[WHY&NEXT] A Government Stingy with 'Corporate Goodwill'? ... Behind It Lies Concern over Abuse

As interest grows around Booyoung Group's support of "100 million won in childbirth support funds," cases where the government imposed a "hyena tax" on corporate goodwill are being revisited. Examples such as Hwang Pil-sang, the founder of Suwon Gyotcharo, and Kim Shin, former Air Force Chief of Staff and descendant of Baekbeom (白凡) Kim Gu, highlight how hundreds of billions and tens of billions of won in tax bombs have been levied on public-spirited donations, which critics argue hinder philanthropic contributions from corporations and wealthy individuals. Among major countries, South Korea is the only one that restricts voting rights of public interest corporations, which is also pointed out as a problem. Considering the public's strong aversion to illicit inheritance and gifts, these regulations are difficult to resolve easily, but there is a continuous call for practical improvements.

"Because I was not born in Australia or the UK, I have only earned the stigma of a high-value tax delinquent rather than any honors." This is a remark left by founder Hwang in an interview with a daily newspaper after donating 18 billion won to a public scholarship foundation and being forced to pay 14 billion won in gift tax, which was only barely recognized after a legal battle. At the time, the law imposed inheritance and gift taxes of up to 60% on the portion exceeding 5% of total issued shares when a major shareholder donated shares to a public interest corporation. After receiving a tax bomb in 2008, Hwang and the foundation engaged in a protracted lawsuit from 2009, culminating in a 2017 Supreme Court ruling that "imposing a huge gift tax is unfair." The countries he cited, such as the UK and Australia, have no regulations on public interest corporations.

In the case of former Chief of Staff Kim, son of Kim Gu, he donated 4.2 billion won to overseas universities to promote Kim Gu's anti-Japanese independence struggle history, but since overseas universities are not public foundations, his descendants had to bear a tax bomb of 2.7 billion won in inheritance tax (900 million won) and gift tax (1.8 billion won). Although the National Tax Tribunal later reduced the gift tax by half, the tax burden remains high.

These cases represent instances where current laws impose strict standards on the goodwill of entrepreneurs or wealthy individuals, resulting in tax bombs for the foundations, the individuals, or their descendants. This overlaps with Booyoung's near experience of a tax bomb when attempting to provide "100 million won in childbirth support funds." It reflects that Korean society's donation culture heavily relies on donors' goodwill and lacks institutional mechanisms to encourage donations. Some argue that the system itself is actually hindering donation activation.

A representative example is the regulation on acquisition and holding of shares by public interest corporations, which are a major channel for corporate donations. The Korea Economic Association pointed out in a report titled "Study on Public Interest Corporation Legislation," commissioned last month to Professor Choi Seung-jae of Sejong University’s Department of Law, that "regulations seem to have been created focusing more on the negative effects or functions of public interest corporations rather than their positive effects or functions." The 2020 amendment to the Fair Trade Act prohibits public interest corporations within mutual shareholding restricted business groups from exercising voting rights on shares of domestic affiliates they hold, which Professor Choi analyzes as reflecting a negative perception of public interest corporations in legislation. Furthermore, if a public interest corporation acquires 10% or more of shares in a domestic corporation (20% if voting rights are not exercised), gift tax is imposed on the excess portion, and for public interest corporations belonging to mutual shareholding restricted business groups, this limit is only 5%.

This contrasts with Japan, where acquisition of up to 50% of total issued shares is allowed. Germany exempts inheritance tax on assets donated by the decedent to public interest corporations, charitable corporations, or church corporations, and if those assets are contributed to a public interest corporation within two years after inheritance, the already incurred inheritance tax is canceled. In the United States, founders of companies like Microsoft (MS) and Meta (formerly Facebook) form group governance structures through public interest foundations.

There are also criticisms that there are insufficient tax exemption exceptions for donations made to entities that are not public interest corporations, as in the case of former Chief of Staff Kim. The National Assembly Legislative Research Office stated in a 2020 report regarding Kim’s case that "there are not enough exceptions stipulating tax exemption requirements in the Inheritance and Gift Tax Act (IGTA)," and analyzed that "while the IGTA exempts inheritance and gift tax for public donations without tax avoidance purposes, it strictly limits the recognition of such donations to those made to public interest corporations designated by the IGTA through certain procedures."

Experts also emphasize the need for mechanisms to activate donations from wealthy individuals. Choi Won-seok, president of the Korean Tax Association, said, "More consideration is needed on how to provide tax incentives to encourage donations from high-net-worth individuals," adding, "We should refer to cases in other countries and theoretically explore ways to form a donation culture and induce willingness to donate by establishing appropriate mechanisms."

However, from the tax authorities’ perspective, they must be cautious about uniformly granting tax benefits for "corporate goodwill." There is a possibility of attempts to abuse such benefits. Lee Young-han, dean of the Graduate School of Taxation at the University of Seoul, explained, "I agree with the concern that taxing payments made as welfare benefits to solve issues like low birth rates might reduce the donation effect, but from the government's standpoint, it is difficult to distinguish whether such payments are truly welfare benefits or actually salary expenses," adding, "Because of the potential for abuse, it is not easy to reflect this in tax law."

There is also a fairness controversy as tax benefits might be concentrated only on certain companies. According to National Tax Service statistics, in 2022, 472,380 workers reported non-taxable childbirth and childcare allowances, with a total reported amount of 320.7 billion won, averaging 679,000 won per person. Most workers received amounts below the annual non-taxable limit (1.2 million won). Cases like Booyoung’s "100 million won childbirth support fund" are limited to a very small minority. Public interest corporations, which the corporate sector calls for "regulatory relaxation," are also under continuous suspicion of being used as means for illicit gifting.