Legal Risks When a U.S. Citizen or U.S. Company Transfers Assets to a Korean Individual or Korean Company

 

 

Jungsup Kim, U.S. Attorney
Frederick Lee & Kim LLC
T. +82-2-6013-2256, 2257
office@flkim.com / jsk@flkim.com

Recently, while reviewing a real case, a significant legal issue came to light. In that matter, a property located in the State of Hawaii was transferred into the name of a Korean corporation, and questions were raised regarding whether proper legal procedures had been followed during the transfer process.

The issue in this case was not merely a simple change of title. Rather, it involved the legal, tax, and potential criminal risks that arise when U.S. assets are transferred to a foreign entity. According to statements and documentary evidence from individuals involved, the Hawaii property owned by a U.S. company appears to have been transferred into the name of a Korean corporation without proper notice or approval procedures. Additionally, questions were raised as to whether the required tax filings and legal documentation were properly completed.

This situation illustrates how complex and highly regulated the transfer of U.S. assets can be when a U.S. citizen or U.S. company transfers assets to a Korean individual or a Korean company.

Why Transferring U.S. Assets to Korea Can Create Legal Problems

Many people assume that transferring U.S. real estate or business assets to a Korean company is simply a matter of “changing the name on the title.” In reality, however, multiple legal frameworks must be reviewed and addressed simultaneously.

These typically include:

• U.S. real estate law
• Federal tax law
• International tax reporting regulations
• Foreign exchange and financial regulations
• Corporate law

If assets are transferred without properly addressing these legal requirements, the consequences may extend beyond civil liability and could potentially lead to criminal liability as well.

Legal Procedures Required When Transferring U.S. Real Estate to a Foreign Entity

When transferring U.S. real estate to a foreign individual or foreign corporation, several legal procedures must be properly completed.

1. Proper Preparation of Real Estate Transfer Documents

In the United States, a Deed is required to transfer ownership of real property.

Common types of deeds include:

• Warranty Deed
• Grant Deed
• Quitclaim Deed

(A detailed discussion of each type of deed will be addressed in a separate column.)

In addition, the following procedures are generally required:

• Notarization
• Recording with the county recorder
• Proper retention of transaction documents

If ownership is transferred without following these procedures, the validity of the transfer itself may be challenged.

In practice, when transferring U.S. real estate to a foreign party, most individuals complete the deed preparation and recording without difficulty. However, the more important issues often arise in the regulatory and tax compliance steps that follow.

2. State Conveyance Tax Filing

In Hawaii—and similarly in many U.S. states—a Conveyance Tax filing is required when real property is transferred.

Typical filing documents include:

• Conveyance Tax Return
• Form P-64 (for Hawaii)

Failure to file these documents may not only result in tax issues but could also raise suspicions of improper or unlawful transfer. In certain circumstances, it could trigger an audit or even criminal investigation.

3. FIRPTA Compliance

When U.S. real estate is transferred to a foreign individual or foreign entity, the transaction must comply with the Foreign Investment in Real Property Tax Act (FIRPTA).

Under FIRPTA:

• Transfers of U.S. real estate to foreign persons may require withholding of a certain percentage of the purchase price.
• The transaction must be reported to the IRS.

Failure to comply with FIRPTA can result in significant tax liabilities and penalties.

The Most Serious Legal Issue: Fraudulent Transfer

One of the most serious legal concerns in asset transfer cases is Fraudulent Transfer.

Examples of potentially fraudulent transfers include:

• Transferring assets to avoid creditors
• Concealing the true beneficial owner
• Transferring assets to avoid legal liability
• Moving corporate assets into foreign entities

Fraudulent transfer laws exist both at the federal level and at the state level. In Hawaii, the relevant law is the:

Hawaii Uniform Fraudulent Transfer Act
(HRS §651C-4)

If a court determines that a transfer was fraudulent, the following consequences may occur:

• The real estate transfer may be voided
• Assets may be recovered
• Damages may be awarded
• Additional civil liability may arise

 

Tax Risks When Holding U.S. Assets Through a Foreign Corporation

Another common issue in cross-border disputes involves using a Korean corporation to hold U.S. assets.

While such structures may appear legitimate, U.S. tax law imposes strict reporting obligations.

Key reporting requirements include:

Form 5471
Required when a U.S. person owns or controls 10% or more of a foreign corporation.

Form 5472
Required for reportable transactions between a foreign-owned entity and a U.S. entity.

FBAR / FATCA Reporting
Required for certain foreign financial accounts.

Failure to comply with these reporting obligations can lead to allegations of tax evasion or false reporting.

Additional Risks When Corporate Assets Are Transferred Abroad

When assets belonging to a U.S. company are transferred to a foreign entity, corporate law principles such as fiduciary duty become critically important.

Certain activities may create significant legal exposure, including:

• Inflated invoices
• Unexplained international transfers
• Personal use of corporate assets
• Asset transfers without shareholder approval

Such conduct may lead to civil claims such as:

• Fraud
• Conversion
• Breach of fiduciary duty
• Unjust enrichment

When combined with tax violations, these issues may escalate into criminal investigations.

Why These Issues Can Lead to Criminal Liability

In the United States, tax-related matters are treated with particular seriousness. As a result, asset transfer issues do not always remain civil disputes.

They may lead to criminal allegations such as:

• Tax Evasion
• Wire Fraud
• Money Laundering
• Conspiracy

These offenses carry severe penalties.

For example:

• Tax evasion: up to 5 years imprisonment
• Money laundering: up to 20 years imprisonment
• Wire fraud: up to 20–30 years imprisonment

For this reason, cross-border asset transfers should always be reviewed by qualified legal and tax professionals.

Key Principles When Transferring U.S. Assets to Korea

When a U.S. citizen or U.S. company transfers assets to a Korean individual or Korean corporation, several key principles must be followed.

1. Design the legal structure before transferring assets

Real estate law, tax law, corporate law, and international tax regulations must all be considered together.

2. Ensure all tax filings are properly completed

This includes compliance with:

• FIRPTA
• Conveyance Tax filings
• IRS reporting requirements

3. Maintain transparency in corporate transactions

This includes maintaining:

• Board resolutions
• Written agreements
• Proper accounting records

4. Comply with international tax reporting obligations

Examples include:

• Form 5471
• Form 5472
• FBAR filings

Conclusion

Transferring U.S. assets to a Korean individual or Korean corporation is not a simple change of ownership.

The process involves complex legal issues, including:

• Real estate law
• Tax law
• Corporate law
• International financial regulations

If these legal requirements are not properly addressed, the consequences may include invalidated property transfers, tax assessments, civil lawsuits, and even criminal liability.

Therefore, when dealing with cross-border asset transfers, one fundamental principle must always be remembered:

“Design the legal structure before transferring the assets.”

Following this principle is the safest and most effective way to manage international asset transfers.