CONTENTS
- 1. International Tax Adjustment | Reporting Obligation for Foreign Trusts Following the Amendment of the Act
- - Foreign Trusts Also Included Within the Scope of Administration
- 2. International Tax Adjustment | The Definition of a ‘Foreign Trust,’ the Crux of Future Interpretive Disputes
- - The Reality Within the International Information-Exchange Framework
- 3. International Tax Adjustment | The Structure That High-Net-Worth Individuals Have Chosen
- - Disadvantages That Arise in the Event of a Failure to Report
- - Daeryun's Assistance
1. International Tax Adjustment | Reporting Obligation for Foreign Trusts Following the Amendment of the Act
With the entry into force of Article 58 of the Adjustment of International Taxes Act, the first-ever reporting deadline for resident holders of foreign trusts arrives on June 30, 2026.
This should be understood as a qualitative shift in the international tax administration framework directed at ultra-high-net-worth individuals and global enterprises.
In recent years, asset management and inheritance planning using foreign trusts, such as the living trust in the United States, have become increasingly common among holders of substantial assets.
Foreign trusts offer various advantages, including the transfer of assets during one's lifetime, the prevention of inheritance disputes, and the design of tax-efficient structures. Because of the structural feature that title to the property is transferred to the trustee, however, they have until now received comparatively little attention in the area of tax administration.
The situation has now changed.
This is because, under the amended Adjustment of International Taxes Act revised at the end of 2023, the reporting obligation for foreign trusts takes full effect beginning in 2026.
The fact that the system is in its early stage of implementation is not a reason to treat the matter lightly. It should be understood as a signal that the international tax adjustment framework is expanding by a further step.
Foreign Trusts Also Included Within the Scope of Administration
Until now, the tax authorities have operated relatively systematic administration systems for foreign real estate and foreign financial accounts.
Foreign trusts, by contrast, have complex structures and an apparent separation of ownership, which has made it difficult to ascertain their substance.
The amendment of the Adjustment of International Taxes Act is a measure intended to close this blind spot. The reporting requirement applies not only to residents but also to domestic corporations.
The most important criterion is not the formal title but whether there is ‘substantive dominion and control.’
For example, as with a grantor trust in the United States, if the grantor retains the right to revoke the trust or to change the beneficiary, a reporting obligation may arise for each business year, even though the property is formally held in the trustee's name.
2. International Tax Adjustment | The Definition of a ‘Foreign Trust,’ the Crux of Future Interpretive Disputes
A point that warrants particular attention in this amendment of the Adjustment of International Taxes Act is the definition of the foreign trusts subject to reporting.
The statute defines such a trust as “a trust established under foreign law that is similar to a trust under the Korean Trust Act.”
The issue lies in the interpretation of ‘similarity.’
Trusts in the United States are governed by laws that differ from state to state and take a wide variety of forms.
A legal review must therefore be conducted first as to whether the structure one has established satisfies the core requirement of ‘the management and disposition of property based on a fiduciary relationship’ referred to in Article 2 of the Korean Trust Act.
In practice, the tax authorities are already showing a tendency to assess the substance of a trust, focusing on the structure of beneficial interests, whether the grantor's control persists, and whether the grantor retains the authority to revoke or amend the trust.
Ultimately, each individual provision of the trust agreement may become an important factor in determining whether a reporting obligation exists.
The Reality Within the International Information-Exchange Framework
Some underestimate the risk on the ground that the system is in its early stage of implementation, but this is a judgment that calls for considerable caution.
Through the Korea-U.S. agreement on the automatic exchange of financial information, the Korean National Tax Service already receives, on a regular basis, information from U.S. financial institutions on the account numbers, balances, and interest and dividend income of Korean residents.
There have been cases in which assets concealed abroad through trusts in tax havens were uncovered through analysis of foreign exchange transaction records and exchanged information, resulting in the collection of substantial back taxes.
It should be recognized that the international tax adjustment framework is not a one-off measure but a data-based administration system in which information continually accumulates.
Reporting a foreign trust is not merely a passive fulfillment of a legal obligation.
Rather, it can be regarded as a measure for managing assets that, by organizing and transparently managing the source and operating structure of the assets in advance, structurally forecloses future risks of disputes over inheritance, gifts, and international taxation.
The earlier the stage of the system's introduction, the more advisable it is to understand the Korean and U.S. tax structures in a multidimensional way, to analyze accurately the legal character of the trust and the structure of control, and then to establish a systematic response strategy.
A foreign trust, if appropriately designed and managed, can be an effective means of asset management.
At present, however, as the international tax adjustment environment is being strengthened, a strategic approach premised on transparency and legal stability must accompany it.
3. International Tax Adjustment | The Structure That High-Net-Worth Individuals Have Chosen
A foreign trust is a trust established under foreign law in which the grantor transfers certain assets to a trustee and has the trustee manage and dispose of them for the benefit of the beneficiary.
Representative examples that have been used include the living trust and the grantor trust in the United States.
The reasons high-net-worth individuals have used foreign trusts are as follows.
- Prevention of inheritance disputes
- Design of a business-succession structure
- Securing flexibility in transferring assets during one's lifetime
- Protection of specific beneficiaries
- A structure for asset separation and limitation of liability
Because title to a trust is transferred to the trustee, the holder of the assets is not outwardly apparent, and trusts were therefore at times regarded in the past as a blind spot of tax administration.
The situation has now changed.
Disadvantages That Arise in the Event of a Failure to Report
This system is not a matter that ends at the level of a mere administrative fine.
① Administrative fine
- 10% of the value of the trust property
- Up to KRW 100 million (under current standards)
Where the scale of the assets reaches tens of billions of won, the burden of the administrative fine itself is significant.
② Possibility of strengthened sanctions
The precedent of the foreign financial account reporting system shows the following features.
- A sharp increase from 525 reporting persons in 2011 to 6,858 in 2025
- Introduction of criminal punishment and public disclosure of names within three years of the system's introduction
For foreign trusts as well, there is a strong likelihood that sanctions will be strengthened in stages, in the order of an increase in the administrative fine ceiling, then criminal punishment, then public disclosure of names.
③ Retroactive verification of the source of funds over ten years
Where a report is incomplete or an explanation is requested, the National Tax Service may require an explanation of the source of funds for the flow of funds within the ten years preceding the date of the request for explanation.
If no explanation is provided within ninety days, very strict verification is carried out in the ensuing tax investigation.
Daeryun's Assistance
For the reporting of foreign trusts by high-net-worth individuals and global corporations, international taxation, inheritance, and corporate governance must be analyzed in an integrated manner.
Daeryun can provide integrated assistance in the following respects.
① Legal analysis of the trust structure
- Detailed review of the provisions of the trust agreement
- Determination of whether substantive dominion and control exist
- Preparation of a legal opinion on whether the trust falls within the scope of reporting
② Establishment of an asset valuation strategy
- Advice on the valuation of unlisted shares
- Review of appraised values of foreign real estate
- Prevention of taxation risk arising from overvaluation
③ Organization of past fund flows
- Analysis of fund movements over the preceding ten years
- Establishment of a strategy for explaining the source of funds
- Simulation of responses to a tax investigation
④ Cross-review of Korean and U.S. tax law
- Review of the impact on Korean inheritance tax and gift tax
- Design of a strategy to prevent double taxation
Through a collaborative framework with SJKP, a U.S. local law firm, and with law firms worldwide, the Firm responds with strategies tailored to each client's situation.
In addition, tax accountants and certified public accountants within the firm work together to consider asset management and efficient tax-saving methods.
If you need assistance with a matter relating to international tax adjustment, you are welcome to request a consultation.
