[Why&Next] 'Stock Price Suppression' for Succession No Longer Possible... Lee: "Will Push Forward Swiftly"

Lee Expresses Support for Inheritance and Gift Tax Reform Bill
Unlisted Company Valuation Method to Apply for PBR Below 0.8
Stock Market Boost Expected Alongside Third Commercial Act Amendment
Concerns Raised by Business Community... Tax Experts Also Urge Caution

As South Korea enters the era of the "KOSPI 5000," President Lee Jaemyung and the Democratic Party of Korea have brought "inheritance and gift tax reform" to the forefront as the next step in capital market reform. Following the first and second rounds of amendments to the Commercial Act aimed at resolving the chronic "Korea discount," their latest plan targets the entrenched practice of "stock price suppression" by major shareholders ahead of succession. The upcoming third amendment to the Commercial Act, which will mandate the cancellation of treasury shares, is also expected to have a significant policy impact on the stock market.

Examining the 'Stock Price Suppression Prevention Act'

According to the office of Democratic Party lawmaker Lee Soyoung on January 23, President Lee expressed his support for the so-called "Stock Price Suppression Prevention Act" during a luncheon at the Blue House with members of the Democratic Party's KOSPI 5000 Special Committee the previous day, where they discussed measures to invigorate the capital market. Shortly after the luncheon, Assemblywoman Lee welcomed the move on her social media, stating, "(The President) expressed his support for the Stock Price Suppression Prevention Act and called for its swift implementation," adding, "This is the name I have given to the inheritance and gift tax law I am sponsoring."

The core of the Stock Price Suppression Prevention Act is to tax listed companies with a price-to-book ratio (PBR) below 0.8 using the unlisted company valuation method (fair value assessment based on assets and earnings), rather than the "stock price," for inheritance and gift tax purposes. Assemblywoman Lee explained, "Since listed companies are taxed based on their stock price, major shareholders benefit when the stock price is low. As a result, companies with high controlling shareholder stakes often have chronically undervalued stock prices, with PBRs as low as 0.3 to 0.4 being common."

Under the current law, inheritance and gift taxes for listed companies are calculated based on the average stock price over a four-month period (two months before and after the transfer). In contrast, for unlisted companies, the fair value is calculated as a weighted average of net asset value and net income value at a 2:3 ratio, and if this fair value falls below 80% of the net asset value, the 80% threshold is automatically applied. This has led to frequent cases where company owners deliberately lower stock prices through unnecessary paid-in capital increases or reduced investment before transferring shares to their children, according to critics.

A previous analysis by Assemblywoman Lee's office of eight major domestic conglomerates as of October last year found that the value of controlling shareholders' stakes, as calculated under the current tax law, was 25% to 71% lower than if the unlisted company valuation method were applied, with an average undervaluation of 48%. The proposed amendment, which President Lee has now endorsed, is designed to increase the inheritance and gift tax burden if stock prices are artificially lowered ahead of succession, thereby blocking market-distorting practices.

Voluntary Stock Price Enhancement Expected... Some Call for Caution

The Democratic Party expects that if the bill is enacted, the incentive to artificially suppress stock prices for succession purposes will disappear, prompting listed companies with PBRs below 0.8 to voluntarily seek to boost their stock prices. Combined with policies such as mandatory treasury share cancellation and strengthened shareholder return measures, this is seen as a way to fundamentally improve the domestic stock market and shed the persistent "Korea discount" label.

Cheon Joonbeom, Vice President of the Korea Corporate Governance Forum and CEO of Wise Forest, emphasized that the "Stock Price Suppression Prevention Act" is a bill that restores normalcy to an abnormal situation. He stated, "Some companies, despite not needing to raise capital, have used their listing status to suppress stock prices and lower their PBR, effectively turning the listing system into a tax-saving tool for major shareholders. Along with the amended Commercial Act and the introduction of separate taxation on dividend income, this will become a key foundation for resolving the Korea discount."

However, backlash from the business community is inevitable. Many listed companies would see a sharp rise in inheritance and gift tax burdens if the bill passes, especially fast-growing companies with rapidly increasing assets and profits. There are also concerns that the increased succession burden could reduce the incentive for high-quality unlisted companies to go public. In particular, there is a risk that major shareholders, already pressured by punitive policies, may become more focused on finding loopholes. Some analysts suggest that offering a "carrot," such as easing inheritance taxes, would be more effective. Representative supplementary incentives include abolishing the 20% premium for controlling shareholders and allowing inheritance tax payments in the form of listed stocks.

Tax experts are also calling for caution. Oh Moonseong, Professor of Tax Accounting at Hanyang Women's University, said, "It is a problem and abnormal for companies to artificially suppress stock prices for inheritance or gifting purposes. However, it is also ironic that a law is being introduced to prevent this, and it is likely to create many other issues." He added, "The PBR is not an absolute indicator and cannot be applied uniformly. There is a greater need to comprehensively reform the gift tax system." Another tax expert, speaking on condition of anonymity, also pointed out, "Tax policy should be neutral. Uniform application is difficult and manipulation is possible, which could actually distort the market."