[Op-Ed] We Need to Reduce the Inheritance Tax Burden

OECD average tax rate 26%; including countries with no inheritance tax, 13%

In Korea, when the premium taxation applied to controlling shareholders in business succession is added, the rate can be as high as 60%

“Punitive inheritance tax”

That is how Korea’s inheritance tax is often described. Korean companies are even selling their businesses to pay inheritance taxes. Shouldn’t the state guarantee companies the freedom to engage in business management? Korea’s inheritance tax, which hinders corporate growth, needs reform.

Inheritance tax is a tax imposed on inherited property when, due to death, that property is transferred without compensation to family members or others. Currently, Korea’s inheritance tax has a progressive rate structure ranging from a minimum of 10% to a maximum of 50%. When the premium taxation applied to controlling shareholders in business succession is added, the rate can reach as high as 60%.

Korea’s inheritance tax is excessive. When the late Samsung Chairman Lee Kun-hee passed away, he left behind assets worth 26 trillion won, and the inheritance tax due amounted to 12 trillion won. The Samsung family has been paying the tax in installments over five years since April 2021. To pay the inheritance tax, they have so far taken out more than 4 trillion won in loans, and because loans alone could not cover the full amount, shares have also been sold. Most recently, they even disposed of part of their stake in Samsung C&T, which is effectively the holding company of the Samsung Group.

Excessive inheritance tax threatens corporate control. Nexon, with NXC as its holding company, found it difficult to raise cash and therefore paid the inheritance tax by making an in-kind payment of about 30% of NXC’s shares. As a result of a single inheritance tax payment, the Ministry of Economy and Finance became Nexon’s second-largest shareholder. If the government’s stake in NXC were to flow to foreign capital, the possibility of disputes related to management control cannot be ignored.

The excessive burden of inheritance tax ultimately causes the Korea discount. Korean companies’ stock prices are undervalued compared with those in countries of similar economic standing. The higher the stock price, the greater the inheritance tax burden, so there is little incentive to work to boost share prices. If this phenomenon continues, Korea will keep experiencing capital outflows abroad rather than attracting foreign capital.

Viewed globally, Korea’s inheritance tax rate is very high. Based on the top rate, Japan is at 55%, France and the United States at 45%, and the United Kingdom at 40%. Among the 38 OECD member countries, 15—including Canada, Australia, and New Zealand—have no inheritance tax. The OECD average tax rate is 26%, and when countries with no inheritance tax are included, the average is 13%.

Let us look at a case where inheritance tax was abolished altogether. Sweden, the archetypal welfare state, has no inheritance tax. Originally, Sweden’s inheritance tax rate had reached 70%, but at the time a Swedish pharmaceutical company had to sell its company shares, which made up most of the inherited assets, in order to pay the tax, leading to a fall in its stock price. After companies were subsequently sold abroad and similar cases of domestic firms flowing overseas began to occur, Sweden abolished the inheritance tax.

Easing the inheritance tax burden is tantamount to promoting corporate growth. Instead of disposing of shares or giving up management control because of inheritance tax, companies can ensure smoother business succession and focus on finding paths for growth. Therefore, Korea needs to reform its inheritance tax rate to the OECD average level. Before it is too late, Korea too must reduce the inheritance tax burden and strengthen corporate competitiveness.

Nakyoung Cheon, Intern Researcher, Center for Free Enterprise (CFE)

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Original title: [칼럼] 상속세 부담 낮춰야 한다

Author: Na-gyeong Cheon

Date: 2024-03-14

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&idx=26520