[Disabled Wings of Public Interest Corporations] "Tax Exemption Limits Should Be Expanded"... Consensus Formed, Realization Still Pending

Regulations Must Be Eased to Secure Funding for Public Interest Corporations

Discussions on deregulating public interest corporations in South Korea have been conducted cautiously. The business community and academia have consistently voiced the need to improve regulations to ensure that public interest corporations can secure sufficient resources, and some consensus has formed within the government as well. However, there have been difficulties in fully advancing these discussions.

Recently, the Korea Economic Research Institute under the Korea Economic Association argued in its report, "Analysis and Evaluation of the 2024 Tax Law Amendment," that tax system improvements for public interest corporations are necessary this year. Since the 2000s, tax support related to donations has been reduced and regulations on public interest corporations have been strengthened, so to revitalize corporate donations, tax system improvements related to public interest corporations are needed.

The Korea Economic Research Institute stated, “To activate donations and corporate succession, the limit on stock contributions to public interest corporations with strong donation capacity and resources should be raised from 5% to 20% of the total issued shares,” adding, “It is necessary to shift the focus from restrictions on stock contributions themselves to enhancing the public interest activities of public interest corporations.” The Korea Chamber of Commerce and Industry also recently revealed in its “Survey on Corporate Public Interest Corporation System Improvement Tasks” that “a survey conducted on 219 public interest corporations belonging to 88 groups designated as publicly disclosed business groups showed that 61.6% of public interest corporations responded that current regulations negatively affect the finances of corporate foundations.”

Academia and the legal community also predominantly agree that the current strict limits on tax-exempt stock gifts make it difficult for public interest corporations to secure resources for smooth operations. Park Chang-su, a lawyer at the law firm Bae, Kim & Lee LLC, said, “The biggest problem with current regulations is the difficulty in securing resources (for public interest activities),” and added, “It is necessary to first ease the exemption limits on inheritance and gift taxes.”

However, this comes with the condition that thorough post-management is required. Since public interest corporations could potentially be used as indirect control means (illegitimate succession methods) by exploiting the lower burden of inheritance or gift taxes, the tax-exempt limits should be increased under the condition of strengthening post-management systems to enhance transparency as a monitoring measure.

To this end, there are calls for continuous public interest reviews during the establishment and operation of public interest corporations. The Korea Institute of Public Finance suggested in its report, “Study on Tax Systems According to the Establishment, Operation, and Dissolution Stages of Public Interest Corporations,” that “if public interest reviews find that standards are not met, the status of the public interest corporation and tax benefits should be revoked, and the system should be changed to impose fines under the Fair Trade Act.”

There is also an opinion that South Korea should recognize the form of controlling corporate groups through public interest corporations, like Sweden’s Wallenberg Foundation. An expert who requested anonymity said, “Considering social monitoring of public interest corporations, when used as holding companies, they can be operated more transparently than general holding companies,” adding, “Since they have significant public nature, the social benefits could be greater, so the stock holding limits should be further expanded.”

The government is also cautiously raising the need to improve regulations on public interest corporations. A senior government official said, “Although the inheritance tax rate was partially adjusted through this tax law amendment, there is a consensus that deregulation related to public interest corporations in corporate succession is necessary,” but noted that specific discussions are insufficient and lack momentum. This is because it could cause misunderstandings that the government is approving illegitimate corporate control. Additionally, the hurdle of parliamentary approval, which must consider public sentiment, remains an obstacle.