South Korea Weighs Plans to Base Inheritance Tax on Book Value
South Korea targets 'Korea discount' with inheritance tax reforms
South Korea is weighing plans to base inheritance tax on book value instead of market value in order to curb the alleged suppression of share prices.
Under a law proposed by President Lee Jae Myung's ruling party, inheritance taxes for heirs to stock in listed companies trading at a price-to-book ratio of less than 0.8 would be calculated based on asset value and earnings rather than using the current share price.
The new rules, if passed, would remove the incentive to keep share prices low in order to reduce inheritance tax and maintain family control - potentially helping to close the infamous "Korea discount".
"We will open the 'Korea premium' era... through measures including the stock price suppression prevention law," said Han Byung-do, floor leader of the ruling Democratic Party of Korea.
South Korea's inheritance tax is among the highest in the world with the headline rate standing at 50 per cent. This can increase to 60 per cent for controlling shareholders in companies, since the valuation of their stake is marked up by a notional 20 per cent before inheritance tax is applied.
Korea has one of the world's highest inheritance tax rates
| Estate size (Won) | Estate size (US$) | Marginal tax rate | | --- | --- | --- | | <100mn | <$68,000 | 10% | | 100mn-500mn | $68-340k | 20% | | 500mn-1bn | $340-680k | 30% | | 1bn-3bn | $680k-2mn | 40% | | 3bn+ | $2m+ | 50% |
The government's bill would also abolish this 20 per cent surcharge, if the stock price was formed "normally", and allow the estate to pay with shares instead of cash.
Analysts have frequently cited the levy as a structural factor behind the Korea discount - low valuations for the country's shares relative to other markets.
Many investors would rather the government simply cut the inheritance tax rate.
"Calls for inheritance tax cuts have risen sharply as the government rolls out a series of measures to resolve the Korea discount," said Albert Yong, managing partner at Petra Capital Management, a Seoul-based hedge fund.
"Many Korean companies still try to keep stock prices low to reduce inheritance taxes for controlling families."
Activists say tax reform could align the interests of controlling and minority shareholders, pointing to an increase in dividend payout ratios following tax cuts on dividend income.
"The fundamental issue in Korea's corporate governance is the misalignment of interests between controlling and minority shareholders," said Namuh Rhee, chair of the Korean Corporate Governance Forum.
"Minority shareholders want higher valuations, but controlling shareholders have little incentive to lift stock prices because that increases their inheritance tax burden."
Rhee said that lowering the inheritance tax rate to 20-30 per cent would promote "long-term harmony" between the two groups.
According to research group Leaders Index, heirs to the country's top 30 conglomerates face Won64.8tn ($45.2bn) in combined inheritance tax bills.
In April, Samsung's Lee family will complete the payment of about 12tn won in inheritance tax - the largest such payment in the country's history - following the death of patriarch Lee Kun-hee in 2020.
The Koo family of LG Group also paid Won921.5bn over five years. The bereaved family of Kim Jung-ju, founder of the game developer Nexon, transferred part of its stake, making the Korean government the second-largest shareholder in its parent company NXC.
Almost every major chaebol group has at some point been accused of corruption or opaque deals aimed at preserving family control.
"Korea's poor corporate governance stems from owner families' desire to pass on control efficiently," said Park Ju-geun, head of Leaders Index. "That often leads to dubious intragroup deals and restructurings that distort capital markets and harm minority investors."
Despite growing investor calls, the government is against cutting inheritance taxes for chaebol families. It fears that lower rates would make it easier to entrench dynastic control, hence the proposal to levy taxes at book value instead.
Nearly two-thirds of companies on the Kospi trade below book value, meaning the market values them at less than the stated worth of their net assets.
Changhwan Lee, chief executive of activist fund Align Partners, said change would not come easily.
"Controlling shareholders wield outsized influence over decision-making because boards lack independence," he said. "Even if inheritance taxes fall, their behaviour is unlikely to change in this environment. Governance reform should come first."
