Korea's Inheritance Tax Rate Highest in OECD... "Urgent Need for Inheritance Tax Reform"

Federation of Korean Industries Proposes 'Inheritance Tax System Improvement' to Ministry of Economy and Finance
Suggests Abolishing Premium Valuation on Majority Shareholder Stocks

[Provided by the Federation of Korean Industries]

[Asia Economy Reporter Han Yeju] South Korea's highest inheritance tax rate is among the highest in the Organisation for Economic Co-operation and Development (OECD), prompting calls for urgent reform of the inheritance tax system to enhance corporate competitiveness.

The Federation of Korean Industries (FKI) announced on the 17th that it has submitted "Opinions on Improving the Inheritance Tax System to Support Smooth Business Succession," outlining desirable directions and tasks for reforming the inheritance tax system, to the Ministry of Economy and Finance.

According to the FKI, South Korea's current highest inheritance tax rate is 50%, and in the case of business succession, the rate can increase up to 60% due to the regulation that adds 20% to the major shareholder's stock price for taxation purposes (hereinafter referred to as the 'major shareholder stock premium valuation').

The FKI pointed out that South Korea's inheritance tax burden is excessively high compared to major foreign countries, raising concerns about the decline in corporate vitality and competitiveness. Currently, among the 38 OECD countries, 20 countries?nearly half?do not impose inheritance tax on direct descendants. Among the remaining 18 countries, South Korea's highest inheritance tax rate is the second highest after Japan (55%), and when the major shareholder stock premium valuation is applied, the highest rate reaches 60%, the highest among OECD countries. The proportion of inheritance tax in total tax revenue has also been steadily increasing recently, reaching about 1.5 times the OECD average (as of 2019, South Korea 1.07%, OECD 0.70%).

In particular, the FKI's position is that inheritance tax involves double taxation because it is an additional tax imposed on wealth accumulated after income tax has been levied. South Korea has both high income tax rates and inheritance tax rates, resulting in an excessive tax burden due to punitive taxation on wealth.

Chu Gwang-ho, head of the Economic Headquarters, stated, "The inheritance tax rates and tax brackets have not been revised for 22 years since 2000, failing to reflect changes in economic and social structures," and emphasized, "Business succession is not merely the transfer of wealth but a means to contribute to economic growth through the continuity of businesses, investment, and job creation. It is now time to fundamentally overhaul the tax system, including tax rates."

Accordingly, the FKI proposed four major improvement tasks: ▲ lowering inheritance tax rates and simplifying tax brackets ▲ abolishing the major shareholder stock premium valuation ▲ expanding the scope of businesses eligible for the business succession deduction ▲ changing the inheritance tax method (from estate tax to inheritance acquisition tax).

In the short term, the FKI recommended lowering the highest inheritance tax rate to the OECD average of 30% and reducing the number of tax brackets from five to three. In the medium to long term, the FKI argued that inheritance tax should be abolished and replaced with capital gains tax or similar.

It also pointed out that South Korea is the only OECD country that uniformly applies the premium valuation to major shareholders' stocks, and proposed abolishing this uniform major shareholder premium valuation rule, which increases the inheritance tax burden on companies.

Furthermore, the FKI argued that simply disallowing the business succession deduction (which exempts a certain amount of inherited property from taxation when inheriting small and medium-sized enterprises managed for over 10 years or mid-sized companies with sales under 400 billion KRW) based solely on company size contradicts the purpose of supporting smooth business succession. Therefore, it requested an expansion of the scope of businesses eligible for the business succession deduction.

The FKI noted that South Korea's inheritance tax system follows the 'estate tax' method, which taxes the total inherited property of the deceased regardless of the actual share received by the heir, undermining the principle of ability to pay. In contrast, the inheritance acquisition tax method taxes each heir based on their respective share after dividing the inherited property, making it a fairer taxation method in terms of taxpayers' ability to bear the tax burden. Therefore, the FKI recommended switching to this taxation method.

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