Introducing Capital Gains Tax for Business Continuity
High-Net-Worth Individuals Renouncing Nationality Due to Inheritance Tax Burden
Inheritance Tax Payment Methods Need Greater Flexibility
Amid active discussions in the National Assembly on reforming inheritance tax to ease the burden on the middle class, the business community has proposed a 'hybrid inheritance tax-capital gains tax system' as an alternative to reduce the burden of corporate succession.
The Korea Chamber of Commerce and Industry (KCCI) pointed out in its report titled "Proposal for a Hybrid Inheritance Tax-Capital Gains Tax System for Business Continuity" on the 10th that "the current inheritance tax system remains stuck in the past view of corporate succession as a mere transfer of wealth," and "the premium valuation on shares of major shareholders is hindering the continuity of business operations."
The KCCI emphasized the need to consider introducing a capital gains tax like major foreign countries, stating that the current inheritance tax imposes excessive taxes at the time of corporate succession, disrupting business continuity. A capital gains tax is a system that does not tax inherited assets immediately but taxes the gains realized upon their sale. The KCCI explained, "Considering the reality that it is not easy for companies to sell shares to maintain management rights, taxation at the time of sale can simultaneously achieve business continuity and secure tax revenue."
Exterior view of the Korea Chamber of Commerce and Industry, provided by the Korea Chamber of Commerce and Industry
Abroad, cases of abolishing inheritance tax or switching to capital gains tax to support corporate succession are increasing. Among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD), 14 countries have no inheritance tax. Canada was the first in the world to abolish inheritance tax in 1972 and switch to capital gains tax, and Australia introduced capital gains tax in 1985 due to difficulties in succession for farmers and small businesses. Sweden abolished inheritance tax in 2005 following concerns that the inheritance tax burden was causing business downsizing and closures, and now operates a flat-rate capital gains tax. Singapore abolished inheritance tax entirely in 2008 and has since risen as an Asian financial hub. Recently, in terms of net inflow of high-net-worth individuals, the United Arab Emirates (UAE), Singapore, Canada, and Australia rank among the top.
South Korea is considered one of the most difficult countries in the world for corporate succession due to the current highest inheritance tax rate (50%) plus a 20% premium valuation on major shareholders. The KCCI expressed concern that "excessive inheritance tax weakens companies' capacity for growth investment, causes failures in business succession, and reduces economic dynamism."
In particular, the phenomenon of high-net-worth individuals renouncing their nationality due to inheritance tax burdens is becoming visible. According to Henry & Partners, a UK investment immigration consulting firm, South Korea ranked 4th worldwide in 2024 for net nationality outflow of individuals with net assets over 1 million dollars, with 1,200 people. In terms of net outflow relative to population, it is second only to the UK.
The KCCI explained that it proposed the hybrid system considering the social perception that inheritance tax relief discussions related to corporate succession are simply 'tax cuts for the rich.' The hybrid system is a system that applies both inheritance tax and capital gains tax depending on the timing of inheritance tax payment, the taxable object, and the value of the inheritance.
Specific proposals include ▲imposing inheritance tax (up to 30%) at the time of the decedent's death followed by additional capital gains tax (20%) upon share sale ▲applying the existing inheritance tax to non-management-related assets and capital gains tax to management-related shares ▲applying the existing inheritance tax to inherited assets up to 60 billion won and capital gains tax on the excess.
Furthermore, the KCCI emphasized the need to enhance flexibility in inheritance tax payment methods. Currently, large corporations can pay inheritance tax in installments (annual deferred payment) for up to 10 years, but there is no grace (deferment) period. The KCCI stated, "It is necessary to allow various options such as a 5-year grace period followed by 5 years of installment payments for large corporations to alleviate temporary tax burdens."
Kang Seok-gu, head of the KCCI Research Department, said, "Our companies are experiencing complex crises such as low growth and industrial transformation," and stressed, "Beyond the business succession deduction system, a comprehensive reform of the corporate succession system is necessary for job creation and sustainable national economic growth." He added, "While major countries around the world are easing the burden of corporate succession and expanding capital and talent inflows through system improvements, maintaining the outdated inheritance tax system only in South Korea will lead to a weakening of global competitiveness."
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