SEOUL: Business groups in South Korea have stepped up their calls for the government to lower the country's high rate of inheritance tax.
South Korea's inheritance tax rate of 50 per cent is second only to Japan among Organisation for Economic Cooperation and Development (OECD) countries. Japan's tax rate is 55 per cent.
South Korea's inheritance tax came into the limelight after the death of Samsung Electronics chairman Lee Kun-hee. His family was subjected to 12 trillion won (US$9.15 billion) in inheritance taxes.
According to a Korea Times report, the high inheritance tax is meant to reduce the wealth gap among the country's population but business groups have continued to lobby the government to lower the rate.
Many saw the inheritance tax as necessary for a more equitable society by lowering the concentration of wealth and that it only affected a handful of the rich.
"It would not be right to make simple comparisons of rates levied among countries, but the rate levied on large South Korean businesses handing down assets worth more than 10 billion won is not a small amount," Kang Sung-hoon, a professor of policy studies at Hanyang University, said.
"A fairer method, however, would be to determine first whether a company holds assets that they can sell to pay the tax, and then subject them to taxation accordingly."
The government had been offering tax exemptions when inheriting businesses, but these only applied to small and mid-tier companies that meet certain criteria, such as annual sales that are lower than 300 billion won.
However, since the new government headed by president Yoon Suk-yeol was sworn-in, the threshold has been increased to firms that are generating less than 1 trillion won in annual revenue.
The tax cuts are meant to help smaller companies maintain their businesses, while ensuring competent businesses continue operating and contribute to the economy by creating jobs.
It was previously reported that the family of the late Samsung chairman Lee, had to get loans to pay the huge inheritance tax. They also had to sell 2 trillion won worth of shares.
The wife and three children of the late Samsung chairman paid around a sixth of the 12 trillion won in inheritance taxes in April last year. The remaining 10 trillion won is being paid in instalments over the next five years. Of the total tax, 11 trillion won was for inheriting stocks.
According to the country's National Tax Service, only 2.9 per cent of heirs in the country were subjected to inheritance taxes in 2020.
The current inheritance tax system was introduced in 2000 and the maximum 50 per cent tax rate is applied to inherited assets that exceed 3 billion won.
According to the Korea Times, when inheriting stocks from the largest shareholder of a business, another 20 per cent tax is levied on the "managerial control premium."
The high tax rates also meant that it was difficult for the owner's family to keep control over the business for more than two generations, and this is a problem not limited to conglomerates such as Samsung.
It was reported that the family that owned the top nail clipper manufacturer Three Seven, had to sell all of their shares in 2008 due to a hefty inheritance tax burden following the sudden death of the founder.
Other examples include the family that owned Unidus, which was once the world's top condom manufacturer. They had to hand over managerial control of the company to a private equity fund in 2017 due to the inheritance tax.
The founder of kitchen utensil manufacturer LocknLock sold his stake to a private equity fund in 2017 instead of handing over the business to his family, reportedly due to inheritance tax.
Business groups have argued that the high inheritance tax could hamper entrepreneurship by setting barriers to inheriting a business.
It was previously reported that according to the National Assembly Research Service's analysis of 38 OECD countries, 24 members levy inheritance taxes. Seven countries had no inheritance tax, while the rest levy taxes on capital gains or extra income.
It has been suggested that South Korea should also levy inheritance acquisition taxes instead of inheritance taxes so that each of the family members can be subject to a lower tax rate.
