S. Korea’s high inheritance tax rate hinders investment and consumption

An old man is passing by a tax office [Photo by Han Joo-hyung]

South Korea’s outdated tax system with the word’s second highest inheritance and gift tax rate at 50 percent comes under fire for compromising national competitiveness and future economy as it prevents the elderly from transferring their assets to their younger generation.

The net asset of seniors aged 60 and over in Korea exceeded 3,500 trillion won ($2,744 billion) for the first time in 2022, according to Statistics Korea data analyzed by Maeil Business Newspaper on Monday. It has more than tripled in 11 years, but a chunk of the asset, 1.7 times more wealth than total nominal GDP last year, has been held up by the elderly because of a high inheritance and gift tax rate.

Korea’s maximum inheritance and gift tax rate is 50 percent, the second highest among member countries of the Organization for Economic Cooperation and Development (OECD) after Japan whose top rate is 55 percent. The Korean rate is significantly higher than the OECD average of 15 percent as well as that of G5 countries - 40 percent in the United States and 45 percent in France.

It has been unchanged for 23 years since 2000.

“The economy can revive only when the assets held by the elderly are easily transferred to the younger generation, who are willing to consume and regenerate income,” said Kang Namkyu, Managing Partner of GAON Law Group. “An inheritance and gift tax reform needs to be viewed from the perspective of increasing the wealth of our society.”

Tax barriers are also acting as a threatening factor to corporate management rights. According to the Ministry of Economy and Finance, among long-lived companies with a history of more than 50 years in Korea, 49 percent of owners are over 60 years old.

Experts say there is an urgent need to activate inheritance tax deduction for family business, which facilitates a successful succession in a family-owned business.

Last year, the government revised the tax law to expand the criteria for mid-sized companies eligible for family business inheritance deduction to less than 1 trillion won in sales from 400 billion won but ended up only raising it to less than 500 billion won due to the opposition from the Democratic Party of Korea, which argues it could be “a tax cut for the rich.”