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Samsung Group

Tax burden pushes Samsung heirs to sell $1.8 bn worth of shares by April 2022

The late chairman's four heirs must pay remaining inheritance tax of 10 trillion won ($8.3 billion) by 2026

By Oct 11, 2021 (Gmt+09:00)

All heirs except Samsung Electronics head Jay Y. Lee will sell Samsung Group shares by April 2022.
All heirs except Samsung Electronics head Jay Y. Lee will sell Samsung Group shares by April 2022.

The heavy inheritance tax burden in South Korea is pushing the heirs of the late Samsung Group Chairman Lee Kun-hee to sell about 2.2 trillion won ($1.8 billion) worth of their shares.

According to Samsung Electronics Co. and the company’s public filing to the Financial Supervisory Service (FSS) on Oct. 10, the deceased chairman’s wife Hong Ra-hee and two daughters Lee Boo-jin and Lee Seo-hyun signed a trust deal with the country’s leading Kookmin Bank of the KB Financial Group to sell shares of the Samsung affiliates including the electronics unit.

Hong will sell 19.9 million shares of Samsung Electronics or 1.4 trillion won ($1.2 billion) worth of shares based on the closing price of Oct. 8. Hong’s stake in the electronics unit will be cut from 2.30% to 1.97% following the share sales.

Hotel Shilla CEO Lee Boo-jin will sell 1.5 million shares in Samsung SDS, worth about 242.2 billion won ($202 million). The second daughter and chair of the Samsung Welfare Foundation Lee Seo-hyun will also sell 242.2 billion won ($202 million) worth of Samsung SDS shares, as well as 3.5 million shares in Samsung Life Insurance worth 247.3 billion won ($207 million).

Sources stated that Samsung Electronics Vice Chairman Jay Y. Lee has not entrusted any shares to the bank. The vice chairman owns a 1.63% stake in Samsung Electronics and also exerts management control of the electronics company indirectly through 10.44% shares of the de facto parent company Samsung Life Insurance.  

“Jay Y. Lee is expected to raise the needed tax money by selling real estate properties and through other forms of funding rather than selling the group affiliates’ shares,” said an industry source.

The public filing of Samsung Electronics specifically stated that the trust agreement was to pay for the remaining portion of the inheritance tax. The heirs inherited 26 trillion won ($21.8 billion) worth of Samsung group shares, real estate properties and artwork from Lee Kun-hee, and have so far paid 2 trillion won ($1.7 billion) out of the total inheritance tax of 12 trillion won ($10 billion).

Prior to the recent deal with Kookmin Bank, the heirs had deposited their shares with the court as collateral for the inheritance tax. The heirs in April this year announced that they will pay the tax over the next five years, or by April 2026, in accordance with the local laws.

Samsung Group heirs at late chairman Lee Kun-hee's funeral last October
Samsung Group heirs at late chairman Lee Kun-hee's funeral last October

Kookmin Bank has not disclosed the exact terms of the share trust deal to respect the privacy of the Samsung family. But experts note that the bank may fail to sell the shares by the agreed date of Apr. 25 next year, if the agreement includes clauses that specify the minimum price of the stock sellout and if the market price stays below the pre-agreed price.

Others in business circles say that the Samsung heirs have inevitably decided to risk their ownership over the group due to the immense financial burden posed by the tax. They note that Jay Y. Lee is highly unlikely to sell his shares in defense of his and his family’s ownership in Samsung Electronics.  

SAMSUNG CASE FUELS DEBATE ON KOREA’S HIGH INHERITANCE TAX

The situation of Samsung’s heirs -- the richest family in the nation -- being almost forced to sell their shares is driving the country’s legal and business experts to criticize the country’s inheritance tax system.

The highest tax bracket for inheritance tax in Korea is 50%, the second-highest among the OECD countries after Japan’s 55%. But Korea also levies an extra tax on a company's largest shareholder, increasing the rate up to s maximum of 60%. The 60% figure is more than double the OECD average at 27.1%.

While South Korea offers tax benefits when inheriting family businesses, the system only applies to small-cap companies with less than 500 billion won ($419 million) worth of assets.

Other major conglomerates in South Korea have also recently suffered from the massive inheritance tax. LG Group Chairman Koo Kwang-mo, who in 2018 inherited 8.8% of the LG Group’s holding company LG Corp., had to pay 720 billion won ($603 million) in inheritance tax. Lotte Group Chairman Shin Dong-bin also faced an inheritance tax bill of more than 300 billion won ($251 million) when the group founder passed away last year.

Samsung Vice Chairman Jay Y. Lee (center) and Lotte Chairman Shin Dong-bin at Lotte Group founder Shin Kyuk-ho's funeral. 
Samsung Vice Chairman Jay Y. Lee (center) and Lotte Chairman Shin Dong-bin at Lotte Group founder Shin Kyuk-ho's funeral. 

South Korean business leaders and academic experts have been calling for lower inheritance tax rates, in the range of 20-30%. Others also argue that South Korea needs to introduce a dual-class share structure to protect the management rights of company owners.

“South Korea needs to adopt a dual-class stock structure with differential voting rights to defend the management rights of the owners,” said an industry official.

Write to Shin-young Park at nyusos@hankyung.com

Daniel Cho edited this article.

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