Time to end the punitive inheritance tax

Ha Hyun-ock
The author is an editorial writer of the JoongAng Ilbo.

The Ministry of Economy and Finance is the second largest shareholder of Korean gaming company Nexon. The ministry owns a 29.3 percent stake in NXC, the holding company of the online giant. The family of its founder and former chairman Kim Jung-ju surrendered the stake worth 4.7 trillion won ($3.5 billion) to the government because they could not afford to pay the inheritance tax after his death in 2022. Although tax should be paid in cash, it can be done in real estate or shares under certain conditions. The government tried to divest its 29.3 percent stake twice but couldn’t find a successful buyer.

A family feud over the management rights to Hanmi Pharmaceutical Group was triggered by an inheritance tax of 540 billion won following the founder’s death. His wife and daughter, who had ascended to run the group, sought to sell their controlling stake in Hanmi Science, its holding company, to chemical firm OCI Group to pay off the inheritance tax due. The merger scheme flopped due to opposition from the sons, who took over the management rights by winning over the shareholders. The family has yet to come up with an alternative means to pay off the inheritance dues.

The inheritance tax poses a major problem for family-owned Korean companies. Samsung Group family members took out a securities-based loan from banks to pay off their record-setting 12-trillion-won inheritance tax following the death of chairman Lee Kun-hee. The world’s heaviest inheritance tax can even cost managerial rights. Food container household name Lock & Lock and Three Seven, the world’s No. 1 nail clipper maker, are some of the examples.

Inheritance tax amid a generational shift has become a major managerial risk for Korea Inc. due to the excruciating rates, which range from 10 to 50 percent. A stock premium of 20 percent is added if you inherit the largest stake with management rights, sending the maximum rate up to 60 percent, the world’s highest after Japan’s 55. The tax more than doubles the 25.8 percent average of the 19 Organisation for Economic Cooperation and Development members. Seo Jung-jin, chairman of Celltrion Group, said last year that the biosimilar and healthcare leader could eventually become nationalized due to the heavy inheritance tax.

Korea’s system has remained untouched for more than 20 years, despite significant changes in the economy’s size, inflation and asset value. And yet, the killer inheritance tax has not stoked much resistance and protest, as it is levied on the rich. The call for fixes has not gained popular backing as the tax is deemed exclusively a problem for elites.

The heavy inheritance tax has helped contain the passage of wealth, but there have also been economic side effects. For instance, family-owned companies are reluctant to prop up their share prices. They are also passive toward bolstering shareholder returns through dividend payments and buyback programs. Inheritance tax has become a major factor behind the “Korea discount,” or the undervaluation of Korean stocks.

A punitive inheritance tax challenges corporate sustainability and negatively impacts the economy. Astra AB, a former Swedish drug giant, is a perfect example. The company was sold to Britain’s Zeneca Group in 1999 because its owner couldn’t afford the maximum 70 percent inheritance tax rate. The Swedish government did away with its disastrous inheritance tax in 2005 as it had scared companies out of the country, depressing investments at home and fanning unemployment.

It is a national waste if firms have to spend resources on inheritance taxes, not on investment and innovation. It would be a bigger loss if companies shuttered due to the inexorable system.