[‘Countdown’ Global Minimum Tax] ④ Companies Pushed to 'Sell Shares' Due to Tax Burden

Last Bastion 'Equity Stake Adjustment'
Over 80% Stake in Overseas Subsidiaries
Concerns Over Increased Tax Burden for 5 Parent Companies
Potential Governance Changes if Sold
LG Chem "Reviewing All Possible Scenarios"

Some major domestic conglomerates are also considering selling their overseas subsidiaries located in countries where the corporate tax rate is below 15%. This move aims to reduce the parent company's tax burden by cutting back on overseas investments, but selling shares could alter the corporate governance or change the management environment of the respective companies. It is expected that global expansion strategies will undergo significant changes to avoid a tax bomb.

According to the business and legal circles on the 22nd, some domestic companies are reviewing scenarios to dispose of shares in overseas subsidiaries as a last resort if additional taxes become difficult to bear due to the application of the global minimum tax. Disposing of shares in overseas subsidiaries can fundamentally block variables and side effects that may arise from the application of the global minimum tax. However, there is a risk of considerable losses due to relinquishing management rights over those subsidiaries.

An analysis of disclosure data from the top 50 domestic companies by Asia Economy revealed that some corporate groups’ parent companies are exposed to tax burdens on overseas subsidiaries. Simply looking at the current shareholding status, Hyundai Motor owns 100% of Hyundai Kepico (Vietnam, etc.), SK holds 90% of SK E&S (in eight countries including the U.S. and Vietnam), CJ owns 96% of CJ Foodville (with over 400 overseas stores), and LS holds 92.3% of LS Cable & System (in the U.S., Vietnam, etc.).

These parent companies are exposed to subsidiary tax burdens because their shareholding ratios exceed 80%. According to current tax laws stipulating the global minimum tax, if the shareholding ratio is below 80%, the additional tax must be reported and paid by the intermediate parent company, not the headquarters. Since holding more than 80% of shares can relatively easily eliminate the burden of the global minimum tax, it is expected that these companies will actively consider selling some shares.

The company attracting the most attention due to the implementation of the global minimum tax is LG Chem. The parent company, LG Corporation, does not have any subsidiaries with over 80% ownership, but its affiliate LG Chem is the parent company holding more than 80% of LG Energy Solution’s shares. The industry evaluates LG Chem as being at the very center of speculation regarding share sales due to the global minimum tax, as it owns a subsidiary with large sales and significant tax benefits.

LG Chem holds 81.7% of LG Energy Solution, which receives substantial production tax credits (AMPC) under the Inflation Reduction Act (IRA) in the U.S. LG Energy Solution is expected to receive about 2 trillion KRW in tax credits this year through AMPC, which could lower its effective tax rate to below 15%, with LG Chem bearing the remaining taxable amount. Experts predict that LG Chem will have to pay additional taxes amounting to hundreds of billions of KRW this year and thousands of billions from next year. Simple calculations based on formulas estimate that the additional tax burden on LG Chem could be around 180 billion KRW.

Repeated similar forecasts have strengthened speculation about share sales. It is widely believed that LG Chem will sell some or all of its shares in LG Energy Solution to eliminate the additional tax burden. The dominant analysis is that LG Chem will sell about 2% of its shares to reduce the ratio below 80%. If LG Chem lowers its shareholding below 80%, the responsibility for paying taxes can be transferred to the intermediate parent company. There are also ancillary effects. Noh Woo-ho, a researcher at Meritz Securities, predicted, "If LG Chem sells 2%, it will secure cash through subsidiary share liquidity, reduce the discount rate on held shares, maximize financial leverage, and have an opportunity for stock price revaluation."

LG Chem has not yet decided on a response direction and is reviewing all possible options. In a conference call last January, it acknowledged, "It seems that we will have to pay some additional taxes," but added, "We will decide after considering various funding situations and strategic mergers and acquisitions (M&A)." Regarding the shares it currently holds in LG Energy Solution, LG Chem stated, "We consider them assets that can be strategically utilized." This indicates that maintaining the shares despite the tax burden could be more beneficial for the company.

However, LG Energy Solution plans to expand its base by increasing the number of operating plants in the U.S. from three this year to seven next year, which could further increase the scale subject to the global minimum tax. Consequently, the tax burden is also expected to rise. LG Chem disclosed in its first-quarter report that the current corporate tax expense due to the global minimum tax was 863 million KRW, a smaller amount than expected, but the amount could increase dramatically by the end of this year and next year. This is why LG Chem is taking time to carefully consider how to handle its shares in LG Energy Solution.

Besides LG Chem, there are several companies considered to have potential to sell shares. Some companies are reportedly even examining corporate governance restructuring. Whether they will sell some shares will be ultimately decided based on future review results.

Share sales by companies also affect management systems. Lawyer Lee Jong-cheol of Yulchon LLC said, "If sales are limited to just adjusting to 80% ownership, the scale is unlikely to be large, so management rights are not expected to shift, but who the shares are sold to will be crucial." He added, "In such cases, the overall management system of the company could change."