As published on businesskorea.co.kr, Friday 12 May, 2023.
South Korea's inheritance and gift tax burden, in relation to its Gross Domestic Product (GDP), ranks highest among member countries of the Organization for Economic Co-operation and Development (OECD), triggering calls for a comprehensive reform of the country's inheritance tax system. Advocates argue for a decrease in inheritance tax rates and the abolition of surcharges on major shareholders to stimulate corporate succession, job creation, and income generation.
This was highlighted in a report titled “Problems and Directions for Improvement in the Current Corporate Succession Inheritance Tax System” released by the Korea Economic Research Institute (KERI), under the Federation of Korean Industries, on May 11th.
The report underscored that as of 2021, the proportion of South Korea's inheritance and gift taxes to GDP is on par with France and Belgium, the highest among OECD nations, indicating a significantly heavy level.
South Korea climbed from third place in 2020 (0.5%) to the highest spot among OECD nations in 2021 with a 0.2 percentage points increase in the inheritance-and-gift-taxes-to-GDP ratio.
The maximum inheritance tax rate (50%) on direct descendants for corporate succession was second only to Japan (55%) among OECD member countries. In such cases, a 20% surcharge is applied to the appraisal value when inheriting shares from major shareholders, effectively interpreted as the highest level when a maximum 60% tax rate is applied with the surcharge on major shareholder's shares.
Researcher Lim Dong-won of KERI emphasized, "Only South Korea uniformly applies a surcharge to major shareholders, which contradicts the principle of substantive taxation in tax law, as the control premium is already included in the stock." He added that "Inheritance tax, which occurs when the heir's property is transferred to the inheritor for free without any change in the corporate entity, serves as the biggest obstacle during corporate succession.”
In fact, the Samsung Group's controlling family is struggling due to excessive inheritance taxes. The stocks left by the late Chairman Lee Kun-hee include 4.18% of Samsung Electronics, 20.76% of Samsung Life, 2.9% of Samsung C&T, and 0.01% of Samsung SDS. The family members are required to pay approximately 12 trillion won (US$9 billion) in inheritance taxes. Out of this, the inheritance tax on the shares alone amounts to 11 trillion won (US$8.2 billion).
The inheritance tax on the shares alone is estimated to be 3.1 trillion won (US$2.3 billion) for Hong Ra-hee, the former director of Leeum Samsung Museum of Art and the wife of the late chairman, 2.9 trillion won (US$2.2 billion) for Chairman Lee Jae-yong, 2.6 trillion won ( US$1.9 billion) for President Lee Boo-jin, and 2.4 trillion won (US$1.8 billion) for Director Lee Seo-hyun, who are his children.
They are utilizing an installment payment system to pay inheritance taxes in six installments. They paid the second installment in October of the same year following April 2021. It is known that the Samsung Group's conglomerate family is raising funds through various methods such as selling stakes and taking out loans to pay inheritance taxes.
The report pointed out that the business inheritance tax deduction, which was introduced to encourage corporate succession, has limited applicability and stringent requirements, leading to its low utilization. The number of cases where South Korea's business inheritance tax deduction is applied is only one percent of that in Germany.
Researcher Lim evaluated, “For businesses to survive and develop in global competition and create jobs and income under the current excessive inheritance tax system with a maximum rate of 60%, it is essential to drastically lower the inheritance tax rate and abolish the surcharge on major shareholders.”
The report stated that there are limits to promoting business succession with the government's recent inheritance tax reform proposals such as transitioning to estate acquisition tax and increasing deductions. It suggested reducing inheritance tax rates and introducing capital gains tax specifically for future business successions.