NTS clamps down on nonprofits

A cultural foundation affiliated with a Korean conglomerate recently received a huge amount of cash from three other conglomerate affiliates under the pretense of building a memorial hall.

Instead of building the memorial hall, though, it used the money to buy land surrounding the birthplace of the conglomerate’s founder.

The cultural foundation received an exemption on the gift tax that it would have had to pay on the money, as the memorial hall was considered a public service project.

After the National Tax Service (NTS) found that the money was used to buy the land, it slapped a 3 billion won ($2.67 million) gift tax on the foundation.

The NTS on Wednesday said that since the second half of last year a special team has investigated nearly 200 non-profit foundations owned by conglomerates and found 36 instances of tax evasion.

It slapped taxes, including inheritance and gift taxes, of $41 billion won on them in total.

“In recent years, the founding families of conglomerates have been using their charity foundations for personal purposes, including strengthening their governance,” said a NTS official.

In one case, a cultural foundation affiliated with a conglomerate broke several laws, including holding a stake in an affiliate that exceeds the legal limit allowed for nonprofit foundations. It also provided expensive art that was donated by one affiliate to another affiliate for free in violation of gift tax law.

The foundation was slapped with 15 billion won in gift taxes for both violations.

Under the current law, nonprofits receive various tax benefits, such as exemptions on inheritance or gift taxes, when they receive donations either in cash or real estate.

When nonprofits receive donations in stocks, the government only collects a gift tax if the donation exceeds 5 percent of the company’s total shares.

The stock donation limit goes up to 10 percent when it meets certain requirements, such as spending more than 80 percent of its income on public service purposes and receiving an audit from an outside accounting firm.

The government has been targeting conglomerates’ nonprofit foundations since last year. Concern has been growing that these foundations were being used for less-than-charitable purposes and were under the control of conglomerate family members.

According to the Fair Trade Commission, 90 percent of the 165 nonprofit foundations owned by 44 conglomerates are currently managed by the founding family.

Eighty-four percent of these foundations have either the owner of the conglomerate, relatives or affiliate executives as a high-ranking executive within the foundation. More than half actually have the head of the conglomerate or those close to him as the foundation’s CEO, making them vulnerable to the founding family’s interests.

The nonprofit foundation controversy started after Samsung was accused of using one of its charity foundations to organize the ascent of apparent heir Lee Jae-yong through the merger between Samsung C&T and Samsung affiliate Cheil Industries in 2016.

In February of that year, Samsung Life Public Welfare Foundation purchased 2 million shares of Samsung C&T in order to meet the government’s requirements for cross-shareholding regulations.

Since 2015, Lee has been the head of the life insurer’s nonprofit foundation. The purchase actually raised Lee’s stake in Samsung C&T, Samsung’s de facto holding company.

Samsung Life Public Welfare Foundation is the biggest of all conglomerate foundations, with assets of 2.89 trillion won and total income of 1.4 trillion won. It has stakes in major Samsung affiliates.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]