Joint Economic Statement Urging Improvement of Inheritance and Gift Tax
50% Threshold for Major Shareholders... Should Be Lowered to Around 26%, the Average of Major Countries
Calls for Abolition of 20% Surcharge Tax on Major Shareholders

The business community has appealed to the current regular National Assembly session to lower the inheritance tax rate and abolish the 20% surcharge tax provision on major shareholders.

On the 21st, six major economic organizations, including the Korea Chamber of Commerce and Industry, issued a joint statement urging the National Assembly to promptly improve the inheritance tax system. The organizations issuing the statement are the Korea Chamber of Commerce and Industry, the Korea Economic Association, the Korea Federation of Small and Medium Business, the Korea Federation of Medium-sized Enterprises, the Korea Employers Federation, and the Korea International Trade Association.

The current highest inheritance tax rate is 50%, but with the 20% surcharge tax applied to shares held by major shareholders, the effective tax rate reaches 60%, which is the highest level among the Organization for Economic Cooperation and Development (OECD) countries. In July, the government announced a revision bill to the Inheritance and Gift Tax Act that lowers the highest inheritance tax rate from 50% to 40% and abolishes the 20% surcharge tax on shares held by major shareholders, and submitted the bill to the National Assembly.

The business community explained that the net national assets per capita doubled over ten years, from 220 million won in 2012 to 440 million won in 2022. During the same period, the total assessed tax amount increased more than tenfold, from 1.8 trillion won to 19.3 trillion won. This means that the rate of increase in tax payments far outpaced asset growth.

They also noted that the aging of business executives is progressing rapidly. Among publicly disclosed business groups, 80% of executives are aged 60 or older; among medium-sized enterprises, 45% (62% excluding professional managers); and among small businesses, 34%.

In addition to issues of assets, tax payments, and aging, the business community argued that considering global trends, the abolition of the major shareholder surcharge valuation, regional economic revitalization, and the sustainable growth of small and medium-sized enterprises, improvement of the inheritance tax system is essential.

First, they said the highest inheritance tax rate should be adjusted to align with global trends. Korea’s nominal highest inheritance tax rate is 50%, the second highest among the 38 OECD member countries. When applying the major shareholder surcharge valuation, the effective tax rate reaches up to 60%, ranking first. The highest inheritance tax rate has remained unchanged for 25 years since it was raised to 45% in 1997 and 50% in 2000. In contrast, major countries have continuously lowered their top rates or abolished inheritance taxes.

The ratio of inheritance tax burden relative to economic level also far exceeds that of major global countries. As of 2022, the ratio of inheritance and gift tax to gross domestic product (GDP) in Korea is 0.68%, 4.5 times higher than the OECD average of 0.15%. The share of inheritance and gift tax in total taxation is 2.4% in Korea, while the OECD average is only 0.4%.

They emphasized that the unprecedented surcharge tax on major shareholders must be abolished. Business owners pay inheritance tax of up to 60% when applying the 20% surcharge tax on shares held by major shareholders during business succession. This makes it difficult to maintain stable management rights, increases vulnerability to hostile takeovers by external forces, and has led to cases where businesses have been abandoned.

They also called for expanding the business succession deduction for companies relocating to Opportunity Development Zones to revitalize regional economies. The government’s proposed amendment to the Inheritance and Gift Tax Act includes provisions allowing small and medium-sized enterprises that relocate or start up in Opportunity Development Zones to receive unlimited inheritance deductions on the full value of inherited business assets. Opportunity Development Zones are special areas outside the metropolitan area that provide tax and financial support and improve living conditions to attract corporate investment. Since the first zone was designated in June, all non-metropolitan cities and provinces have been designated as zones.

Furthermore, they argued for expanding the scope of business succession deductions. Currently, the system uses a 'positive' listing method that limits eligible industries for business succession deductions to certain sectors. The business community requested expanding the scope to include all medium-sized enterprises and switching to a 'negative' method that allows business succession deductions for all industries except a few excluded ones.

The business community stated, "Considering global trends in inheritance tax, the need for a system design commensurate with the world’s 12th largest economy, and changes in public values, the inheritance tax system cannot be sustained if it remains based on past standards." They added, "If the inheritance tax system is improved, the business community will demonstrate new entrepreneurial spirit and open the next 100 years."