no. 91Da40931 rendered on September 22, 1992; Supreme Court decision on case no. 92Da37673 rendered on January 15, 1993). However, such obligation to withhold the relevant taxes does not arise in the case of provisional payments made pursuant to a court judgment accompanied by an order for provisional execution (Supreme Court decision on case no. 87Nu407 rendered on September 27, 1989).
- Divorce Suits and Taxation
- Consolation Money
Consolation money, in the context of divorce suits, is damages compensation for mental suffering resulting from divorce, and it therefore does not fall under “Miscellaneous Income” as defined by Article 21(1)(x) of the Income Tax Act or any other type of taxable income prescribed by the Income Tax Act. Therefore, it does not constitute taxable income of the recipient. Further, since consolation money is intended as restoration of mental damage and does not constitute a transfer of assets without consideration, it is not subject to gift tax.
However, if there is suspected tax evasion (for example, a married couple fakes a divorce for the purpose of evading gift tax even though there was an actual gifting of assets between the couple), gift tax may be imposed with respect to the assets transferred as consolation money (Inheritance Tax and Gift Tax Act, General Provisions, 31-24…6).
Since the transfer of real estate or stocks subject to capital gains tax as a means to pay consolation money substitutes for performance of the obligation to pay consolation money to the counterparty, the economic benefit is obtained whereby the obligation to pay consolation money is extinguished in consideration for such transfer. Therefore, such transfer constitutes a transfer for consideration, which is subject to the imposition of capital gains tax (Supreme Court decision on case no. 95Nu4599 rendered on November 24, 1995, et al).
- Division of Assets
Since the division of assets in a divorce is in the nature of a partition of common property, it does not constitute the transfer of assets for consideration, and even if real estate owned in the name of only one of the couple is transferred to the other at the time of divorce, it is not subject to the imposition of capital gains tax (Supreme Court decision on case no. 2002Du6422 rendered on November 14, 2003).
Since the system of dividing assets is in the nature of the liquidation of co-owned property accumulated during marriage and support for an ex-spouse, it is not subject to the imposition of gift tax (Constitutional Court decision on case no. 96HunBa14 rendered on October 30, 1997).
However, if the assets to be divided at the time of divorce is excessive, even considering the amount of assets accumulated through the joint effort of the parties during marriage and other relevant circumstances, such that they exceed the amount of one spouse’s potential share of the assets or the scope of support for an ex-spouse, such excess amount of assets may be viewed as a gift. And if the division of assets is based on a sham divorce aimed at evading inheritance tax or gift tax, the entire amount of assets acquired through such divorce may be viewed as a gift.
Since the division of assets does not constitute any of the types of income prescribed by the Income Tax Act, it is not subject to the imposition of income tax.
Since acquisition tax is a transaction tax imposed on the transfer of the ownership of real estate itself, acquisition tax is imposed even if real estate is acquired through the division of assets in a divorce (Supreme Court decision on case no. 2003Du4331 rendered on August 19, 2003).
- Inheritance Tax Issues in Civil Suit for Return of the Minimum Inheritance Portion
Although there are conflicting theories as to the nature of the right to claim the return of the minimum inheritance portion, which are the “right of formation” theory and the “right of claim” theory, and the relevant court precedents are unclear on this issue, given the fact that Article 1115(1) of the Civil Code provides that “when there is a deficiency in the minimum inheritance portion, [the heir] may claim the return of assets to the extent of such deficiency,” and that Article 1117 of the Civil Code prescribes the statute of limitations on the claim for return of an inheritance portion, the “right of claim” theory seems reasonable. Under this theory, the legal relationships for purposes of inheritance tax would be adjusted as of the time when the assets are actually returned pursuant to a court judgment, and the person receiving the minimum inheritance portion should file an amended tax report (Article 45 of the Framework Act on National Taxation), and the person that returned such assets should file a subsequent correction tax report (Article 45-2(2)(i) of the Framework Act on National Taxation).