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SEOUL: For decades, South Korea has levied an inheritance tax of as much as 60 per cent on the controlling shareholders of firms like Samsung Electronics, forcing billionaire families to perform financial contortions in order to pay up.
Now the nation’s richest clans are a step closer to a controversial reprieve on the levies, which are among the highest in the world.
President Yoon Suk-yeol plans to lower the ceiling on the inheritance tax to 40 per cent from 50 per cent and scrap the rule that requires owners to pay even more, the Finance Ministry said Thursday (July 25).
The idea behind the tax was to stop rich families that run the nation’s sprawling conglomerates, known as chaebols, from passing down their wealth and maintaining what critics say is a disproportionate influence over the economy.
But the levies have also been unpopular with South Korea’s army of retail investors, who say it created the “Korea discount” because controlling shareholders were incentivised to keep stock prices artificially low.
If approved by the opposition-controlled Parliament, the proposal would mark the first reduction of the nation’s inheritance tax rate since 1995.
“The immediate beneficiaries are the controlling shareholders of large conglomerates like Samsung and Hyundai, who will see a significant reduction in their inheritance tax burden,” said Vikas Pershad, Asian equities portfolio manager at M&G Investments in Singapore.
Still, the tax cuts “are expected to stimulate investment in the stock market, potentially leading to increased liquidity and higher valuations for Korean companies”.
Looming bills
The taxes have delivered a big financial hit to many of the nation’s richest families.
In 2021, the heirs of former Samsung Electronics Chairman Lee Kun-hee, who had an estimated fortune of US$20.7 billion (S$27.8 billion) when he died in October of 2020, were left with a tax bill of more than 12 trillion won (S$11.6 billion).
At the time, the inheritance bill levied on the Lee clan was one of the largest ever in the nation and globally.
The family announced a plan to pay it in six installments over five years, which included donating 1 trillion won for medical facilities and approximately 23,000 works of art as part of its payment.
The Lee family also substantially increased its share-backed borrowing, giving it the means to pay the duties and avoid ceding control. Still, such measures might now become less pressing.
“It’s a significant move since excessively high inheritance taxes have been one of the key reasons for poor corporate governance in Korea,” Douglas Kim, an analyst at Douglas Research Advisory who publishes on the SmartKarma platform, wrote in a note.
“Although this proposal is likely to be met with some stiff opposition in the National Assembly, we believe that there is an increasing probability,” it could be made into law in the fourth quarter, he said.
Controversial
Earlier this year, the president’s thoughts on the tax – pointing to Germany as an example that might work – were welcomed by business lobby groups, but they brought a backlash from the main opposition Democratic Party.
Lee Gae-ho, the party’s top policymaker, said at the time that he was “shocked” by Yoon’s comments, adding the president was representing the interests of the ultra-rich and trying to fool ordinary citizens.
Even though the rich are set to benefit, the government is casting the reform as part of a broader strategy to stimulate economic growth and attract investment.
South Korea’s regular maximum inheritance levy is the second-highest among members of the Organisation for Economic Co-operation and Development, after 55 per cent in Japan.
In South Korea, there are high levels of nationalism which prevents powerful chaebol families from emigrating, unlike Sweden where ultra-high inheritance taxes - abolished about 20 years ago - prompted a wave of powerful billionaires to leave the country, such as the late IKEA founder Ingvar Kamprad, according to Kim, the analyst.
Just last year, the family of Kim Jung-ju, the late billionaire founder of online game developer Nexon, transferred some of its ownership in its parent, NXC Corp, to pay part of its inheritance tax bill, leaving the South Korean government as the second-largest NXC shareholder.
“Rather than emigrating, some of the chaebol members have chosen different ways to break up and merge companies that are in the best interests of the controlling shareholders but not in the best interests of the minority shareholders,” Douglas Research Advisory’s Kim said. - Bloomberg
