"Facing Closure Crisis for Mid-sized Companies Due to Excessive Inheritance and Gift Taxes... Reform Needed"

Mid-sized Enterprise Innovation Growth Policy Forum Held
Inheritance Tax Reduction and Abolition of Controlling Shareholder Stock Premium Taxation Needed
Oh Munsung "Inheritance Tax Should Be Replaced with Capital Gains Tax"

The Innovation Growth Policy Forum for Mid-sized Enterprises was held on the 19th at the National Assembly Members' Office Building, hosted by Song Eon-seok, chairman of the National Assembly's Planning and Finance Committee and a member of the People Power Party. At the forum, there were claims that mid-sized enterprises, which serve as a bridge between large corporations and small and medium-sized enterprises, are facing the risk of closure due to excessive inheritance and gift taxes, and that tax reform is necessary. In his opening remarks, Representative Song stated, "It is globally recognized that the current inheritance tax rate is excessively high," urging that inheritance and gift taxes be reformed in line with global trends to ensure the sustainable growth of mid-sized enterprises.

Song Eon-seok, chairman of the People Power Party's Fiscal and Tax Reform Special Committee, is speaking at the "5th Tax Reform for Enhancing the Value of the Korean Stock Market and Protecting Investors, Abolishing Financial Investment Income Tax" forum held at the National Assembly on the 18th. Photo by Kim Hyun-min kimhyun81@

Earlier, the government announced a tax law amendment bill in July this year to reflect the changed economic conditions and reduce the excessive tax burden on corporate succession, including lowering the top inheritance tax rate from 50% to 40% and abolishing the 20% surcharge on shares held by major shareholders. The 'Inheritance and Gift Tax Law Amendment Bill' was submitted to the National Assembly in September. However, the Democratic Party and opposition parties oppose the government’s proposal, calling it a tax cut for the wealthy.

Oh Moon-sung, president of the Korean Tax Policy Association and professor at Hanyang Women's University, who presented at the forum, argued that South Korea's top inheritance tax rate of 50%, the second highest among OECD countries after Japan (55%), should be lowered.

He pointed out that inheritance tax is levied on assets that have already been subject to income tax during the lifetime, or assets acquired with such resources, making it a form of double taxation, and that it is unfair for the inheritance tax rate to be higher than the income tax rate. Oh suggested that a more appropriate rate would be around 30% for estates exceeding 10 billion KRW, which is more lenient than the government's tax law amendment proposal (top tax rate of 40% for estates exceeding 1 billion KRW).

Ultimately, he also advocated replacing inheritance tax with a capital gains tax. While inheritance tax is assessed based on market value, capital gains tax would assess the tax rate based on the acquisition cost of inherited real estate or other assets at the time of inheritance, and tax the gains realized when the heir disposes of the assets, thereby reducing the inheritance tax burden.

There was also a demand to abolish the surcharge tax on shares held by controlling shareholders. Currently, when the largest shareholder inherits shares to family members or other related parties, 20% is added to the assessed value. Although the current top tax rate is 50%, in cases where the inherited property is shares, the '20% surcharge on major shareholders' is applied, resulting in an effective inheritance tax rate of up to 60%. This makes corporate succession difficult and induces downsizing or sale of businesses, hindering sustainable corporate development.

Lim Dong-won, senior research fellow at the Korea Economic Research Institute, also criticized that Korea is the only country that uniformly applies a surcharge on shares held by controlling shareholders, stating, "With income tax rates not being lower than those of major countries overseas, the world's highest inheritance and gift tax rates add to the particularly heavy tax burden on wealth."