Business leaders in South Korea are urging an overhaul of the nation’s inheritance tax system. (Image courtesy of Korea Bizwire)
SEOUL, May 27 (Korea Bizwire) – Business leaders in South Korea are urging an overhaul of the nation’s inheritance tax system, arguing that the current rates are stifling economic dynamism and hampering investment and job creation.
In a report published on May 26 titled “Problems with the Inheritance Tax System and Proposed Improvements,” the Korean Chamber of Commerce and Industry (KCCI) stated that the top inheritance tax rate, which rose from 40% in 1996 to 50% in 2000, should be lowered.
The chamber also recommended easing the tax burden on public interest corporations funded by private companies.
Citing domestic and international research, the business lobby group contended that high inheritance taxes directly undermine corporate investment and job creation, thereby constraining economic growth.
An analysis by professor Song Heonjae of the University of Seoul, examining OECD data from 1965 to 2013, found that for every 1 trillion won increase in inheritance tax revenues, economic growth slowed by 0.63 percentage points.
While domestic investment has stagnated, inheritance and gift tax receipts in South Korea have surged almost tenfold from 1.5 trillion won in 1997 to 14.6 trillion won in 2022.
Conversely, studies suggest lowering inheritance taxes could stimulate business innovation and contribute to economic expansion. Research by the SME-focused Pi-Touch Institute indicates that reducing the inheritance tax rate for innovative companies in manufacturing and information technology by 30 percentage points could increase real GDP by 6 trillion won and create 30,000 new jobs.
The KCCI also criticized the current system for discouraging corporate philanthropy. Existing laws cap the inheritance tax exemption for stock donations to public interest corporations at just 5% for businesses affiliated with the country’s largest conglomerates, with a limit of 10 to 20% for other firms.
Public corporations tied to the major corporate groups also face voting rights restrictions on their shareholdings.
In contrast, most nations offer full inheritance tax exemptions for stock contributions to philanthropic organizations, the KCCI noted.
Additionally, the high inheritance tax rates, which top out at 60%, deter owners from increasing their firms’ valuations through growth investments, the KCCI argued. Under the current system, preparing to cover hefty inheritance tax liabilities offers greater utility for controlling shareholders than strategies to enhance their companies’ market value.
To address these issues, the KCCI has proposed several reforms, including an immediate cut in the top inheritance tax rate to 15% – the OECD average.
It also recommends transitioning to an estate acquisition tax system, eliminating the higher rates applied to controlling shareholders, and ultimately phasing out inheritance taxes altogether over the long term.
“With the rapid aging of Korean business leaders, the direction of our inheritance tax policies over the next few years will have a profound impact on the nation’s economic prospects,” a KCCI official stressed. “If this burden is alleviated, our companies could seize a critical opportunity to make a new leap forward.”
M. H. Lee (mhlee@koreabizwire.com)
