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39 fle and pay the deemed gif tax (which is calculated by multiplying the deemed gifed proft by the marginal gif tax rates) within three months from the fling due date for the corporate tax return of the benefciary corpo- ration. iii. unconstitutionality of the deemed gift Tax regime Practitioners and academics in Korea have pointed out three major constitutional problems with the new gif tax regime. Te frst constitutional objection is that the new regime taxes unrealized income; since the benefciary corporation reaps the beneft of increased revenues and the taxpayer only re- alizes such benefts from dividends or capital gains later, the new regime may constitute taxation of unrealized income of the taxpayer. Te second constitutional issue is double tax- ation: By imposing gif tax on deemed gifed proft and later imposing tax on the dividends, which are ultimately paid out of the proft of the corporation, the gif tax can be argued to operate as a double tax on the corporation’s proft from the perspective of the individual taxpayer. Finally, the third constitutional is- sue is that the new gif tax regime may violate the principle of freedom of contract: impos- ing the gif tax on arm’s length transactions between the benefciary corporation and the related corporation just because of the large magnitude of the transactions may violate persons ’ freedom of contract. iV. Preparations for the deemed gift Tax regime To prepare for possible assessment of deemed gif tax, it is necessary to frst realize the extent of risk. To that end, the value of the enterprise, its control structure and the char- acter of the business must be analyzed. Once the risk has been measured, plans to reduce or eliminate the risk must be implemented. Tese may include relocation of shares, re- structuring and change in the business. How- ever, as seen in Section V below, foreign-in- vested corporations may not have to prepare as much for the new gif tax regime as their Korean competitors. V. impact on foreign invested Corporations in Korea Te new gif tax regime was initially appli- cable to foreign-invested corporations. At the end of March 2013, however, the Ministry of Strategy and Finance (the MOSF) announced that it would exclude foreign-invested corpo- rations with foreign investors holding more than 50% of their shares. Te MOSF decided not to apply the new gif tax regime to for- eign-invested corporations for various rea- sons. One MOSF ofcial stated that, because there is no such regime abroad, there is a pos- sibility of trade dispute if only Korea assesses such a gif tax. Furthermore, considering that the purpose of the new regime is to solve spe- cial issues created by family owners of large conglomerates exercising too much control and giving excessive work to their subsidiar- ies, it is inappropriate to expand the applica- tion to foreign-invested corporations. Tere- fore, for many foreign-invested corporations, the risk of paying the new gif tax does not appear to be high. However, even though foreign-invested corporations may not be directly impacted by the new gif tax regime, they may still be afected by it indirectly. Due to the fact that large domestic conglomerates will be sub- ject to the new gif tax regime, some of such companies may consider restructuring and changing their business model (including supply chain) to minimize exposure to the gif tax. For instance, these conglomerates may merge the benefciary corporation and the related corporation so that the transac- tion will be intracompany rather than inter- company, thereby avoiding the application of the deemed gif tax regime. Terefore, in the coming months, foreign-invested corpora- tions may observe that entities they are cur- rently doing business with may change, and will have to adapt accordingly. For example, in the merger example above, the foreign-in- vested corporation may have cause for con- cern if the debt-to-equity ratio of the surviv- ing company deteriorated. Yulchon LLC is a full-service international law frm with over 250 professionals, including more than 50 licensed in jurisdictions outside of Korea. (02) 528-5200 www.yulchon.com