"Public Interest Corporations Must Be Sustainable... Samsung Scholarship Foundation Should Also Be Allowed to Buy Samsung Electronics Stocks"

'Public Interest Corporation Legal Research' Professor Choi Seungjae of Sejong University
"Regulations Must Be Eased for Corporate Sustainability"
Easing Regulations Makes Funding Easier
"Abuse Should Be Prevented Through Monitoring and Post-Regulation"

In April 2021, regarding the plan announced by the Samsung Group owner family to donate the late Lee Kun-hee, former chairman of Samsung Group's, inheritance to society, some in the business community evaluated it as "second best rather than the best." One reason behind this evaluation is that the majority of the inheritance was not donated to public interest foundations affiliated with Samsung Group.

The majority of the ‘Lee Kun-hee Collection’ artworks, valued at around 3 trillion won, were donated not to the Leeum Museum of Art or Hoam Art Museum but to institutions such as the National Museum of Korea and the National Museum of Modern and Contemporary Art. Before the announcement, there was an expectation in the business community that the inheritance would be donated to public interest foundations. This is because it would allow the family to preserve the inheritance while achieving social donation goals and also benefit from inheritance tax reductions. Nevertheless, experts analyze that the Samsung family chose a different path considering various regulations that public interest foundations would be subject to upon donation and the negative social perception of donating to such foundations.

Key Legal Regulations Applied to Public Interest Corporations. Graphic by Jiwon Moon

Professor Choi Seung-jae, a law professor at Sejong University and a lawyer who authored the ‘Public Interest Foundation Legal Research’ report commissioned by the Korea Economic Association, said in a phone interview with this paper on the 31st, "Excessive regulations sometimes cause companies to hesitate in choosing public interest foundations." Professor Choi viewed that although public interest foundations are the best means for companies to fulfill their social responsibilities, legal regulations prevent them from properly performing their original functions.

The report points out that despite the value of public interest foundations as an alternative to resolve issues faced by large business owners such as Samsung and LG who sold shares due to inheritance tax burdens, there is a lack of social incentives at the time of establishment, resulting in insufficient attention. Professor Choi said, "If someone donates 10 billion won to a scholarship foundation for a good cause but 5 billion won is taken as tax, no one will donate again." He emphasized that the biggest reason to ease legal regulations on public interest foundations is "the sustainability of the foundation."

Professor Choi believes that if legal regulations are relaxed, it would be easier for public interest foundations to secure resources for public interest activities. This would enable them to engage in social contribution activities over a long period. If public interest foundations continuously engage in social contributions, it can create a virtuous cycle that addresses social polarization issues and expands the culture of donation.

Under current law, regulations on public interest foundations mainly consist of two aspects: restrictions on voting rights and high tax rates. The Monopoly Regulation and Fair Trade Act (Fair Trade Act) generally prohibits public interest foundations affiliated with business groups with total assets exceeding 10 trillion won (large corporations) from exercising voting rights on domestic affiliate company stocks they hold. The Inheritance and Gift Tax Act imposes gift tax on the excess when a public interest foundation receives shares amounting to 10% or more of total shares (20% or more if voting rights are not exercised) as a form of stock acquisition, but the tax exemption limit for public interest foundations affiliated with business groups subject to mutual shareholding restrictions is only about 5%. Even if a company wants to donate to a public interest foundation for a good cause, the gift tax burden limits donations to between 5% and 20%. This inevitably restricts corporate social contribution activities.

Choi Seung-jae, Professor of Law at Sejong University (Attorney). Photo by Professor Choi Seung-jae

Professor Choi also argued that after regulations are eased, some allowance should be made for public interest foundations to engage in profit-making businesses. He expressed, "If the Samsung Scholarship Foundation needs to maintain its resources, it should be able to purchase Samsung Electronics shares." He added, "It is too strict a regulation to view the purchase of shares in the same affiliate negatively or to prohibit exercising voting rights."

However, he said that institutional measures should be in place to prevent misuse of public interest foundations when they purchase shares of the same affiliate. Professor Choi stated, "It is absolutely unacceptable for a hospital to use a public interest foundation to purchase shares to maintain management rights or to create a scholarship foundation and funnel scholarships to the owner's children." He added, "Misuse of public interest foundations should be prevented not by preemptive pressure such as taxation but through meticulous monitoring systems and post-incident behavioral regulations." Finally, Professor Choi said, "Discussions and debates on public interest foundations have been insufficient so far. I hope this report will serve as an opportunity to create a forum for discussion."

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