[Chatham House Roundtable] Regulation of Public Interest Corporations is a Shackle... Should Shift to Supervision and Support

Excessively Strict Tax-Exempt Donation Limits for Public Interest Corporations
Acting as an Obstacle to Social Contribution through Securing Resources

As society matures, expectations for public interest corporations also increase. This is because nonprofit public interest corporations can address many issues that governments or businesses have yet to resolve. In many advanced countries, public interest corporations are solving problems that the state and market have failed to address, extending beyond charity and scholarships to fields such as science, technology, and the environment.

Asia Economy held a "Chatham House Roundtable" on the 14th to explore concrete methodologies for improving the public interest corporation system. From the left: Song Kyung-yong, CEO of the nonprofit organization Nanum and Future; Yoo Wook, Chairman of the Dongcheon Foundation; Park Hoon, Professor of Taxation at the University of Seoul; Kim Pil-su, Managing Editor of Economic Finance at Asia Economy. Photo by Yoon Dong-joo doso7@

However, public interest corporations in South Korea face significant obstacles in contributing to society through active nonprofit activities. This is mainly because the exemption limits on inheritance and gift taxes for public interest corporations are strictly enforced in an environment where the culture of donation is not very active. The exemption limits on stock donations to public interest corporations in South Korea are very restrictive compared to other major advanced countries. This is because corporate funds flowing into public interest corporations have been perceived as a ‘trick’ to avoid inheritance or gift taxes.

Asia Economy recently held a ‘Chatham House Roundtable’ to explore concrete methods for improving the public interest corporation system. The roundtable was attended by Song Kyung-yong, Chairman of the Korea Social Value Solidarity Fund; Yoo Wook, Chairman of the Dongcheon Foundation; and Park Hoon, Professor of Taxation at the University of Seoul. They unanimously agreed on the need to ease the current system, which sets excessively narrow tax exemption limits for public interest corporations, and suggested that to encourage active donations, the perspective on public interest corporations should shift from ‘regulation’ to ‘support.’ The roundtable was conducted under the Chatham House rule, where real names were disclosed but speakers remained anonymous.

▶Moderator = Kim Pil-su, Managing Editor of Economic Finance, Asia Economy

On the 14th, Professor Park Hoon of the Department of Taxation at the University of Seoul participated in the economic and financial Chatham House. Photo by Yoon Dong-joo doso7@

Q. Do you agree with the claim that the exemption limits for public interest corporations under the inheritance and gift tax law are too strict?

A: I agree. I see it as excessive regulation. Currently, South Korea restricts voting rights for public interest corporations affiliated with mutual investment-restricted business groups (chaebol groups) under the Fair Trade Act. Although there were past cases where public foundations were abused as a means of illicit succession by chaebol companies, many of these concerns have been addressed through various legislations. Now, our society should expand the role of public interest corporations like Western countries such as the U.S. and Europe. We hope to correct regulations that block private companies’ social contributions through foundations and foster a healthy and vibrant donation culture.

B: It is time to reconsider the current three-tier rule of stock donation tax exemption limits at 5%, 10%, and 20%. The high regulatory intensity resulted from past problems where chaebol companies used cultural foundations as tools for private gain and tax evasion, leading to progressively stricter stock donation limits. Regulations have been repeatedly relaxed and tightened, resulting in overlapping one-off regulations. Since the environment has changed significantly from the past, it is necessary to review this from scratch.

C: To strengthen corporate social responsibility, social contribution activities need to be specialized. However, strong regulations hinder the spread of such a culture. A few years ago, I met a chairman of a large corporation who wanted to donate 200 billion won worth of his own stock but was repeatedly frustrated by current regulations and laws. Now that our society’s civic consciousness has grown, we no longer tolerate illicit succession or tax evasion by companies. We should not block channels through which companies can exert positive influence by overinterpreting a few abuse cases. Improvement of the current inheritance and gift tax law is necessary.

On the 14th, Yoo Wook, Chairman of the Dongcheon Foundation, participated in the Chatham House event hosted by Asia Economy Economic Finance. Photo by Dongju Yoon doso7@

Q. It seems all three of you agree that the current inheritance and gift tax law is excessive. What do you see as the biggest problem with the current tax system?

B: The current inheritance and gift tax law has a separate track called ‘exclusion from taxable value.’ This track ensures that properties donated to public interest corporations for ‘good causes’ are exempt from inheritance and gift taxes. It is designed so that donations made through inheritance and gifts are not taxed.

However, considering the special nature of stocks, limited benefits are granted, but this operates too mechanically and complicatedly. Since voting stocks can be a means to control a company, tax exemption limits of 5%, 10%, and 20% are applied depending on company size and whether voting rights are exercised.

Specifically, public interest corporations related to mutual investment-restricted business groups (with total assets over 10 trillion won) are automatically taxed if the donated stocks or shares exceed 5%, and general domestic corporations face taxation if exceeding 10%.

(*To expand the tax exemption limit on stocks donated to public interest corporations under the current inheritance and gift tax law, donors or related parties must comply with basic requirements such as not exceeding one-fifth of the number of directors and using over 80% of operating income for public purposes, and meet complex conditions such as not exercising voting rights in the articles of incorporation.)

Because the rules are so strict, cases like Suwon Intersection occur. (*Dr. Hwang Pil-sang, founder of Suwon Intersection, donated nearly his entire fortune?about 18 billion won in company stocks and 21 billion won in cash?to the Guwon Scholarship Foundation, co-established with Ajou University. The National Tax Service imposed about 14 billion won in gift taxes and penalties on the foundation in 2008. Although the Supreme Court eventually canceled the ruling, the foundation endured seven years of litigation, including penalties and home seizure.)

Song Kyung-yong, CEO of the nonprofit organization Nanum and Future, participated in the Asia Economy Economic Finance Chatham House held on the 14th. Photo by Dongju Yoon doso7@

A: As you mentioned, the current inheritance and gift tax law aims primarily to prevent companies from using public foundations as a loophole to evade inheritance and gift taxes. I think the purpose of the regulation itself is legitimate. However, the 5% exemption limit for mutual investment-restricted business groups is excessive.

After the death of Samsung Group Chairman Lee Kun-hee, his heirs paid 13 trillion won in inheritance taxes. In contrast, Warren Buffett, chairman of Berkshire Hathaway in the U.S., does not pass his wealth to his children but donates most of it to foundations. Bill Gates, founder of Microsoft, donates 5 trillion won annually through the Gates & Melinda Foundation. South Korea also needs to establish a mechanism to return social achievements in the form of stocks to society through public foundations.

C: I want to use an analogy to describe the side effects of the current inheritance and gift tax law. In terms of college admissions, the U.S. contrasts with Korea. It is easy to enter college but difficult to graduate. The entrance is broadly open, allowing students to freely choose majors according to their aptitude and abilities, but graduation requirements are strict. Similarly, I hope South Korea opens the entrance for funds to flow into public interest corporations and focuses on monitoring whether the money is used for good purposes. Currently, the entrance for securing resources for public interest corporations is narrow. Stocks are wealth built collectively by society. It is time for a social discourse on how to use this wealth for good causes.

B: In South Korea, donations through public interest corporations are often viewed mainly as a tax-saving channel where wealthy parents reduce taxes by 50% when passing assets to their children. However, the trend is changing. Emerging wealthy individuals are showing interest in social contributions and are moving to donate stocks worth trillions to society instead of passing them to their children. From this perspective, current regulations are excessive. The pure demand for donations is increasing as times change.

Q. All three of you agree that current domestic inheritance and gift tax regulations are problematic. How about overseas?

B: The U.S. fundamentally has a well-developed donation culture. Support takes precedence over regulation regarding donations. The U.S. also has a 20% stock donation exemption limit, but it does not block donations excessively from the start like South Korea.

Japan is somewhat unique. Although Japan had a bureaucratic and totalitarian mindset, after the Kobe earthquake, distrust in the government grew, leading to significant changes in the public interest corporation system. With the catchphrase ‘from government to private,’ laws related to nonprofit organizations (NPOs) expanded, and the private sector began to take on roles the government could not fulfill.

C: That’s right. During the Kobe earthquake, private organizations responded much faster than the government and stayed on-site until the end. The shock to Japanese society was not only physical from the earthquake but also social. (Japan applies tax exemption up to 50% on stocks donated to eligible corporations.)

The U.S. public interest corporation operation system has many aspects worth emulating. In South Korea, to operate a public interest corporation or foundation, detailed business plans must be submitted and approved by the relevant ministry. If the plan changes, the process must be repeated. This is why many public foundation operators in South Korea file constitutional complaints. In contrast, the U.S. sets a broad public interest budget and allows flexible operation and adjustment within it. However, if fraud or illicit practices are discovered and trust is lost, approvals are decisively revoked.

A: South Korea’s Civil Code was promulgated in 1958 and enacted in 1960, and the provisions related to nonprofit corporations have never been amended since. It does not reflect the current Korean society, which has grown economically and culturally beyond comparison with that time.

South Korea’s bureaucratic culture is also problematic. Whenever issues like corporate tax evasion or illicit succession arise, patchwork regulations through tax laws have been used. We need to move beyond this and approach the issue from a holistic perspective on how to create a virtuous cycle in society through public interest corporations.

C: We need to establish an institutional environment that promotes active social contributions in the private sector. For example, after transferring the disaster relief donation window to the public interest foundation Community Chest of Korea (Fruit of Love), the amount of donations increased by tens of times. It is time for South Korean citizens to experience more how money circulated through virtuous cycle funds produces positive outcomes.

Q. How specifically should the stock tax exemption limits for public interest corporations under the inheritance and gift tax law be adjusted?

A: The Fair Trade Act allows up to 15% voting rights exercise, but the inheritance and gift tax law limits it to 5%, which is inconsistent legally. The tax exemption limit for public interest corporations under the inheritance and gift tax law should also be raised to 15%. For non-voting stocks, raising the current 20% limit to 30%, and eventually to 50% in the long term, seems a good approach.

C: Ideally, I would like to ease it from 5% to 20%, but a sudden full relaxation could cause side effects. It would be better to refine each proviso in detail and gradually raise the limits step by step.

B: Tax systems should be simple and internationally competitive. The current three-tier rule of 5%, 10%, and 20% is complicated. The 20% limit set by the U.S. was the result of careful consideration. Simplifying to a single 20% limit would secure tax competitiveness. Originally, there was no limit, but the 20% regulation was introduced in the 1960s. I believe tax systems should be simple.

Economic Finance Chatham House. Photo by Dongju Yoon doso7@

Q. Why has this 30-year-old outdated regulation not been changed yet? Setting aside government failure, is corporate illicit behavior still widespread?

A: It cannot be said that no companies use public interest corporations as a loophole anymore. Because of precedents of such companies, regulations have been maintained. Therefore, companies with pure donation intentions find it difficult to boldly request system reforms from the government.

However, since criminal penalties exist for violating the 15% rule under the Fair Trade Act, the sanction provisions are well established. Approaching this with outdated stereotypes is problematic. Amendments to both tax law and civil law are necessary.

B: Companies have partly brought this on themselves. During criminal trials of chaebol heads, attempts to improve their image through donations have sometimes been abused as a kind of pardon. In contrast, I once saw a restaurant in the U.S. reserve a seat in the store for donors who contributed to society. If this were done in South Korea, it would be criticized as excessive privilege for the wealthy.

South Korea has a somewhat idealistic view that ‘donations must be pure.’ We need to move beyond this. Donations involve not only pure intentions but also self-satisfaction and tax-saving purposes. Donating for tax-saving reasons does not diminish the meaning of donation. Regardless of the motive, if chaebols release money they held by donating, it would be good to establish a culture that applauds this.

This content was produced with the assistance of AI translation services.