Inheritance Tax Reform: Balancing Fairness and Economic Growth in South Korea

The South Korean government is set to revise its inheritance tax scheme, which currently imposes a tax rate of up to 50% on large companies. This move is part of the government's broader tax code revision, scheduled for late July. Finance Minister Choi Sang-mok has prioritized the inheritance tax reform, acknowledging the need for a reasonable revision of the current system, which has been in place for over 20 years.

Unlocking Opportunities for Businesses and Families

Addressing the High Inheritance Tax Burden

South Korea's inheritance tax rate of 50% for assets exceeding 3 billion won (approximately .2 million) is the second-highest among OECD member countries, trailing only Japan's 55% rate. In contrast, the average inheritance tax rate for OECD members stands at just 15%. Several countries, including Sweden, Norway, Austria, Canada, and Australia, have even abolished the inheritance tax altogether to foster a more favorable corporate environment.The high inheritance tax rate in South Korea has been in place for 24 years, with the exemption ceiling remaining at 1 billion won since 1997. As a result, the number of taxpayers subject to the inheritance tax has seen a sharp surge, rising from 10,181 in 2020 to 19,944 in 2023, partly due to the recent surge in real estate prices.

Exploring Potential Reforms

The presidential office has been considering a reduction in the maximum inheritance tax rate from the current 50% to 30%. Additionally, the government is exploring the possibility of reforming the "estate tax" system, which levies a tax on the total assets owned by a predecessor, rather than the "inheritance tax" system that imposes a tax on the divided inheritance.Finance Minister Choi Sang-mok has acknowledged the urgency and necessity of the tax reform, stating that the revisions will be included in the tax law amendments scheduled for July. This move aims to address the concerns raised by major business lobby groups, who have called for the government to revise the inheritance tax and gift tax laws, which they claim run counter to global standards and impose an excessive burden on businesses and families.

Overcoming Political Hurdles

The government's push to revise the inheritance tax law, however, faces challenges from the opposition. Last year, the government's reform plan was postponed due to heavy criticism, with the Democratic Party of Korea, which holds a majority in the parliament, criticizing the revision scheme as an act that would only benefit those born with a "silver spoon."Despite these political obstacles, the government remains committed to addressing the inheritance tax issue, recognizing its importance in resolving the "Korea discount" – the tendency of companies listed in South Korea to have lower market valuations than their global peers.

Incentivizing Corporate Value Enhancement

Alongside the inheritance tax reform, the government is also focusing on its "corporate value-up program," which aims to boost the Korean stock market by encouraging listed firms to enhance shareholder value. Finance Minister Choi Sang-mok has indicated that the government is considering providing tax incentives to participating companies, such as easing regulations on corporate tax and income tax on dividends.The government's efforts to address the inheritance tax burden and promote corporate value enhancement are part of a broader strategy to strengthen the competitiveness of South Korea's business environment and foster long-term economic growth. By striking a balance between fairness and economic incentives, the government hopes to unlock new opportunities for businesses and families, ultimately contributing to the country's prosperity.