Stock plunge gives South Korea business owners chance to save on succession costs

[SEOUL] Ageing owners of South Korean companies are taking advantage of a coronavirus-induced plunge in stock prices to transfer stakes to kin on the cheap, in what will eventually soften the blow of one of the world's highest rates of inheritance tax.

From massive family-run chaebols to smaller enterprises, succession is expensive business in corporate Korea, one of just five of the 36 members of the Organisation for Economic Cooperation and Development (OECD) to fully tax direct parent-to-child inheritance. South Korea also taxes stock inherited from major shareholders without exception, unlike the US.

With market participants fretting over the impact of the novel coronavirus - which this year has prompted governments to curb economic activity - South Korean shares have hovered at decade-low prices, giving business owners an avenue to shore up control without opposition by transferring stakes at minimal cost.

Transfers classed as gifts are subject to tax, but bills are relative to prices. And with bigger stakes in the hands of the next generation, inheritance tax bills will be lower.

The chairman of CJ Group - South Korea's 14th-largest chaebol with 31 trillion won (S$36.29 billion) in assets and which produced Academy Award Best Picture winner Parasite - cancelled his Dec 9 transfer of 1.84 million preferred shares in holding company CJ Corp to his two children, and repeated it on April 1 at a price 24 per cent lower, regulatory filings showed.

As a result, the children saved as much as 20 billion won in gift tax, showed Reuters calculations based on local tax law and assuming an unchanged share price for the following two months.

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The transfer was the first CJ Group chairman Lee Jay-hyun, 60, had made to his children, showed CJ Corp filings since 2001.

Last month, a member of the family-owner of Dong Suh Companies Inc gifted 1.3 billion won worth of shares in the food maker to his two children, in their early 30s and late 20s respectively. The chief executive of Semisysco Co Ltd also gifted his two children 40,000 shares in the display manufacturing equipment supplier.

Older members of family-owners of at least 10 other firms gifted stakes to younger generations in March, filings showed.

CJ Group and Dong Suh declined to comment. Semisysco did not have an immediate comment.

PREMIUM

The wave of stock gifts comes as South Korea's main stock price index, the Kospi, was 35 per cent lower in mid-March than when the coronavirus spread beyond China's borders in February, hitting its lowest since the 2009 global economic downturn.

"This is one of the best times to prepare for succession," said Shin Dong-du, a tax accountant specialising in corporate succession. "South Korea has gradually strengthened enforcement of tax codes on succession only in the past decade, and with many sitting company owners coincidentally aging beyond 60 right now, succession planning has only recently begun to be a field."

Beneficiaries of over three billion won in inheritance must pay 1.04 billion won in tax plus 50 per cent of the amount above three billion won, plus a premium of 20 per cent of the value of stock inherited from the major shareholder, adding up to one of the highest rates of inheritance tax among OECD members, analysts said.

Samsung Group heir Jay Y Lee would have to pay around 8.3 trillion won to inherit the his ailing father's 4.18 per cent stake in Samsung Electronics Co Ltd - the biggest stake held by an individual - as of the stock's average price over December 2019 through March 2020, showed Reuters calculations.

At LG Group and Hanjin Group, whose patriarchs died in the past two years, beneficiaries are paying inheritance tax of 921.5 billion won and about 270 billion won respectively in instalments over five years.

REUTERS