Housing costs, food, transportation — money seems to drain away just by breathing. But one more expense is quietly embedded in everyday life and often goes unnoticed: taxes. Owning even a single apartment now means grappling with inheritance and gift taxes. There is no need to panic, though. Reading through other people's cases may feel like someone else's problem at first, but you will naturally pick up tax-saving hints that apply to your own situation. Drawing on consultations with tax-planning specialists, this column — "Your Tax Questions Answered" — breaks down the tax dilemmas of daily life in plain language.
I sold treasury shares to clear a provisional payment balance — now they're telling me it's not capital gains, so I owe twice the tax?
Lee Woori, chief executive of a profitable unlisted company, recently found himself wrestling with how to clear 1 billion won ($675,000) in provisional payments that had accumulated on the company's books.
The simplest solution he could think of was to sell 1 billion won worth of his own shares back to the company. He assumed it was a straightforward share transfer subject only to capital gains tax — 22 to 27.5 percent including local income tax — and that paying roughly 175.45 million won in capital gains tax would settle the matter cleanly.
The revised Commercial Act, which took effect March 6, upended that assumption entirely. Under the new rules, a company that buys back its own shares must cancel them within one year as a general rule. Holding treasury shares as a tool for defending management control or clearing provisional payments — once common practice — is no longer permitted. Under tax law, treasury shares are now classified as a deduction from equity rather than a company asset, putting a firm stop to the workarounds of the past.
Lee also learned that unlisted companies like his face a particular risk: if a company cannot clearly demonstrate the purpose behind a buyback, tax authorities may treat the transaction not as a share transfer subject to capital gains tax but as a deemed dividend subject to dividend income tax.
Ultimately, the shares were canceled within 18 months of the transfer, and Lee — facing a tax bill more than double what he had anticipated — came to "National Tax Sister," a tax advisory service, to find out why.
Q. How exactly did the revised Commercial Act change the rules on treasury shares?
A. The core change is this: "If a company buys back its own shares, it must cancel them within one year — no exceptions."
Newly acquired treasury shares must be canceled within one year of the acquisition date. Shares already held before March 5, 2026 must be canceled within 18 months of the law's effective date — by Sept. 5, 2027.
Treasury shares are no longer recognized as a company asset under either accounting or tax law. The era of majority shareholders using treasury shares as a discretionary cash pool or a management-control defense mechanism is over.
Q. Why am I being taxed on dividend income instead of capital gains?
A. Tax authorities treat a corporate buyback as a capital gain if the purpose is temporary holding and disposal, and as dividend income if the purpose is cancellation.
Because the revised Commercial Act, effective March 6, 2026, mandates cancellation after a buyback, income arising from transferring shares to a company is now treated in principle as dividend income — specifically, deemed dividend income. Even before the revision, court precedent held that if the substantive purpose was a return of capital, taxation as a deemed dividend was appropriate.
Previously, there was no cancellation obligation. The revision made cancellation by board resolution the default, with exemptions available only through shareholder resolution in narrow circumstances.
Q. I filed under capital gains tax — how much dividend income tax do I actually owe?
A. You likely assumed this was a simple share transfer. Under capital gains tax, the taxable gain would have been 800 million won — the 1 billion won sale price minus the 200 million won acquisition cost — taxed at roughly 22 percent, for a total bill of about 175.45 million won.
Under the revised Commercial Act, however, the transaction is now treated as a cancellation, which means the 1 billion won the company paid is reclassified — not as the purchase price of shares, but as a deemed dividend distributed to a shareholder.
Once reclassified as deemed dividend income, the full 1 billion won is added to comprehensive income and subject to the top marginal rate of 49.5 percent. The base tax alone comes to roughly 444.38 million won. Add the additional national health insurance premium of about 64.72 million won, and the total burden reaches 509.1 million won.
That is more than 333 million won above what Lee originally expected to pay. Penalties for incorrect filing — ranging from 10 to 40 percent — and late-payment interest at an annual rate of 8.03 percent would also apply.
Q. Do existing treasury shares already on hand have to be canceled within the deadline no matter what?
A. Exemptions are available if the shares fall under one of the "permitted holding purposes" defined by the Commercial Act — such as employee performance compensation through stock options or other management purposes. The exemption requires a shareholder resolution passed at the general meeting, however, followed by an amendment to the articles of incorporation that clearly establishes the business-related purpose.
The specific exemptions from the one-year cancellation requirement are: (1) disposal to all shareholders on equal terms proportional to their shareholding; (2) use for employee compensation purposes, such as granting stock options; (3) use for an employee stock ownership plan, such as granting employee stock purchase options; and (4) use necessary to achieve a management objective, such as introducing new technology or improving the company's financial structure.
Q. What happens if we received shareholder approval to hold treasury shares but then dispose of them differently from the approved plan?
A. For listed companies, this is also a punishable offense. Under Article 635, Paragraph 1, Item 10 of the revised Commercial Act, holding or disposing of treasury shares in violation of an approved treasury share holding and disposal plan is subject to an administrative fine.
In short, companies must manage treasury shares strictly in accordance with the purpose and method set out in the approved plan.
Q. How do the penalties for unauthorized disposal of treasury shares or other violations differ between listed and unlisted companies?
A. Listed companies face administrative sanctions. Failing to cancel shares within one year without shareholder approval, or disposing of treasury shares contrary to an approved plan, triggers a fine under the Commercial Act.
Unlisted companies face no administrative fine, but a severe tax liability awaits instead. Even without a penalty, sloppy treasury share management can result in half a company's assets going to taxes. Rather than capital gains tax at 22 percent, deemed dividend treatment at up to 49.5 percent applies — meaning, as in Lee's case, an additional tax and health insurance burden of around 300 million won.
Q. If we hold treasury shares under an exemption and tax authorities suspect 'effective cancellation' during an audit, what should we do?
A. Pay particular attention to ongoing compliance through the annual general meeting.
If a company chooses to hold or dispose of treasury shares but cannot adequately demonstrate the purpose, tax authorities are likely to reclassify the transaction as cancellation and impose dividend income tax.
To defend against this, companies should make it standard practice to place a "treasury share holding and disposal plan and statement" on the agenda as a separate item at each annual general meeting and obtain approval. Keeping detailed minutes of those meetings to satisfy the burden of proof is essential. Companies holding shares for more than one year should also continuously monitor official tax authority interpretations.
Q. I am planning to transfer my shareholding to my children and pass on the family business — how should I think about share valuation after treasury share cancellation?
A. Unlike listed companies, unlisted company shares are valued using a formula prescribed by tax law, based on the company's assets and earnings.
When a company uses cash to buy back and cancel a parent's shares, the company's total assets and paid-in capital both shrink, pulling down the net asset value that serves as the denominator in the unlisted share valuation formula.
The result is a lower per-share valuation. If shares are gifted to children at that point, the gift tax is calculated on the lower valuation, which can substantially reduce the overall tax burden. From the parent's perspective, receiving the share proceeds from the company in advance also helps fund retirement or provides a source of funds to cover future inheritance tax.
There are risks to watch for, however. The lower share valuation and the resulting reduction in the children's gift tax may look attractive, but proceeding without careful analysis can backfire badly — because there are risks that must be weighed.
First, consider the potentially large income tax burden on the parent. When the company buys back the parent's shares, the parent receives proceeds that tax law may treat as either a dividend or a capital gain, triggering comprehensive income tax or capital gains tax. If the tax the parent owes exceeds the gift tax the child saves, the net outcome is negative.
Strict post-transaction scrutiny by tax authorities is another risk. If the buyback price is far out of line with the market price, or if there are procedural deficiencies, tax authorities may treat the transaction as improper and impose additional gift tax or refuse to recognize the transaction altogether. Relevant regulations and Commercial Act procedures have become considerably more stringent in recent years.
For a successful business succession, adjusting share value through treasury share cancellation can be a powerful tax-saving tool when used correctly — but used carelessly, it can trigger a tax blow from both sides. Before taking any action, carefully compare the company's current financial position, the estimated income tax the parent will owe, and the gift and inheritance tax savings the child stands to gain.
won@heraldcorp.com
