Hankyung Research Institute: "Punitive Inheritance Tax Rate Should Be Reduced for Corporate Succession"

'Issues of Excessive Inheritance Tax Imposition in Business Succession'
Combined Top Income and Inheritance Tax Rates Ranked 2nd in OECD

[Asia Economy Reporter Dongwoo Lee] It has been argued that punitive inheritance tax burdens during business succession not only reduce inherited assets but also increase uncertainty in management succession, potentially weakening entrepreneurial spirit. Considering the impact on corporate sustainability, there is a need to lower inheritance tax rates and shift to capital gains tax.

On the 5th, the Korea Economic Research Institute stated this in a report titled "Problems of Excessive Inheritance Tax Imposition in Business Succession." The report explained that South Korea's top inheritance tax rate is 50%, the second highest among OECD countries after Japan (55%). However, when applying a 20% controlling shareholder premium on stock value during business succession, the effective top rate reaches 60%, making it effectively the highest level.

In reality, Three Seven (a nail clipper manufacturer and the world's number one at the time) fell into deficit after selling all shares due to inheritance tax in 2008, and Lock&Lock (the leading domestic airtight container manufacturer) sold shares to a Hong Kong-based private equity fund at the end of 2017 considering the burden of inheritance tax during the owner's lifetime. These cases show that excessive inheritance tax has led to giving up business succession.

When comparing the combined top rates of income tax and inheritance tax among OECD countries, South Korea ranks second at 92% after Japan (100%). Applying the controlling shareholder premium raises this to 102%, the highest among OECD members, indicating the greatest burden from income and inheritance taxes. According to the 2020 tax law amendment, the top income tax rate for income exceeding 1 billion KRW will increase from 42% to 45%, raising South Korea's income tax rate ranking to 7th.

The report compared the actual inheritance tax burden on listed stocks worth 18.2 trillion KRW inherited by direct descendants with major OECD countries, finding South Korea's effective inheritance tax rate at 58.2%, the highest, followed by Japan (55.0%), the United States (39.9%), Germany (30.0%), and the United Kingdom (20.0%).

Researcher Lim pointed out, "From these cases, South Korea's inheritance tax burden is 46% to 253% higher than major countries: 46% higher than the U.S., 94% higher than Germany, 191% higher than the U.K., and 253% higher than Canada. Currently, punitive inheritance tax in South Korea is imposed on businesses like a death sentence."

The report emphasized that business succession should not be overlooked as merely wealth transfer but as a means to contribute to national economic growth through business continuity and job retention.

Researcher Dongwon Lim said, "To remove the obstacle of 'punitive inheritance tax' during business succession, inheritance tax rates should be lowered in the short term, and if capital gains taxation limited to business succession is introduced later, smooth succession can be achieved." He added, "As a long-term solution, inheritance tax, which is an obstacle to business succession, should be abolished, and simultaneously, capital gains tax (taxation on succession acquisition value) that maintains tax equity should be introduced."

This content was produced with the assistance of AI translation services.