[KH Explains] Inheritance tax reform postponed amid criticism over 'silver spoon'

Big companies to still face up to 50 percent tax rate on inherited assets

(123rf)

Major changes in the inheritance tax, one of President Yoon Suk Yeol's key campaign promises, have been postponed until next year's general election, as the reform could intensify criticism over tax cuts for the wealthy.

On July 27, the government unveiled the tax code revision plan to be submitted to the National Assembly.

Providing a tax reduction on the inheritance of family business for large conglomerates was not included in the proposal, as the government has been cautious on public opinion that stands against the reform as enabling the rich to enjoy lifelong benefits of the "silver spoon effect."

Instead, the proposal for the revision of inheritance tax was limited to small and medium-sized businesses with sales of up to 500 billion won ($385 million), lifting the cap on the 10 percent tax rate -- a relatively low rate of taxation for inheritance tax -- from 6 billion won to 30 billion won in inherited assets.

For inheritance of assets worth 30 billion won or more, the existing tax law will continue to be applied, meaning up to a 50 percent tax rate on those assets.

There is also a 20 percent surcharge for the largest shareholders for large companies when they pass on their holdings, sending the effective top rate go up to 60 percent.

Due to the regulations, business owners sometimes have a hard time holding on to their management rights, as an ownership family’s stake in a company is watered down through inheritance.

For instance, the surviving family members of Kim Jung-ju, the deceased head of gaming giant Nexon, used stock to pay their inheritance tax, giving a 29.3 percent stake in NXC, Nexon’s holding company, to the Finance Ministry in late May. In turn, the Korean government became the second-largest shareholder of the company.

Even the ownership families of local tech giants Samsung and LG Group have taken out stock loans to pay the inheritance tax. Some even sell the companies off to private equity funds.

Business circles in Korea have called for the government to ease regulations on inheritance, arguing the strict rules are an obstacle for owners to maintain control of their businesses.

One of the major requested changes is the transition from an “estate tax” system to an “inheritance tax” system.

Estate tax is a levy on the total assets owned by a predecessor, meaning the inheritors can divide the levied taxes. Inheritance tax is a levy on assets inherited from a predecessor, meaning the assets will be divided to inheritors first and then levied upon. Inheritance tax system can lessen the burden on inheritors as a lower rate of tax will be levied on the divided assets.

The government has been mulling over such a transition. It commissioned a study on inheritance tax that has been ongoing since October and plans to gather public opinions on the subject.

South Korea is one of few countries in the Organization for Economic Cooperation and Development that uses the estate tax system. Out of 28 countries in the OECD with inheritance tax law, four countries including Korea adopt the estate tax system, according to the Korean Chamber of Commerce and Industry.

“The estate tax system does not meet the global standards. Only a handful of major countries adopt such a system. This needs to be changed,” said Lee Soo-won, head of the corporate policy team at the KCCI.

The KCCI has also requested that the government lower tax rates for inheritance. According to the KCCI, Korea has the highest tax rate for inheritance among member countries of the OECD, while the average stands at 26 percent.

Though many had expected a revision on the law to come when the government unveiled its road map for a tax code revision last week, it was not included partly because the government was pressured by the upcoming general election slated for May.

The reform could spark controversy that the government plans to introduce tax reductions for the rich. It would also not be easy for the revised bill to pass the National Assembly, as the opposition Democratic Party of Korea holds more seats than the ruling People Power Party.

Concerns on the resulting decrease in government tax revenue remain too. Tax revenues in Korea totaled 178.5 trillion won from January to June, down 39.7 trillion from the same period of 2022 due to a slowing economy.

Experts are calling for the government to ease the inheritance tax, as heavy taxation could undermine the local economy.

“The inheritance tax should be applied at the same rate as that of the income tax for fair taxation. The numbers should be brought down realistically,” said Kim Hag-soo, a researcher at the Korea Development Institute.

By Im Eun-byel(silverstar@heraldcorp.com)