'Unpaid' Lee Jae-yong Only Receives Dividends... "Inheritance Tax Is Insufficient, Capital Gains Tax Introduced"

Hankyung Research Institute Demands Fundamental Reform of Inheritance and Gift Tax
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"Lower Inheritance Tax Rates, Abolish Premium Valuation for Major Shareholders"

#The major shareholder of Company A experienced an absurd situation. Inherited stocks worth 10 billion KRW were evaluated at 12 billion KRW. As a result, they had to pay 6 billion KRW in taxes, which is 50% (the highest inheritance tax rate) of 12 billion KRW. This is due to the current system that increases the valuation by 20% when stocks are inherited by major shareholders.

#The major shareholder of Company B acquired inherited stocks worth 30 billion KRW for 10 billion KRW. No taxes were paid at the time of inheritance. Later, the stocks were increased in value to 50 billion KRW and then sold. Only capital gains tax on the 40 billion KRW profit was paid.

The case of Company A’s major shareholder reflects the reality in Korea in 2023. Due to the surcharge valuation, inheritance stocks are taxed more. If a capital gains tax is introduced, only taxes on gains or losses from inherited stocks, like in the case of Company B’s major shareholder, would be required.

On the 11th, the Korea Economic Research Institute under the Federation of Korean Industries released a report titled "Problems and Improvement Directions of the Current Corporate Succession Inheritance Tax System," which stated that inheritance tax should be abolished in the long term and a capital gains tax should be introduced.

The Korea Economic Research Institute said that reforming the government’s inheritance acquisition tax alone is insufficient. Recently, the Ministry of Economy and Finance has been considering changing the inheritance tax to an inheritance acquisition tax. The inheritance acquisition tax system levies inheritance tax based on the value of assets received by the heir (the person inheriting the property). Previously, the tax was calculated based on the total assets left by the decedent (the person passing on the property), applying deductions such as spouse deductions and minor deductions. The amount of tax deductions varied depending on the number of minors within the family.

The Korea Economic Research Institute explained that Korea’s inheritance and gift tax revenue as a percentage of GDP is 0.7%, ranking first in the world. The highest inheritance tax rate for direct descendants (sons, grandsons) in corporate succession is 50%, second only to Japan’s 55%. When stocks are inherited by major shareholders, a 20% surcharge valuation is applied. This effectively means bearing a tax rate of 60%, the highest in the world.

For example, owner families such as Lee Jae-yong, chairman of Samsung Electronics, and Koo Kwang-mo, chairman of LG Group, mainly inherit stocks. In the case of Chairman Lee Jae-yong, although he received 304.8 billion KRW in dividends last year, he must pay 2.9 trillion KRW in inheritance tax on the stocks inherited from the late Chairman Lee Kun-hee over six years in installments. This year, he will bear 489.1 billion KRW. This is because, according to the amended enforcement decree of the Inheritance and Gift Tax Act implemented since 2020, an annual interest rate of 1.2% is applied.

Lim Dong-won, a research fellow at the Korea Economic Research Institute, said, "Only Korea applies a uniform surcharge valuation to major shareholders," adding, "Since a management premium is already included in the stock price, this violates the principle of substantive taxation under tax law." The principle of substantive taxation means paying taxes according to actual income.

Lim also said, "Inheritance tax is especially the biggest obstacle to corporate succession because it is a tax imposed on the process where the decedent’s assets are transferred free of charge to the heir without any change in the corporate entity." Even though the major shareholder inherits the assets, the corporate entity?such as employees, assets, and business content?does not change, so it is unreasonable to impose a surcharge burden only on the major shareholder.

Samsung Electronics Chairman Lee Jae-yong encouraging the Korean team at the closing ceremony of the 2022 International Skills Olympics Special Competition held on October 17 last year at KINTEX in Goyang-si, Gyeonggi-do.
[Photo by Yonhap News]

Of course, major shareholders can pay inheritance tax with stock dividends. However, they inevitably face difficulties in defending management rights. Lim said, "Although expanding dividends is suggested as a way to raise funds for inheritance tax, excessive dividends will burden the company," adding, "Even if the major shareholder sells stocks to secure funds for inheritance tax, succession and defense of management rights may be difficult."

He pointed out limitations in the current business succession deduction system. The average annual usage of Korea’s business succession deduction system from 2016 to 2021 was 95.7 cases, with a total deduction amount of 296.7 billion KRW. During the same period, Germany’s figures were an average of 10,308 cases annually and 16.3 billion euros (approximately 23.8 trillion KRW). At the end of last year, a bill expanding the inheritance tax deduction limit for medium-sized enterprises passed the National Assembly. Lim commented, "It is regrettable that the application target was expanded only to some medium-sized enterprises."

The Korea Economic Research Institute suggested lowering the inheritance tax rate from the current highest 50% to 30% and introducing a capital gains tax limited to corporate succession in the future. This means changing the system so that only taxes on stock gains, like in the case of Company B’s major shareholder, are paid.

Lim said, "First, it is reasonable to lower the inheritance tax rate (50%) to 30%, which is slightly higher than the OECD member average, and abolish the major shareholder surcharge taxation," adding, "In the long term, inheritance tax should be abolished and a capital gains tax introduced." He further added, "Since only capital gains tax on both the deceased’s and heir’s capital gains will be paid when inherited assets are disposed of later, tax fairness can also be maintained."

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