Abstract

In this study, we investigated the taxation issues faced by domestic investors in foreign corporate reorganization, focusing on the spin－off of AT&T in the United States. This event, which emerged as a significant concern in Korea in 2022 and resulted in a legal dispute, involved a qualified reorganization under U.S. tax law. As per this classification, neither the corporation nor its domestic and foreign shareholders incurred taxes. However, amidst subsequent controversies, Korean investors were subjected to taxation as deemed dividend income, following domestic tax law, equivalent to the market value of the distributed stocks. It’s crucial to note that AT&T’s spin－off transaction was categorized as an indirect spin－off, distinct from a comprehensive succession. It entailed the spin－off of a business operated by a separate subsidiary and incorporated a parallel cash－out strategy, featuring elements of divestiture of a business division previously operated by AT&T. Given these intricacies, determining whether AT&T qualifies as a spin－off under Korean tax law, and subsequently whether it meets eligibility requirements, proves challenging, even though it is a domestic corporation. On the other hand, within an income tax system adopting the enumeration principle, uncertainties arise regarding whether spin－offs of American corporations, deviating from procedures under Korean commercial law, can be acknowledged as divisions under tax law and taxed as constructive dividends. Opting to tax it as an in－kind distribution may be more appropriate than treating it as a fictitious dividend. This controversy is attributed to the oversight of not considering reorganization based on foreign law when initially enacting the taxation of shareholders’ fictitious dividends in Korea’s tax system for reorganization. Initially, there was likely no intention to exclusively tax reorganizations based on domestic law in the Income Tax Act and exempt reorganizations based on foreign laws. In this study, we conduct a comparative analysis of the tax treatment of domestic shareholders in Korea and Japan concerning the reorganization of foreign corporations, using the AT&T spin－off transaction as a case study. Based on this comparison, we aim to establish a clear foundation for the taxation of Korean investors in the reorganization of foreign corporations.

Keywords

• Spin－off
• qualified reorganization
• deemed dividend
• non－recognition

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