Taxation of Domestic Investors in Foreign Corporate Reorganizations：Issues and Legislative Proposals

Abstract

[Purpose]Amid surging overseas stock investments, tax deferral is denied to domestic investors even when foreign corporations undergo qualifying reorganizations locally. This study analyzes this issue and proposes legislative reforms based on major jurisdictions. [Methodology]This study examines Korea’s reorganization tax deferral regime through statutes, precedents, and rulings. It compares US, Japanese, UK, and German tax laws, focusing on corporate－ and shareholder－level requirement linkages and the international scope of qualifying reorganizations. [Findings]Korea limits qualifying reorganizations to domestic entities and links corporate and shareholder requirements, precluding shareholder deferral in foreign reorganizations. The compared jurisdictions lack such domestic restrictions. Japan and the UK allow deferral for specific share exchanges, while the US and Germany broadly permit it in foreign reorganizations if substantive taxing jurisdiction is preserved. [Implications]Corporate－ and shareholder－level requirements should be partially decoupled to establish an independent shareholder deferral regime for cross－border reorganizations. Qualifying reorganizations should expand to include foreign corporations, with deferral based on preserving Korea’s substantive taxing jurisdiction and supported by post－reorganization compliance measures.