Taxation carried forward of transfer income

Date: Nov 9, 2020

I. Introduction

This post will look into the taxation carriedforward of transfer income.

 

II. Taxation carried forward

Necessary expenses that a resident may deductfrom the sale price when the resident calculates the gain on the transfer of anasset acquired as gift from his or her spouse or from any of his/her linealascendants or descendants, within five years retroactively from the date oftransfer, shall be determined. But the acquisition value shall be determinedwith the amount as at the time the spouse or lineal ascendant or descendantacquired the asset. In such cases, the amount equivalent to the gift tax thatthe resident paid or shall pay for the asset acquired as gift shall be includedin necessary expenses.

 

III. Requirement

1) Applicable assets: real estate, rights touse facilities, and rights to acquire real estate

2) Special relationship: the relation between adonor and done should be lineal ascendant and descendant

3) Period: within five years from the date oftransfer

4) Should not be the case for the exclusionfrom application

 

IV. Determinationof special relationship

 

1) Spouse

It includes only relationby marriage. Therefore relation by a de facto marriage is excluded. Taxation carriedforward is applied when he or she is in a relationship by marriage in thetiming of determination of special relationship but other cases taxation carriedforward are not applied.  

2) Lineal ascendantsand descendants

When linealascendants and descendants are dead taxation carried forward is applied andeven the relationship of lineal ascendants and descendants are cancelled taxationcarried forward is applied.

 

V. Reasons for exemption of taxation carriedforward

1) Where a resident acquires an asset at leasttwo years earlier than the date of public announcement of the approval of therelevant project, but the asset is sold under an agreement or expropriated.

2) Where a case constitutes a transfer of ahouse including high-priced houses ineligible for non-taxation on capital gains.

3) Where the final capital gains tax calculatedis smaller than the final capital gains tax calculated.

 

VI. Calculation

1) Acquisition amount: Where a residentincreases or decreases excluding depreciation the book value of assets andliabilities he/she possesses, when calculating income in the taxable period towhich the date of such appraisal belongs and the taxable period thereafter, thebook value of the relevant assets and liabilities shall be the book valuebefore appraisal: Provided That, the value of inventory assets shall be theface value evaluated for each asset in the manner prescribed by PresidentialDecree.

 

2) Expenses

-> Acquisition amount of donor: inclusion indeductible expenses

-> Acquisition amount of done: not thesubject of expenses

-> Other expenses: expenses other thanacquisition amount should be reflected based on the expense of done

 

3) Period of possession: for tax deduction andlong-term possession deduction it should be calculated from the date ofacquisition of donor

 

4) Assets acquired by conditional donation isnot subject to taxation carried forward

 

VII. Laws and Regulations

 

Article 97-2 (Special Cases concerning NecessaryExpenses for Capital Gains)

 

(1) Necessary expenses that a resident may deduct from the sale price whenthe resident calculates the gain on the transfer of an asset acquired as giftfrom his/her spouse (including where the marital relationship ceases to existas at the time of transfer, but excluding where the marital relationship ceasesto exist due to death; hereafter the same shall apply in this paragraph) orfrom any of his/her lineal ascendants or descendants under Article 94 (1) 1 orof any other asset specified by Presidential Decree, within five yearsretroactively from the date of transfer, shall be determined in accordance withArticle 97 (2), but the acquisition value shall be determined with the amountunder Article 97 (1) 1 as at the time the spouse or lineal ascendant ordescendant acquired the asset. In such cases, the amount equivalent to the gifttax that the resident paid or shall pay for the asset acquired as gift shall beincluded in necessary expenses, notwithstanding Article 97 (2). <Amended byAct No. 15225, Dec. 19, 2017>

 

(2) Paragraph (1) shall not apply to the following cases: <Amended by ActNo. 12852, Dec. 23, 2014; Act No. 13558, Dec. 15, 2015; Act No. 14389, Dec. 20,2016>

 

 

1.  Wherea resident acquires an asset at least two years earlier than the date of publicannouncement of the approval of the relevant project, but the asset is soldunder an agreement or expropriated under the Act on Acquisition of andCompensation for Land, etc. for Public Works Projects or any other Act;

 

2.  Wherea case constitutes a transfer of a house specified in any item of Article 89(1) 3 (including high-priced houses ineligible for non-taxation on capitalgains under the same subparagraph (including land appurtenant thereto)), ifparagraph (1) applies to such case;

 

3.  Wherethe final capital gains tax calculated by applying paragraph (1) is smallerthan the final capital gains tax calculated without applying paragraph(1). 

 

(3)  Thenumber of years prescribed in paragraph (1) shall be determined with the periodof ownership recorded on the register.

 

(4) Necessary expenses that may be deducted from the sale price of an assetin calculating the gain on the transfer of an asset to which the deductionunder Article 18 (2) 1 of the Inheritance Tax and Gift Tax Act (hereafterreferred to as "deduction for inheritance of a family business" inthis paragraph) was applied shall be determined in accordance with Article 97(2): Provided, That the acquisition value shall be calculated by aggregatingthe following amounts: <Amended by Act No. 15225, Dec. 19, 2017>

 

1.  Thedeceased's acquisition value (the amount under Article 97 (1) 1) x Ratio of thededuction for inheritance of a family business to the relevant asset value(hereafter referred to as "ratio of deduction for inheritance of a familybusiness" in this Article);

 

2.  Assetvalue at the beginning of inheritance x (1 - Ratio of deduction for inheritanceof a family business).

 

(5) Matters necessary for calculating necessary expenses in applyingparagraphs (1) through (4), such as the methods of calculating the amountequivalent to the gift tax and the ratio of deduction for inheritance of afamily business, shall be prescribed by Presidential Decree.

 

 

Learn more about Korean tax system by visiting our website