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SEOUL, Feb. 2 (Korea Bizwire) — South Korea’s Supreme Court has sided with the National Tax Service in a closely watched inheritance tax dispute involving more than 100 billion won, ruling that lower courts failed to adequately examine whether a stock sale shortly before the decedent’s death was designed to avoid taxes.
According to legal officials on Sunday, the Supreme Court overturned a lower-court ruling that had partially favored the heirs of a wealthy individual identified only as Mr. A, and sent the case back to the Seoul High Court for further review.
At the center of the dispute is a stock sale conducted about one month before Mr. A’s death. Tax authorities argued that the transaction — involving shares in a Malaysian energy company — constituted a sham sale intended to reduce inheritance tax liabilities.
The heirs reported total inherited assets of about 2.06 trillion won in 2016, resulting in an inheritance tax assessment of roughly 102.4 billion won. Following a tax audit and a review by the Board of Audit and Inspection, authorities imposed an additional tax bill of about 7 billion won.
The National Tax Service concluded that the shares had effectively remained part of the inheritance, citing evidence that the buyer was a paper company established by the heirs in Seychelles, a known tax haven.
The agency also questioned the validity of the transaction, noting that Mr. A was hospitalized and had suffered cardiac arrest symptoms at the time the contract was signed.
Court Reinforces ‘Substance Over Form’ in Inheritance Tax Case (Image courtesy of Yonhap)
After reassessing the valuation of other inherited shares, the tax authority revised the taxable estate to about 2.09 trillion won, raising the final inheritance tax bill to approximately 109.4 billion won.
Lower courts had previously ruled in favor of the heirs, finding no clear evidence that the sale contract was forged, that Mr. A lacked cognitive capacity at the time, or that the heirs exercised actual control over the offshore entity.
The Supreme Court, however, said those rulings focused too narrowly on the formal legal validity of the contract and failed to properly apply the principle of substance over form — a cornerstone of tax law that allows authorities to disregard transactions that appear legally valid but are economically artificial.
In its decision, the court said judges should have examined whether the transaction lacked a reasonable business purpose beyond tax avoidance, why the sale occurred while the individual was hospitalized, and how the unusually low share price — set at one dollar per share — was determined.
The court emphasized that even legally effective contracts may be subject to taxation if their form does not reflect economic reality, citing prior precedents on the application of the substance-over-form doctrine.
The ruling is expected to have broad implications for high-net-worth inheritance cases, reinforcing the tax authority’s ability to challenge last-minute asset transfers that may be structured to minimize tax exposure.
Jerry M. Kim (jerry_kim@koreabizwire.com)
