3rd-gen. corporate succession in S.Korea slashes stake from 100% to 16%

South Korea's business sector is urging reform of the domestic inheritance tax system to alleviate problems in corporate succession, citing difficulty for companies to retain their shares and management rights after inheritance due to levies of up to 60%.

The Korea Chamber of Commerce and Industry (KCCI) on Wednesday submitted a 137-task proposal for improving the tax system to the government and National Assembly, starting with a reduction in the inheritance tax.

The nation's highest inheritance tax is 50%, but corporations face a 20% premium levy on appraised value when inheriting shares from the largest shareholder, something that raises the de facto overall rate to 60%.

The nation has the highest inheritance tax among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD). Many analysts say retention of corporate management is difficult if the highest rate of 60% is applied.

For example, if the first-generation owners hold 100% of a company and pass it on to the second, only a 40% stake remains; this plummets to 16% in a third-generation succession.

The KCCI also complained of the estate tax method of taxing an entire inherited property, resulting in excessive taxes compared to the wealth an individual inherits. Among the 24 OECD countries with inheritance tax, only South Korea, the US, UK and Denmark use this approach.

Even so, Denmark's inheritance tax is a low 15% and the US's basic deduction of $12.9 million allows for a much lower tax burden. The other 20 countries use an inheritance acquisition tax system that applies only to individually acquired assets.

For small and medium enterprises, the KCCI said the deduction system for family business inheritance was underutilized because the targets were limited to such businesses and middle-market companies with sales of under 500 billion won ($387.7 million).

Write to Ye-Rin Choi at rambutan@hankyung.com