"Inheritance Tax System That Forces Renunciation of Inheritance, Urgent Need for Improvement"

KCCI Submits 137 'Tax System Improvement Tasks' to Government and National Assembly

Amid growing concerns that the government's momentum for tax reform may weaken due to deteriorating domestic and international economic conditions, the business community has called for improvements to the tax system, including easing the burden of corporate succession.

The Korea Chamber of Commerce and Industry (KCCI) stated in its "2023 Tax System Improvement Proposal" released on the 21st, "Our companies face significant difficulties in generational transition due to high inheritance tax rates that deviate from global standards and the 'estate tax' system," adding, "We need to create a corporate tax environment where companies can build competitiveness and grow in a stable environment."

KCCI collects and submits corporate opinions annually ahead of government and National Assembly tax law revisions. This year's proposal includes 137 tax system improvement tasks such as ▲ lowering inheritance tax rates and reforming the taxation system, ▲ resolving corporate concerns related to the global minimum tax, and ▲ establishing tax policies for balanced regional development.

OECD's Highest Inheritance Tax Burden... Founder's 100% Ownership Shrinks to 16% by the Third Generation

First, KCCI proposed lowering the inheritance tax rate and reforming the taxation system from the 'estate tax' method to the 'inheritance acquisition tax' method, based on examples from major OECD countries. South Korea's top inheritance tax rate is 50%, but for large corporations, a 20% surcharge is applied on the valuation of shares inherited by the largest shareholder, resulting in an effective rate of 60%, the highest inheritance tax burden among 38 OECD countries.

Moreover, South Korea adopts the estate tax system, which taxes the entire inherited property, causing excessive tax payments relative to the actual inherited assets. Among the 38 OECD countries, 24 impose inheritance tax, and 20 of these follow the inheritance acquisition tax system based on individual acquisition of assets. Only four countries, including South Korea, apply the estate tax system taxing the entire inherited estate. However, except for South Korea, these countries offset the adverse effects of the estate tax with large basic exemptions (e.g., the United States at $12.92 million), a single tax rate (e.g., the United Kingdom at 40%), or low tax rates (e.g., Denmark at 15%).

For companies subject to the current 60% inheritance tax rate, maintaining management control is difficult. For example, if the founder holding 100% of the company shares passes the business to the second generation, the second generation retains only 40% ownership, which further shrinks to 16% by the third generation. KCCI explained that maintaining such a high inheritance tax rate in an era where all tax sources are transparent poses a threat to corporate management rights.

Although the business succession deduction system for small and medium-sized enterprises (SMEs) is in place and was partially improved last year, its application is limited to SMEs and mid-sized companies with sales under 500 billion won, resulting in low utilization.

A CEO of a company with 25 years of experience based in Ansan, Gyeonggi Province, said, "There is no guarantee that a company burdened with high inheritance tax will continue to operate well after succession, so it may be more beneficial in many aspects to sell the company and gift the proceeds rather than passing down the business," adding, "A reduction in inheritance tax rates is necessary to support entrepreneurs' passion and will, their contributions to the nation and society, and their pride in technology and business experience."

Not only companies but also the general public face a heavy inheritance tax burden. The threshold for the highest inheritance tax rate of 50% remains at 3 billion won since 2000, while GDP per capita has increased 2.9 times and asset prices have surged, effectively resulting in a tax increase. In contrast, Japan, which competes with South Korea for the highest inheritance tax rate among OECD countries (top rate 55%), saw only a 0.3% increase in GDP per capita during the same period.

KCCI stated, "Excessive inheritance tax acts as a factor that restricts economic growth by dampening corporate investment and personal consumption more than achieving income redistribution effects. Therefore, inheritance tax rates should be lowered to the level of major OECD countries and the taxation system improved," adding, "Recently, the installment payment period for inheritance tax was extended from 5 to 10 years to ease payment burdens, but this does not apply retroactively to inheritances that occurred before the law was amended. Thus, the law should be revised to allow retroactive application of installment payment benefits to such cases."

Need to Address Corporate Concerns Including Adjustment of Global Minimum Tax Implementation Timing

South Korea legislated the global minimum tax last year, the first in the world, to prevent tax avoidance through low-tax jurisdictions and curb international corporate tax rate competition, taxing multinational corporations whose effective tax rate is below 15% on the shortfall amount. The law is set to take effect next year.

However, with the U.S.-led supply chain restructuring featuring strong tax incentives such as the Chips Act and the Inflation Reduction Act (IRA), the enactment of global minimum tax laws in major countries remains uncertain. A KCCI official explained that recently, the U.S. introduced Qualified Refundable Tax Credit (QRTC) methods such as 'Direct Pay' and 'Transferability' of unused credits for IRA tax credits to ensure that foreign companies operating in the U.S. do not have effective tax rates below the global minimum tax (15%).

Accordingly, KCCI requested that if South Korea implements the global minimum tax ahead of other major countries, it would lead to a sharp increase in tax burdens for Korean companies operating overseas who receive substantial tax benefits, and increase compliance costs due to complex calculations. Therefore, KCCI urged careful monitoring of major countries' trends and adjustment of the implementation timing to avoid disadvantaging Korean companies.

Additionally, regarding the scope of the global minimum tax, KCCI requested international negotiations to exclude existing investments made before the October 2021 international agreement that received tax incentives from the global minimum tax application. The OECD previously received requests from companies and organizations to exclude retroactive application but did not accept them.

Need to Raise Local Allocation Tax Rate and Promote Corporate Local Income Tax Reduction to Foster Balanced Regional Development

KCCI argued that for balanced regional development, a national policy task, it is necessary not only to establish business-friendly infrastructure in regions but also to allow local governments to offer corporate local income tax reductions as incentives.

Currently, local governments can adjust corporate local income tax rates within 50% of the statutory rate according to local ordinances. However, with shrinking local tax bases due to population decline, local governments lack the capacity to pursue corporate local income tax reductions that immediately affect tax revenues.

KCCI stated that the local allocation tax rate, which has not changed since 2006 (19.24%), should be raised to expand local finances, enabling local governments to attract companies by reducing corporate local income tax.

A "Special Act on Local Investment Promotion" that applies differentiated corporate tax rates for local companies is currently pending in the National Assembly.

Lee Su-won, head of the Corporate Policy Team at KCCI, said, "The government improved tax systems that were unfavorable to foreign companies, such as the double taxation on dividends from overseas subsidiaries last year, resulting in positive effects like increased domestic inflow of overseas retained earnings starting this year. Furthermore, a series of measures including expanded tax credits for facility investments in national strategic technologies this year greatly help enhance corporate competitiveness," adding, "We hope efforts to innovate the tax system to support the competitiveness of companies, the source of economic growth, will continue."

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