Concerns Over Tax Bomb... Companies Considering Donations to Foundations [Public Interest Corporations with Broken Wings]

Nam Seung-woo, Former CEO of Pulmuone, Contemplates Share Donation for 6 Years
Complex Gift Tax Exemption Conditions
Cases Where Gift Tax Exceeds Donation Amount
Overlapping Regulations of Inheritance Tax Law and Fair Trade Act

Editor's NoteWarren Buffett, chairman of Berkshire Hathaway, announced last November that he would donate $866 million (approximately 1.13 trillion KRW). His total donations have reached a staggering $51.5 billion (about 67.2 trillion KRW) to date. Among these, $39.3 billion went to the Bill & Melinda Gates Foundation, established by Bill Gates, the founder of Microsoft (MS). Additionally, $4.2 billion was donated to the Susan Thompson Buffett Foundation, and more than $2.4 billion each was given to foundations operated by Buffett's three children, Susan, Howard, and Peter. Two points stand out: the donated items are Berkshire Hathaway stocks, and the recipients are foundations. Like Buffett's case, stock donations through foundations are active in countries such as the United States, Sweden, Germany, and Denmark. Unlike Korea, there are no major obstacles such as inheritance and gift tax exemption limits or voting rights restrictions on donated stocks. In Korea, the inheritance and gift tax law and the Fair Trade Act maintain very low exemption limits and excessively restrict voting rights, effectively blocking donation channels through public interest foundations. Consequently, Korea ranked 79th last year in the World Giving Index (WGI) published annually by the UK’s Charities Aid Foundation (CAF). This marks a decline over ten years since ranking 45th in 2013. Asia Economy takes an in-depth look at excessive regulations on public interest corporations and improvement measures to promote donations through public interest corporations and healthy business succession.

#Nam Seung-woo, former CEO of Pulmuone, has been struggling with an unresolved issue for over six years. After leading Pulmuone from 1984 to 2017 and retiring, he publicly pledged to donate 10% of his Pulmuone shares to the public interest foundation, Pulmuone Foundation, but the 'gift tax bomb' remains a heavy burden. He has been considering various methods, drawing on his law major from his undergraduate days, but no clear solution has emerged, deepening his concerns.

Companies are hesitant to donate shares to affiliated public interest foundations due to excessive taxes imposed, leading to a decline in donations. Foundations, which are even grateful for small 'trickles,' are calling for more realistic system reforms.

According to industry sources on the 22nd, Nam, the largest shareholder of Pulmuone, still has not transferred his shares to the Pulmuone Foundation. Although he promised to donate 10% of his shares the year after his retirement in 2018, he has been unable to find a way for over six years. When Nam was appointed as a director of the Pulmuone Foundation in February last year, it was expected that the donation would accelerate, but there has been no news yet.

Deepening Concerns Due to Complex Conditions

Nam’s conviction to separate ownership and management of the company without passing management rights to his children and to contribute some shares to society has not changed. He also donated 100,000 Pulmuone shares (about 2 billion KRW at the time) to the Seoul National University Development Fund in 2021. During his tenure as CEO, he steadily increased shares in Hanmaeum Foundation, a nonprofit public interest corporation established to continue the will of the late Won Kyung-sun, the founder of Pulmuone. As of the end of the first half of this year, Hanmaeum Foundation holds 9.99% of Pulmuone shares.

The problem is that donations to the affiliated Pulmuone Foundation involve many considerations. According to current inheritance and gift tax laws, the tax exemption limit for shares donated to public interest corporations varies from 5% to 20%, depending on the size of the company and whether voting rights are exercised. To expand the exemption range, basic requirements must be met, such as donors or related parties not exceeding one-fifth of the number of directors, using more than 80% of operating income for public interest purposes, and including a condition in the articles of incorporation not to exercise voting rights. In this case, up to 20% tax exemption benefits can be enjoyed. Otherwise, it could lead to a tax bomb. A source familiar with the Pulmuone Foundation said, "I understand that Mr. Nam is deeply concerned about this issue," adding, "I heard he is studying various cases directly and considering multiple directions."

"The Tail Is Bigger Than the Belly"…Taxes Equal to the Gift Amount Imposed

There are many cases where taxes imposed equal to the gift amount make the tail bigger than the belly. A representative case is the donation by the late Dr. Hwang Pil-sang, founder of Suwon Gyotcharo. In 2003, Dr. Hwang donated 90% of his company shares (worth 18 billion KRW) and cash totaling 21 billion KRW to the Guwon Scholarship Foundation, jointly established with Ajou University. In 2008, the National Tax Service imposed gift tax and penalties totaling about 14 billion KRW on the foundation. Dr. Hwang’s house was even seized due to taxes, and with penalties increasing, the total burden rose to 22.5 billion KRW, exceeding the total donation amount. Although the scholarship foundation filed a lawsuit in 2009 and the Supreme Court ruled to cancel the gift tax in 2017, Dr. Hwang had already suffered greatly.

The late Ham Tae-ho, honorary chairman of Ottogi, also faced a gift tax bomb. In 2015, with the intention of social contribution and supporting public interest projects, he donated 30,000 Ottogi shares (0.87%, worth about 31.5 billion KRW at the time) to Namseoul Eunhye Church, Milal Art Museum, and Milal Welfare Foundation. However, he failed to consider that these would be combined with 170,000 shares (4.94%) previously donated to the Ottogi Ham Tae-ho Foundation in 1996. Consequently, the National Tax Service imposed a gift tax of 32.4 billion KRW on the excess over 5% at the time of Ham’s death in 2016. After adjusting the payment ratio, Namseoul Eunhye Church and Milal Art Museum, which had to pay about 8.6 billion KRW in gift tax, filed lawsuits and only received cancellation rulings last year.

Need to Change Complex Public Interest Foundation Tax Exemption Regulations

The inheritance and gift tax exemption limit for shares donated to domestic public interest corporations is around 5% to 20%, which is low compared to the U.S. (20% to 35%), Japan (50%), and Germany and Sweden (no limit). Even this is uniformly applied at 5% for large corporations (mutual investment restricted groups), and for general public interest corporations, it varies depending on the number of related-party directors, the ratio of operating income used for public interest, and whether voting rights are exercised. Critics argue that imposing restrictions through various conditions is inefficient.

Moreover, concerns about indirect control through voting rights, as addressed in the inheritance and gift tax law, are already restricted in principle through the Fair Trade Act, except for some exceptions. For example, public interest corporations are only allowed to be sole shareholders of certain affiliates or hold up to 15% of voting rights on major agenda items in listed companies. Regulations aimed at blocking indirect corporate control and securing tax revenue are overlapping, hindering donation activation. A public interest foundation official said, "Even small contributions from companies are a great help as it is difficult to sustain themselves," adding, "We hope regulations will be refined to align complex requirements and promote donation culture."