[La Deok-yeon Gate] Artworks Transaction Taxes Gaining Attention Amid La Deok-yeon Incident

Capital Gains Tax Imposed Only on Works Over 60 Million KRW... No Acquisition, Registration, or Holding Taxes
No Taxes on Works by Living Domestic Artists... Inheritance Tax Up to 50%

The prosecution investigating the stock price crash triggered by Societe Generale (SG) Securities has seized artworks stored in a gallery in Seoul related to CEO Ra Deok-yeon and Hoan. A large number of works recognized for their artistic value in the art market, including those by David Hockney, Alex Katz, and Kim Chang-ryeol, were uncovered. It is interpreted that Ra Deok-yeon and his associates focused on artworks because, unlike real estate and other assets, art is relatively advantageous in terms of asset concealment and taxation.

Only Capital Gains Tax Applies to Art Transactions

In art transactions, only capital gains tax is imposed. There are no acquisition taxes, registration taxes, VAT, or holding taxes. Compared to other assets such as real estate and automobiles, the tax burden is lower, making it easier to use art for concealing criminal proceeds.

Capital gains tax is also relatively low compared to other assets. A National Tax Service official stated, "The tax rate for art is 20% capital gains tax and 2% resident tax," adding, "Taxes are imposed only when the artwork price exceeds 60 million KRW." Typically, the prices of emerging artists who attract attention in the art market range from 20 million to 40 million KRW.

If an artwork purchased for 10 million KRW is resold for 100 million KRW, it becomes subject to capital gains tax. However, the tax is not imposed on the 90 million KRW difference alone. According to Article 21, Paragraph 2 of the Income Tax Act, taxes are calculated after deducting necessary expenses used during the taxable period from the total income. In other words, tax is levied only on the amount remaining after subtracting all expenses incurred in purchasing the artwork. Especially, there is no tax on works by living artists. Enforcement Decree Article 41, Paragraph 14 of the Income Tax Act stipulates that "works by domestic original artists who are alive at the time of transfer are excluded."

The works of artist Woo Guk-won, who recently gained fame in the art market and among the public, were traded around 18 million KRW three to four years ago. Last year, Woo Guk-won's work attracted attention when it was sold for about 300 million KRW at Christie's Hong Kong auction.

Works by living famous artists whose market value has soared, such as Lee Ufan, considered one of the greatest living artists, Park Seo-bo, who gained popularity through collaborations with luxury brands like Louis Vuitton, and Lee Bae, who collaborated with Yves Saint Laurent, are not subject to tax. A gallery official said, "There is a story that taxes are not imposed because if works by living artists are not taxed, they can be sold at higher prices when popular, which helps improve the artists' treatment."

Art Payment System Implemented Triggered by the Lee Kun-hee Collection

However, since artworks are classified as assets, inheritance tax and gift tax are imposed. The current highest inheritance tax rate reaches 50%. A representative case that drew attention due to art inheritance issues is Samsung Group. The collection of the late Samsung Chairman Lee Kun-hee is known to be valued between 2 trillion and 3 trillion KRW. Discussions arose regarding the 'art payment system' for large-scale collections with art historical value.

According to tax law, if artworks are donated to national institutions or public foundations, inheritance tax on the artworks is exempted. After long discussions, the "Partial Amendment to the Inheritance and Gift Tax Act" was passed, and the art payment system was implemented on January 1 of this year.

If it is recognized that paying inheritance tax in cash is difficult, an exception allows payment with real estate or securities. This is called the payment-in-kind system. With the enactment of the tax law amendment, inheritance tax corresponding to the value of inherited artworks or cultural assets can be paid with cultural assets or artworks instead.

A National Tax Service official explained, "Application for payment-in-kind is possible only if the inheritance tax amount on the inherited artwork exceeds 20 million KRW," adding, "It is not possible to pay in kind simply by owning artworks; it applies only to cultural assets and artworks with historical, academic, or cultural value and when requested by the Minister of Culture, Sports and Tourism."

The family of the late Samsung Chairman Lee Kun-hee donated over 23,000 artworks. The 'Lee Kun-hee Collection' is being publicly exhibited free of charge through regional tours at institutions such as the National Museum of Modern and Contemporary Art.

Art fair 'Frieze Seoul' held at COEX, Seoul in September last year. [Image source=Yonhap News]

Collectors Keep Their Holdings Quiet for Fear of Tax Audits

Many wealthy individuals, not only in the business world, collect artworks. However, most are reluctant to disclose their collections. The CEO of asset management firm A said, "If you are known as an art collector, the National Tax Service conducts tax audits," adding, "Art collectors are interpreted as having the financial capacity to purchase high-value assets, which can lead to investigations into other assets such as real estate and financial assets."

While wealthy individuals collect art out of passion for art, they also use it as a means to transfer wealth. Recently, gifting has become active. Gift tax rates are 10% for up to 100 million KRW, 20% for up to 500 million KRW, 30% for up to 1 billion KRW, 40% for up to 3 billion KRW, and 50% for amounts exceeding 3 billion KRW. Gifts between parents and children are exempted up to 50 million KRW over 10 years.

However, gift tax on artworks is not as straightforward to assess as with real estate. Unlike real estate, there is no registration system. For newly revealed works, purchase histories are often not strictly managed like real estate. Also, if the 'reacquisition cost' is not confirmed, taxation is based on the 'book value.' This means that for works without established market prices or that are not famous, tax is levied based on the initial purchase price.

However, it is generally agreed that it is now difficult to evade taxes as tracking famous artists or high-priced works has become easier. Nevertheless, there are still many cases where artworks are used as a means of asset gifting. A gallery official explained, "Methods such as collecting works by living domestic artists who are also famous overseas or purchasing works abroad are utilized."

※The SG Securities-triggered stock price crash has sounded an alarm for the capital market order. Readers' reports will be a great help in uncovering the truth. We welcome any reports regarding investment damage cases, suspicions of stock manipulation and asset concealment by Ra Deok-yeon’s group, insider details about the mass sell-off by major shareholders of Dow Data and Seoul Gas, or any other information (jebo1@asiae.co.kr). Asia Economy will do its best to establish a transparent capital market order.