Stock Market Tax Issues: Is Inheritance and Gift Tax Next After Dividend Income Tax? [Why&Next]

"Pressing Down Share Prices for Tax Savings in Listed Company Successions Must End"
Lee Soyoung Proposes Unlisted Company Valuation Method for PBR 0.8 or Lower
Current Listed Holding Company Valuations Are 48% Lower Than Unlisted Valuation Method

The major tax issues that have affected the stock market this year were the relaxation of requirements for major shareholders and the separate taxation of dividend income. The government's plan to ease the requirements for major shareholders was scrapped, but discussions are still ongoing in the National Assembly regarding the separate taxation of dividend income, with both government and legislative proposals under consideration.

Recently, inheritance and gift tax issues have emerged as a third major topic. This is because there have been frequent cases of intentionally keeping stock prices low when inheriting or gifting shares of listed companies, exploiting the fact that valuations are based on the current share price. President Lee Jaemyung has also repeatedly pointed out the problem of low PBR (price-to-book ratio) companies.

Significant Differences in Inheritance and Gift Tax Depending on Corporate Valuation Method

According to the current Inheritance and Gift Tax Act, when a major shareholder of a listed company pays taxes, the standard is the average share price over the two months before and after the transfer, totaling four months. In contrast, for unlisted companies, fair value is calculated as a weighted average of net assets and net profit at a ratio of 2:3. If the fair value is less than 80% of the net asset value, the law automatically applies 80%. Due to the current tax law, most owner-controlled companies that have not yet undergone succession tend to have significantly low share prices.

On October 30, immediately after the conclusion of the Korea-US customs negotiations, Lee Soyoung, a member of the Democratic Party of Korea, pointed out during a National Assembly Strategy and Finance Committee audit, "For listed company shares, taxes are based solely on the stock price regardless of the company's value. As a result, if there is a gap between the company's value and its stock price, the tax burden differs depending on whether the company is listed or unlisted." She noted that there have been numerous cases where listed companies intentionally keep their stock prices low through unnecessary paid-in capital increases and other methods, then transfer shares to their children via inheritance or gifts. There are even companies that go public deliberately and then keep their stock prices low to reduce tax burdens.

This phenomenon is supported by data. According to an analysis by Lee Soyoung's office of eight major Korean conglomerates, applying the current tax law to calculate the total value of shares held by controlling shareholders results in a corporate value that is 25% to 71% lower-an average of 48% lower-compared to using the unlisted company valuation method. This means that the difference in tax calculation methods can reduce inheritance and gift taxes by more than half.

"Abolish the Premium for Largest Shareholders and Allow Listed Shares for In-Kind Tax Payment"

Lee Soyoung has proposed a bill to apply the unlisted company valuation method to companies with a PBR of 0.8 or lower. The aim is to prevent companies from deliberately lowering their share prices for succession purposes. However, this could result in a surge of listed companies facing a sharp increase in inheritance and gift tax burdens. The tax burden would be even greater for rapidly growing companies with fast-increasing assets and profits. Furthermore, excellent unlisted companies would have less incentive to go public due to succession issues.

Kim Minkook, CEO of VIP Asset Management, commented, "Due to the increased inheritance and gift tax burden and concerns over weakened management control, there is likely to be stronger opposition from the business community than during the last revision of the Commercial Act," adding, "In reality, appropriate incentives must be provided to ensure the stable introduction of the system." Suggested incentives include abolishing the 20% inheritance and gift tax premium for largest shareholders and allowing in-kind tax payment with listed shares.

Under the current tax law, shares held by the largest shareholder are considered to have a management control premium, so the taxable base is calculated at 20% above the market price when inherited or gifted. A representative case is the family of the late Nexon founder Kim Jungju, who inherited approximately 10 trillion won in 2023 and ended up paying about 6 trillion won in inheritance taxes, far more than the amount subject to the highest tax rate (50%). Therefore, abolishing the 20% premium would significantly reduce the tax burden on largest shareholders.

In addition, under the current tax law, only unlisted shares can exceptionally be used for in-kind tax payment, and only if there are no other inherited assets or if priority assets for in-kind payment are insufficient. In the Nexon case, the family paid about 30% of their stake in NXC (Nexon Group's holding company), an unlisted company, to the government instead of cash. If listed shares were also allowed for in-kind tax payment, the tax burden at the time of succession could be reduced.

Unlike the ongoing discussions in the National Assembly over separate taxation of dividend income, changes to the corporate valuation method for inheritance and gift tax on listed companies are likely to be pursued over a longer period. Deputy Prime Minister and Minister of Economy and Finance Koo Yooncheol stated during the audit on October 30, "I fully understand the intention," but added, "We will study how to institutionalize this in our tax law and determine the most efficient way to implement it."