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An unlistedcorporation refers to a corporation that is not yet listed on a stock exchange.When the corporation is first established, it will start as an unlistedcorporation. After a certain period of time, the company will grow to someextent and satisfy the IPO requirements. If the company chooses to go throughIPO process the company can be listed on exchanges such as KOSPI, KOSDAQ, and thecountry's third bourse KONEX ).
The listed company'sshares can be traded publicly. However,unlisted stocks are not traded on exchanges, which leads to limited tradevolume and traded price is not publicly disclosed.
In case of listedstocks, there is not much room for tax controversy except for specialoccasions, since traded price is disclosed through exchanges. However, chancesare that unlisted stocks are not subject in terms of transactions, which leadsto the close connection to the tax law.
This article isto review stock and share controlling issue of unlisted companies.
Frequently asked questions regardingunlisted companies
The following is frequently asked questionsregarding unlisted companies.
-In case there is a cause for move thecompany's share, to which the price shall be set in order to avoid taxproblems?
- Normally stock is traded with marketprice. How can we judge the price was set appropriately?
- How much tax shall beimposed if stock is not traded with the market price recognized by the tax law?
- If there is a share to be given as a gift, how much gift tax shallbe imposed?
- If there is a share to be given as a giftin the form of a family succession method prescribed by the tax law, what isthe requirement?
- If the present shareholder is not anactual shareholder but a shareholder in the name, what happens if changing thename as an actual shareholder? What is the problem and how much is the taxburden is going to be imposed?
Unlisted company's stock transfer
Sometimes, there is a need for sharetransfer. In this case, the trading ofshares is performed by both parties by creating a “Stock Purchase Agreement”,and the list of shareholders is changed by notifying the company of thecontents of the transaction.
In addition, the bestowal of stock shall be accomplished by creating a “BestowalAgreement” between donors.
In this case, the transfer of stocks is regarded as the transfer date ofownership, and for tax reporting purpose, the earliest day between the transferdate on the paper and payment date shall take precedence.
Share transfer shall be made based onmarket price
In principle, whetherit is a transferred stock or a gifted stock, all stocks have to be transferredas a market price. The market price is accepted as the market value of freely tradedthrough unspecified number of persons, and acceptance, public sale price andappraisal price are also recognized as market value (Article 60-2 of InheritanceGift Tax Law)
In the case of unlisted stocks, if there is a transaction value among thenumber of people, it is regarded as market price. However, if there are nosales case, market price as valued based on the supplementary valuation methodprescribed by the Inheritance Tax Law.
However, the supplementary valuation methodis based on the financial statement and the income statement. Therefore, it isbased on the past performance and has limitations to accurately evaluatecurrent price. Capitalization rate of net profit and loss is set 10%, which isrelatively high, which leads to overestimated valuation amount. Therefore,taxpayers tend to bear more burden on transactions and bestowal.
Problems of High-price, Low-priceTransactions
(1) In taxation point of view
Principally, unlisted stocks are tradedbased on market price. In case there is a previous sales event, the transactionprice of such event is regarded as market price. The transaction value itselfis recognized as the market price unless there are special circumstances.
In case of transactions between relatedparties, however, there is no particular problem if transactions are made withmarket value. However, if a transaction was not made based on the market price andthe price is 5% lower or higher than market price, additional transfer income
(2) Inheritance Problems in Gift Tax Law
If one wishes to donate unlisted shares,the valuation of the gift value shall be market price. The market value isdetermined by the value of the trading case, and then the supplementaryvaluation is applied.
In order to apply deemed donation,
- When the party to the transaction is arelated party, the amount of 30% of market price or 300 million KRW, whicheveris the smallest, is applied
- If the counterparty does not belong to arelated party, the amount of the difference between the market value whichexceeds 300 million KRW is deemed to be bestowal amount.
(3) Different treatment of relatedparties based on defined in Income Tax Law and Inheritance Law
Regarding the related parties, theprovisions of the Income Tax Act and the Inheritance tax law are similar, butthe scope of the related parties is broadly defined in the Commercial Law. As aresult, there is a case where the related parties are related to the relatedparty under the Commercial Code, but they may not be related parties under theIncome Tax Act. If shareholder holds 30% or more of the stake, such shareholder and board member is a related party under Commercial Law, but not arelated party under the Income Tax Act.
Under the Income
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