S.Korea should cut inheritance, gift taxes to OECD levels: SME lobby chief

South Korea, which imposes some of the highest inheritance and gift taxes on businesspeople among the Organization for Economic Cooperation and Development (OECD), should significantly lower tax rates to stimulate economic activity and encourage entrepreneurship, said a business lobby chief.

James Jin Shik Choi, chief coordinator and representative of the Federation of Middle Market Enterprises of Korea (FOMEK), also proposed that the government establish a system in which any businessperson who pays inheritance tax in kind, company shares in particular, is allowed to regain ownership of the shares within 10 years of payment.

“The current inheritance and gift tax system has unjust laws that encourage disputes among the heirs of deceased business leaders over management control,” Choi said in an interview with The Korea Economic Daily on Monday.

He said Korea’s high gift tax rates often lead to family feuds. Eventually, the bereaved family faces an excessive inheritance tax and is dragged into wrangling over how to pay the tax and how to split management stakes.

Choi urged the government to slash gift tax rates, if not inheritance tax rates, to ease the financial burden on those who inherit businesses and pay taxes.

“If inheritance and gift tax rates are lowered, people would be willing to pay, which in turn would raise the government’s tax revenue. This is a win-win situation for all,” he said.

SECOND-HIGHEST TAX RATE AMONG OECD MEMBERS

Korea, Asia’s fourth-largest economy, imposes an inheritance tax of 50% – the second highest among the OECD members after Japan’s 55%. Korea also levies an extra tax on a company’s largest shareholder, increasing the tax rate to a maximum of 60% – more than double the OECD average.

The FOMEK chief said the government should cut Korea’s inheritance rates in half to OECD levels.

“When footballers play, every one of them follows the uniform rule set by the FIFA. Then, why does Korea have such a high level of corporate and inheritance tax rates when it is an OECD member?” he asked. “Korea needs to drastically cut its irrationally high inheritance and gift tax rates to 20-25%.”

He continued, “If an inheritor is allowed to pay inheritance tax in company shares and then buy them back within 10 years, they will work harder to regain the ownership of the shares. Such efforts will boost corporate value.”

EASING TAX BURDEN SERVES NATIONAL INTEREST

Choi, currently chief executive of SIMPAC Inc., a midsized machinery company based in Incheon, near Seoul, assumed the chief representative job at FOMEK in 2022.

He said easing the tax burden on business leaders would also serve Korea’s national interest as such a move would discourage entrepreneurs from splitting their businesses into smaller ones to avoid heavy taxes.

In some cases, he argued, smaller business leaders, under heavy tax burden, choose to hand over their management control to a private equity fund or opt to liquidate their business.

La Jung-joo, president of Pi-Touch Institute, a Korean small and medium-sized enterprise research firm, said lower inheritance and gift taxes would create jobs.

“When the inheritance tax rate is lower, CEOs tend to try to grow the company and pass it on to their children. In the process, they create more jobs,” he said in a telephone interview with The Korea Economic Daily.

In his thesis on the macroeconomic effects of business inheritance tax cuts that appeared in the February 2023 edition of Pacific Economic Review, La said a 50% reduction in family business inheritance tax rate increases the business’ total labor demand, total real investment and total sales by 0.13%, 1.88% and 0.15%, respectively.

SAMSUNG INHERITANCE TAXES ASTRONOMICAL

Controversy over Korea’s heavy inheritance tax rates flared when the heirs of late Samsung Group Chairman Lee Kun-hee faced a record 12 trillion won ($9 billion) in inheritance taxes for 26 trillion won worth of their inherited Samsung Group affiliate shares, properties and artwork from Lee who died in October 2020.

To handle the exorbitant inheritance taxes, the heirs agreed to pay them in a five-year installment plan starting in April 2021. They also took loans from banks with their Samsung affiliates’ stakes put up as collateral.

Earlier this month, the deceased chairman’s wife Hong Ra-hee and two daughters Lee Boo-jin and Lee Seo-hyun sought to sell their shares in Samsung Electronics Co. and affiliates worth a combined 2.8 trillion won to cover part of the inheritance tax bill.

Write to Hyung-Chang Choi at calling@hankyung.com


In-Soo Nam edited this article.