In South Korea, discussions about easing the inheritance tax have resurfaced. Critics argue that the tax, introduced in 1950, fails to reflect modern economic developments and inflation. Key figures in the ruling People Power Party (PPP) claim that both businesses and individuals are increasingly burdened by the inheritance tax, and thus, the current inheritance tax system cannot remain unchanged.
During the last general election, the PPP proposed a policy to exempt small and medium-sized enterprises (SMEs) from inheritance tax if they relocate their headquarters to designated opportunity development zones. This suggestion arose because the current family business inheritance tax deduction, which applies up to 60 billion won, is deemed ineffective. Opportunity development zones are areas designed to attract significant corporate investment in regional areas through tax incentives, financial support, regulatory exemptions, and improved living conditions.
The ruling party plans to discuss this proposal thoroughly once it reaches the National Assembly. A PPP official noted that there is a consensus among both ruling and opposition lawmakers on gradually reducing the inheritance tax to align with levels seen in advanced countries.
Hwang Hee, a member of the opposition Democratic Party of Korea (DPK), told The Chosunilbo that inheritance tax reform is necessary, particularly for SMEs. He pointed out that SMEs sometimes dismantle or close down due to the tax burden. Hwang argued that it’s time to examine the overall economic impact of the inheritance tax, which constitutes about 1% of national tax revenue.
However, this view is in the minority within the DPK. Officially, the DPK opposes easing the inheritance tax. On May 29, DPK Deputy Floor Leader Lim Gwang-hyeon criticized the government’s plan to expand inheritance tax deductions, warning it could exacerbate social inequality and turn the country into a class-based society. Despite differing opinions, it is anticipated that discussions on inheritance tax reform are inevitable in the 22nd National Assembly.
Experts have highlighted several issues with the current inheritance tax system. A notable problem is the unchanged deduction limit of 1 billion won since 1997, while inflation has risen by 96% and per capita gross national income has increased 3.8 times. In 1997, inheriting a 60-pyeong (approximately 198 square meters) apartment in Apgujeong, Gangnam, Seoul, would subject one to inheritance tax. Today, inheriting a 20-30 pyeong (approximately 66-99 square meters) apartment in non-Gangnam areas of Seoul would incur the tax. In other words, the tax no longer affects only the wealthy. According to KB Kookmin Bank, the average apartment price in Seoul was 1.2 billion won in May 2023, 2.3 times higher than in May 2009 (521 million won).
In contrast, the U.S. has consistently increased its inheritance tax exemption threshold to account for inflation. In 2022, the U.S. exemption limit was $12.9 million, over 17 times higher than South Korea’s.
Many argue for revising South Korea’s high inheritance tax rates, which range from 10% to 50%, the second-highest among OECD countries after Japan’s 10% to 55%. Other OECD countries initially imposed strict inheritance taxes but eased or abolished them as inflation pushed ordinary homeowners into the taxable bracket, and concerns about capital flight grew. Since 1971, 10 out of 38 OECD member countries have abolished inheritance taxes, starting with Canada and most recently Norway in 2014.
The ‘maximum shareholder premium’ system, which deters business succession, is also controversial. The inheritance tax rate can rise to 60% if the inherited assets include a substantial shareholding, an additional 10% premium on the standard maximum rate of 50%.
The inheritance tax issue also surfaced in the recent management dispute at Hanmi Pharm. The family of the late founder, Lim Sung-ki, faced significant inheritance taxes. His wife, Song Young-sook, and daughters attempted to merge with the OCI Group to manage the tax burden, leading to opposition from Lim’s sons. Eldest son Lim Jong-yoon stated, “Hanmi Group’s family business is being wrecked by taxes on shares that are not even being sold.”