Conglomerates How major shareholders are navigating inheritance taxes
I. Inherent tax status of major conglomerate groups Overweight (Maintain) 1. OCI Group: Inheritance taxes on former chairman Lee Soo-young’s 10.9% stake in OCI are estimated to be W174.5bn. His heirs, including Vice Chairman Lee Woo-hyun, have Industry Report raised the funds to pay the taxes by selling some of their shares in April. June 11, 2019 2. LG Group: Inheritance taxes on former chairman Koo Bon-moo’s 11.3% stake in LG Corp. are estimated to be W921.5bn. Of this, Chairman Koo Kwang-mo owes W716.2bn. We believe Chairman Koo will sell some of his shares in LG Corp. after taking steps to enhance the company’s value. Mirae Asset Daewoo Co., Ltd. 3. Doosan Group: Inheritance taxes on former chairman Park Yong-gon’s 1.6% stake in [Conglomerates/Software ] Doosan Corp. are estimated to be W17.9bn. His heirs, including Chairman Park Jeong-won, sold part of their shares in Doosan Corp. in May to pay their tax bill. Dae -ro Jeong +822 -3774 -1634 4. Hanjin Group: Inheritance taxes on former chairman Cho Yang-ho’s 17.8% stake in [email protected] Hanjin KAL are estimated to be W279.7bn. The deadline for reporting the inheritance taxes
is October. We believe the taxes will be paid through long-term installments using share pledges, as well as through the sale of stakes in non-core subsidiaries.
II. How inheritance taxes are calculated - Inheritance taxes are calculated by applying a 10-50% tax rate to the tax basis, which is the taxable value of the inherited property, minus deductions. - Inheritance taxes on listed shares are based on the average daily closing pric e during the two-month period before and after the assessment date. - When a company’s shares are inherited to its largest shareholder, a 10-30% premium is imposed, depending on the shareholder’s equity stake and size of the company. - If certain condi tions are met, beneficiaries can apply to pay their inheritance taxes in short-term installments, long-term installments, or in kind.
III. How inheritance taxes are funded - Inheritance taxes can be funded through stake sales or share pledges. This ul timately incentivizes holding and controlling companies to increase dividend payments.
IV. Restrictions on inheritance through the use of public interest corporations - Regulators and lawmakers are currently seeking to limit the voting power of conglomerate- owned public interest corporations in affiliates.
V. Samsung Group’s inheritance taxes - Inheritance taxes on Chairman Lee Kun-hee’s stakes in publicly traded Samsung companies, including a 4.2% stake in Samsung Electronics (SEC), are estimated to reach around W9tr. - Given the huge tax bill, we believe a sale of SEC shares is inevitable. But even with the sale, the group’s control in the company will remain essentially unchanged.
[Samsung Group] Given the inheritance huge tax bill, we believe a sale of SEC shares is inevitable, but the group’s control in the company will remain essentially unchanged
(%) 25 Samsung Life Controlling family & foundation Samsung F&M Samsung C&T
20 Voting power would be maintained at 15% 8.5 even if up to 5.9% of SEC shares were sold 15 Voting power 2.6 restricted to 15% 1.5 1.5 10 20.9% 5.9 15.0% 5.9 5 5 5 0 Stake Voting shares
Source: DART, Mirae Asset Daewoo Research
June 11, 2019 Conglomerates
I. Inherent tax status of major conglomerate groups
1. OCI Group
1) Inheritance tax estimation
Former chairman Lee Soo-young passed away in October 2017. Inheritance taxes on the former chairman’s 10.9% stake in OCI are estimated to be W174.5bn. Taxable value and tax basis were filed in April 2018.
2) How inheritance taxes are funded
- The former chairman’s heirs, including Vice Chairman Lee Woo-hyun, have raised the funds to pay the taxes by selling some of their shares in April 2018. To make the remaining inheritance tax payment, Vice Chairman Lee Woo-hyun has applied for payment in long- term installments and made share pledges.
Table 1. Inheritance tax status of the OCI Group (No. of shares, %, Wbn) Before inheritance After inheritance Current
Shareholder No. of No. of Change in Inheritanc No. of Stake Stake Stake Stakes sold shares shares stake e tax (E) shares Lee Soo-young 2,604,921 10.9 0 0.0 -10.9 - - -
Lee Woo-hyun 120,251 0.5 1,459,925 6.1 +5.6 90.0 1,202,459 5.0 1.2% stake (257,466) sold
Lee Ji-hyun 0 0.0 781,476 3.3 +3.3 52.3 451,084 1.9 1.4% stake (330,392) sold
Kim Kyung-ja 5,007 0.0 488,778 2.0 +2.0 32.2 198,123 0.8 1.2% stake (290,655) sold
3.7% stake (878,513) Subtotal (1) 2,730,179 11.4 2,730,179 11.4 0.0 174.5 1,851,666 7.8 decrease Other affiliates (2) 4,117,442 17.3 4,117,442 17.3 0.0 3,481,001 14.6
Controlling family+ other 6,847,621 28.7 6,847,621 28.7 0.0 5,332,667 22.4 affiliates (1)+(2) Note: Previous chairman Lee Soo-young passed away in Note: Inheritance tax estimates do not reflect deductions October 21, 2017 Source: D ART , Mirae Asset Daewoo Research
Figure 1. OCI Group’s governance structure
Source: DART, Mirae Asset Daewoo Research
Mirae Asset Daewoo Research 2 June 11, 2019 Conglomerates
2. LG Group
1) Inheritance tax estimation
Former chairman Koo Bon-moo passed away in May 2018. Inheritance taxes on the former chairman’s 11.3% stake in LG Corp. are estimated to be W921.5bn. Taxable value and tax basis were filed in November 2018. The first payment (W153.6bn) of the inheritance taxes has been made.
2) How inheritance taxes are funded
Of the total inheritance taxes, Chairman Koo Kwang-mo owes W716.2bn. He has applied for payment in long-term installments. Of note, he has sold a 7.5% stake in Pantos and made share pledges to make the first installment payment of inheritance taxes.
Currently, the controlling family has stable control of LG Corp., with their combined stake standing at 46.6%. As such, we expect Chairman Koo Kwang-mo to sell some of its stake in LG Corp. (15%) to fund the remaining inheritance taxes. Before the stake sale, we believe that he will need to boost the enterprise value of LG Corp. In addition, LG Corp. could gradually increase dividend payouts.
Table 2. Inheritance tax status of the LG Group (No. of shares, %, Wbn) Before inheritance After inheritance Current
Shareholder No. of No. of Change in Inheritanc No. of Stake Stake Stake No. of share pledged (%) shares shares stakes e tax (E) shares Koo Bon-moo 19,458,169 11.3 0 0.0 -11.3 - - -
Koo Kwang-mo 10,759,715 6.2 25,881,884 15.0 8.8 716.2 25,881,884 15.0 12,909,200 (49.9%)
Koo Yeon-gyeong 1,566,279 0.9 5,030,279 2.9 2.0 164.0 5,030,279 2.9 3,632,934 (72.2%)
Koo Yeon-su 265,064 0.2 1,137,064 0.7 0.5 41.3 1,137,064 0.7 916,000 (80.6%)
Subtotal (1) 32,049,227 18.6 32,049,227 18.6 0.0 921.5 32,049,227 18.6
Other affiliates (2) 48,498,213 28.1 48,280,019 28.0 -0.1 - 48,280,019 28.0
Controlling family+ other 80,547,440 46.7 80,329,246 46.6 -0.1 - 80,329,246 46.6 affiliates (1)+(2) Note: Previous chairman Koo Bon-moo passed away in Note: Inheritance tax estimates do not reflect deductions May 20, 2018 Source: DART , Mirae Asset Daewoo Research
Figure 2. LG Group’s governance structure
Source: DART, Mirae Asset Daewoo Research
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Table 3. Major shareholders: Total of 46.6% (No. of shares, Wbn) 1st generation 2nd generation 3rd generation 4th generation No. of No. of No. of Name Name Stake Value Name Stake Value Name Stake Value shares shares shares Koo In -hoe Koo Ja -gyeong 1,648,887 1.0% 129 Koo Bon -moo Koo Kwang -mo 25,881,884 15.0% 2,032 (1907.8~1969.12) (1925.4) (1945.2~2018.5) (1978.1)
LG Group Previous LG LG Chairman President Chairman Kim Young -sik 7,253,100 4.2% 569 Koo Yeon -gyeong 5,030,279 2.9% 395
(1952.1) (1978.2)
Koo Yeon -su 1,137,064 0.7% 89
(1996.2)
Koo Hwon -mi 477,533 0.3% 37 Kim Seon -hye 1,299,851 0.8% 102
(1947.6) (1971.8)
Osung Logis Kim Seonjeong 175,587 0.1% 14 Chairman (1974.10)
Kim Ju -young 2,300 0.0% 0
(1992.8)
Koo Bon -neung 5,955,032 3.5% 467 Koo Yeon -seo
(1949.3) (1999)
Heesung Group
Chairman Koo Bon -jun 13,317,448 7.7% 1,045 Koo Hyeong -mo 1,041,857 0.6% 82
(1951.12) (1987.12)
LG Vice -Chairman LGE manager
Koo Yeon -je 450,386 0.3% 35
(1990.2)
Koo Mi -jeong 1,359,600 0.8% 107 Choi Hyun -soo 3,932 0.0% 0
(1955.5) Choi Yeon -soo
Choi Jeong -gyu
Koo Bon -sik 7,728,603 4.5% 607 Koo Yeon -seoung
(1958.6) Koo Yeon -jin
LT Group Chairman Koo Ung -mo Sourc e: D ART , Mirae Asset Daewoo Research
Table 4. Sales of stakes in Pantos (No. of shares, %, Wbn) Shareholder No. of shares Stake Value Note LG International 1,020,000 51.0 371.6 Koo Bon-ho 298,000 14.9 108.6 Others 284,000 14.2 103.5 Koo Kwang-mo 150,000 7.5 54.6 Koo Yeon-gyeong 80,000 4.0 29.1 Sold a total of 19.9% stakes in Koo Yeon-su 70,000 3.5 25.5 Pantos for W145bn Koo Hyeong-mo 50,000 2.5 18.2 (Dec. 21, 2019) Koo Yeon-je 48,000 2.4 17.5 Total 2,000,000 100.0 728.6 Source: D ART , Mirae Asset Daewoo Research
Table 5. Chairman Koo Kwang-mo’s stake in LG Corp. and dividend receipt (W, shares, Wbn) No. of Dividend No. of Dividend Year Dividends Year Dividends shares receipt shares receipt 2002 200 121,300 0.0 2011 1,000 8,146,715 8.1
2003 250 713,593 0.2 2012 1,000 8,146,715 8.1
2004 250 4,827,795 1.2 2013 1,000 8,349,715 8.3
2005 500 4,827,795 2.4 2014 1,000 10,249,715 10.2
2006 500 4,915,795 2.5 2015 1,300 10,409,715 13.5
2007 750 7,674,715 5.8 2016 1,300 10,759,715 14.0
2008 750 7,905,715 5.9 2017 1,300 10,759,715 14.0
2009 1,000 8,053,715 8.1 2018 2,000 25,881,884 51.8
2010 1,000 8,146,715 8.1 Total 162.3
Source: D ART , Mirae Asset Daewoo Research
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3. Doosan Group
1) Inheritance tax estimation
Former chairman Koo Bon-moo passed away in March 2019. Inheritance taxes on the former chairman’s 1.6% stake in Doosan Corp. are estimated to be W17.9bn. Taxable value and tax basis will likely be filed by September 2019.
2) How inheritance taxes are funded
On May 28 th , the heirs of Koo Bon-moo, including Chairman Park Jeong-won, sold 3.84% (700,000 shares) of their shares in Doosan Corp. via off-hours block trading (with a discount rate of 7%), securing the funds for inheritance tax payments. Despite the stake sale, the controlling family has stable control of Doosan Corp., with their combined stake standing at 47.2%.
Table 6. Inheritance tax status of the Doosan Group (No. of shares, %, Wbn) Before inheritance After inheritance Current
Shareholder No. of No. of Change in Inheritanc No. of Stake Stake Stake Stakes sold shares shares stakes e tax (E) shares Park Yong-kon 289,165 1.6 0 0.0 -1.6 - - - Park Jung-Won 1,337,013 7.3 1,481,596 8.1 0.8 9.2 1,351,426 7.4 0.7% stakes (130,170) sold Park Ji-won 891,321 4.9 987,709 5.4 0.5 6.0 900,929 4.9 0.5% stakes (86,780) sold Park Hye-won 444,693 2.4 492,887 2.7 0.3 2.8 449,497 2.5 0.2% stakes (43,390) sold 1.4% stakes (260,340) Subtotal (1) 2,962,192 16.2 2,962,192 16.2 0.0 17.9 2,701,852 14.8 decrease Other affiliates (2) 6,351,243 34.8 6,351,243 34.8 0.0 - 5,911,583 32.4 Controlling family + 9,313,435 51.1 9,313,435 51.1 0.0 - 8,613,435 47.2 other affiliates (1)+(2) Note: Previous chairman Park Yong-kon passed away in Note: Inheritance tax estimates do not reflect deductions March 3, 2019
Source: DART , Mirae Asset Daewoo Research
Figure 3. Doosan Group’s ownership structure
Note: The spin-off of Doosan Corp., which is set to occur on Oct. 1 st , 2019, is reflected Source: DART , Mirae Asset Daewoo Research
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4. Hanjin Group
1) Inheritance tax estimation
Former chairman Cho Yang-ho passed away in April 2019. Inheritance taxes on the former chairman’s 17.8% stake in Hanjin KAL are estimated to be W279.7bn. Taxable value and tax basis will likely be filed by October 2019.
2) How inheritance taxes are funded
Even before inheritance, 35.7% of the controlling family’s combined stake in Hanjin KAL has been pledged for loans. Given the high inheritance tax burden, the heirs will likely apply for payment in long-term installments using additional share pledges, as well as through severance payment for former chairman Cho Yang-ho and the sale of stakes in non-core subsidiaries.
Table 7. Inheritance tax estimates for the Hanjin Group Inheritance Inheritance tax Per -share Company Inheritance Inheritance tax No. of shares Stake inheritance value (F) value (W) Hanjin KAL 10,553,258 17.8 33,118 349.5 209.2 Hanjin KAL (preferred stock) 12,901 2.4 36,362 0.5 0.1 Hanjin 822,729 6.9 41,566 34.2 20.1 Korean Air 14,130 0.0 33,705 0.5 0.1 Korean Air preferred stock) 26,698 2.4 19,340 0.5 0.1 Jungseok Enterprise 254,059 20.6 306,072 77.8 50.1 Total 462.9 279.7
Note1: Former chairman Cho Yang-ho passed away on April 8th, 2019. Note2: For Jungseok Enterprise (unlisted), per-share inheritance value is based on its recent trading value of W306,072 on March 23rd; inheritance tax estimates do not reflect deductions Source: DART , Mirae Asset Daewoo Research
Figure 4. Hanjin Group’s ownership structure
Source: DART, Mirae Asset Daewoo Research
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II. How inheritance taxes are calculated in Korea
1. Structure of the inheritance tax (vs. gift tax)
An inheritance tax is a tax paid by a person who inherits money or property or a levy on the estate (money and property) of a person who has died, while a gift tax is the tax on money or property that one living person gives to another. Of note, items that are subject to inheritance and gift taxes include money, property, or legal rights that have economic value.
Inheritance taxes are calculated by applying a tax rate to the tax basis (which is the taxable value minus deductions). Inheritance and gift taxes have the same tax brackets and rates. There are five divisions at which tax rates change in a progressive tax system, while tax rates range from 10% (for W100mn or lower) to 50% (for more than W3bn).
Table 8. Tax brackets and rates for inheritance and gift taxes Taxation standard Tax rate Progressive deduction amount Less than 0.1Wbn 10% - More than 0.1Wbn ~ Less than 0.5Wbn 20% 0.01Wbn More than 0.5Wbn ~ Less than 1Wbn 30% 0.06Wbn More than 1Wbn ~ Less than 3Wbn 40% 0.16Wbn More than 3Wbn 50% 0.46Wbn Source : Article 26 of Inheritance and Gift Tax Act , Mirae Asset Daewoo Research
Of note, there are significant differences in taxation between inheritance and gift taxes. For the inheritance tax, estate-type taxation is adopted, which applies progressive tax rates based on the total legacies received by beneficiaries, regardless of the number of heirs. The total amount of inheritance taxes to be paid would be the same for single and joint inheritance, with individual taxes imposed on each heir depending on their inheritance ratios. For the gift tax, inheritance-type taxation is employed, applying progressive tax rates based on the property transferred to each individual. As such, the gift tax could be lower than the inheritance tax.
Figure 5. Inheritance tax: Estate-type taxation Figure 6. Gift tax: Inheritance-type taxation
Source: Mirae Asset Daewoo Research Source: Mirae Asset Daewoo Research
Inheritance taxation allows for a variety of deductions, including basic deduction and ones for the elderly/dependents/disabled/expenses, in consideration of heirs’ personal/inheritance characteristics. Inheritance taxes are calculated by applying a tax rate to the tax basis (which is the taxable value minus deductions and property appraisal fees).
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Table 9. Inheritance tax calculation Items Details
1) Inherited property + 2) i nsurance proceeds , r etirement allowance , etc. that are deemed i nherited property + 3) any Total inheritance debt that was paid before the commencement of inheritance
Non -taxable property and exclusions 1) Non -taxable items, including property donated to the government, f orest land that is p rohibit ed from felling , and (-) from taxable value cultural assets ; and 2) exclusions from taxable value , including contributions to non -profit foundation s and trust property
(-) Utilities, funeral expenses, and debt
Value of property transferred to heirs for 10 years before the commencement of inheritance and that of property Value of property transferred before (+) transferred to those other than heirs for five years before the commencement of inheritance. Values of money the commencement of inheritance transferred to found a company and shares transferred to succeed a family business are added, regardless of period.
(=) Taxable value
Include b asic deduction and deductions for family business succession/dependents/ financial assets, housing, and losses (-) Inheritance deductions incurred due to a natural disaster
(-) Property appraisal fees Fees paid to appraisal firms
(=) Tax basis
(x) Tax rate Progressive rates from 10% to 50%
(=) Calculated tax
Impose an additional 30% tax on g eneration skipping inheritance (+) Generation skipping tax (40% additional tax in the event that total inheritance exceeds W2bh).
(-) Tax deductions
(+) Penalty Failure-to-file penalty and failure-to-pay penalty
(=) Inheritance tax to be paid
Pay ment in short -term installments, (-) long -term installments, or in kind
(=) Inheritance tax to be filed
Source : KPMG, Mirae Asset Daewoo Research
Table 10. Major inheritance deductions Items Value of deduction Basic deduction W200mn The actual amount inherited by his spouse is deductible , with the maximum deduction being W3bn or lower. If Deduction for spouse the amount inherited is less than W500 mn, the entire amount is deducted . Children : W50mn per person Minors: W10mn × the number of years left until age 20 Other personal deductions Elderly: W50mn (for those aged 65 or older) Disabled : W10 mn × ( the expected number of years left before death based on Statistics Korea ’s life expectancy ) Lump -sum The taxpayer has the option to choose between 1) the lump-sum deduction of W500 mn and 2) the combination deduction of basic deduction and other personal deductions.
100% of inherited business - 10 to 14 years: Up to W20bn Deduction for family business succession - 15 to 19 years: Up to W30bn - 20 years or longer : W50 bn Deduction for inherited farms, fisheries, and forestry Up to W15bn 20% of inherited net financial assets (up to W 200mn ) Deduction for financial assets If 20% of inherited net financial assets are less than W20mn, W20mn is deducted. If the net financial assets are less than W 20mn, the net financial assets are deducted. Deduction for losses Deductions are allowed for an amount equivalent to the losses arising from natural disasters. For a housing unit where an heir lived together with the diseased for 10 years or longer, 80% of the housing Deduction for housing value (up to W 500mn) is deducted. Source : NTS , Mirae Asset Daewoo Research
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2. Assessment of shares pursuant to Inheritance and Gift Tax Act
1) Listed shares
With regard to shares listed on Korea’s exchanges (KOSPI, KOSDAQ), market prices refer to the value assessed based on the supplementary assessment methods pursuant to the Inheritance Tax and Gift Tax Act. In other words, inheritance taxes on listed shares are based on the average daily closing price (irrespective of whether trading was conducted or not) during the two-month periods each before and after the base date of assessment. Meanwhile, in case where the combined assessment period falls short of four months, the assessed value shall be based on the average daily closing price during the period. When the base date of assessment is not a trading day (e.g., public holiday, suspended trading), the base date shall be the preceding day.
Figure 7. Assessment of listed shares under Inheritance Tax and Gift Tax Act
Source: Mirae Asset Daewoo Research
2) Non-listed shares
The assessment of unlisted shares (shares not listed on Korea Exchange) shall be based on the weighted average of the per-share net profit or loss value and per-share net asset value in the ratio of 3:2.
Table 11. Supplementary assessment methods for shares under Inheritance Tax and Gift Tax Act Listed/non-listed Supplementary assessment methods The average of daily closing market prices for two months each before and after the base General listed shares date of assessment When any grounds for capital increase, The average of daily closing market prices between the day following the event and the last merger, etc. arise before the base date of day of the two-month post-assessment period assessment Capital When any grounds for capital increase, Listed The average of daily closing market prices between the first day of the two-month pre- increases/ merger, etc. arise after the base date of shares assessment period and the day preceding the event merger assessment When any grounds for capital increase, The average of daily closing market prices between the day following an event before the merger, etc. arise both before and after the assessment date and the day preceding another event after the assessment date base date of assessment MAX [ ①, ②]: ① IPO prices determined according to the standards set by FSC, ② the value Shares of companies preparing for IPOs assessed based on the assessment methods for unlisted shares Per -share assessed value = (per -share net asset value ×2 + per -share net profit/loss value × 3)/5 Non-listed * Per-share net profit/loss value = weighted average of net profit/loss value per share for the General unlisted shares shares past three years /restoration rate of net profit/loss value (10%) ** Per-share net asset value=net asset value as of the base date of assessment / no. of total issued shares as of the assessment date (the lowest limit is 80% of total net asset value) Source: NTS, Mirae Asset Daewoo Research
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3) Extra taxation on largest shareholder
When a company’s shares are inherited or given to its largest shareholder, additional taxes shall be imposed, depending on the shareholder’s equity stake and size of the company. When the largest shareholder owns an over-50% stake in the company, additional taxes (30% of the assessed value for large companies; 15% for small/medium-sized companies) shall be levied. When the largest shareholder’s stake is less than 50%, 20% of the assessed value shall be added (10% for small/medium-sized companies). Taxation on listed shares shall be based on the share value, but for unlisted shares, taxation shall be based on the assessment by National Tax Office. Meanwhile, small/medium-sized companies shall be exempt from the additional taxation rule through 2020.
Table 12. Extra taxation on largest shareholders Major shareholder’s stake Small and medium-sized enterprises General enterprises 50% or below 10% 20% More than 50% 15% 30% Note: Shares of a company that has continued to incur deficits during three-or-fewer business years prior to the business year on which the base date of assessment falls Source: Article 63 of Inheritance and Gift Tax Act, Mirae Asset Daewoo Research
3. Reporting deadline and payment methods for inheritance taxes
1) Reporting deadlines
An heir or a legatee under the obligation to pay inheritance tax is obligated to file the taxable value of inheritance and inheritance tax to the head of the tax office that has jurisdiction over the place of payment of tax within six months from the last day of the month on which the commencement date of the inheritance falls (nine months for an ancestor or his/her heir who has established domicile in a foreign country). In addition, when the tax basis of inherited property is reported by the deadline, 3% of the reported tax value can be deducted.
Table 13. Reporting deadlines for inheritance taxes Reporting deadlines
Within six months from the last day of the month in which the commencement date When an ancestor is a resident of the inheritance falls Heir/legatee Within nine months from the last day of the month in which the commencement date When either an ancestor or all heirs are non-residents of the inheritance falls Within six months from the date when t he executor of a will is designated or The executor of a will or the administrator of inherited property appointed A document stating the inheritance relationship with the determined heir shall be When an heir is not determined by the reporting deadline submitted to the head of the tax office having jurisdiction over the place for tax payment within 30 days from the d ate on which the heir is determined Within six (nine) months from the last day of the month in which the commencement When inheritance commences as the ancestor is declared missing date of the inheritance falls When the deadline falls on a public holiday, Saturday, or The day following the deadline Special cases Workers ’ Day regarding When an electronic filing or payment is made impossible The day following the date when such return or payment can be made ordinarily after deadlines on the deadline, due to suspended operation of the such failures are recovered national tax information and communications networks Source: NTS, Mirae Asset Daewoo Research
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2) Payment methods
When the amount of payable inheritance or gift taxes exceeds W10mn, a part of such payable amounts (the amount in excess of W10mn in case where the payable amount is W20mn or less; 50% or below in case where the payable amount exceeds W20mn) can be paid in installments within two months after the payment deadline expires.
In addition, when the amount of inheritance tax exceeds W20mn, the taxpayer is allowed to make the payment in annual installments, after submitting an application to pay in annual installments alongside the inheritance tax return. The applicant shall be notified in writing of whether permission is granted or not, within six months from the end of the month on which the date a return is filed falls; the payment in annual installments shall be allowed for the five-year period following the permission.
Meanwhile, tax authorities may permit payment in kind (e.g., property) upon a request by a person under the obligation to pay tax, in cases where all of the following requirements are met: 1) real estate and securities account for over 50% of the value of the inherited property; 2) the amount of payable inheritance tax exceeds W20mn; 3) an application for payment in kind is filed by the deadline; 4) the amount of inheritance tax exceeds the amount of financial property; and 5) the management and disposal of the property shall be deemed appropriate. Shares of both listed and unlisted companies cannot be appropriated for payment in kind; however, this shall not apply in cases where: 1) shares are listed on the exchange for the first time and the disposal thereof is limited, and 2) another inheritance does not exist for unlisted shares.
Table 14. Inheritance tax payment methods Payment method Description Notes Voluntary General payment method Lump-sum payment payment Paymen Short -term When the payable tax amount exceeds Payment in short -term installments is allowed within t in cash installments W10mn two months (without separate permissions) Annual When the payable tax amount exceeds An application for payment in annual installments installments W20mn, and security is provided can submitted Real estate and securities represent over 50% of total value of the inherited Payment in kind An application for payment in kind can be filed property and the payable tax amount exceeds W20mn When inherited property includes Collection of a substantial part of the relevant Deferment cultural heritage materials or museums inheritance tax can be deferred Source: NTS, Mirae Asset Daewoo Research
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III. How inheritance taxes are funded
1. Inheritance taxes can be funded through stake sales or share pledges
In order for a large conglomerate to ensure the successful transfer of ownership to the next generation, it is critical for an heir to inherit shares of holding and controlling companies, which are directly related to the group’s controlling power. In this light, the heir can opt for the sale of non-core assets in order to raise funds to pay massive inheritance taxes.
Inheritance taxes can also be funded through share pledges on the existing or inherited assets. That said, if the heir files an application for payment in annual installments, he or she needs to provide security, which we think should limit the room for additional share pledges.
In addition, if the heir has already obtained controlling shares together with affiliated parties (e.g., relatives), he/she may opt for the sale of a stake in holding and controlling companies in order to fund inheritance taxes. This should ultimately incentivize holding and controlling companies to boost shares through corporate value improvement.
2. Holding and controlling companies to increase dividends
Tighter regulations on related-party transactions and other unfair profits are expected to limit wealth accumulation by controlling families. Accordingly, holding companies will likely consider paying compensation and increasing dividends to controlling shareholders for them to secure legitimate cash flows to pay inheritance taxes.
Meanwhile, the disclosure of the compensation and calculation methodology of the top five highest-paid executives or employees became mandatory in 2018. Thus, compensation to controlling families is likely to be disclosed (irrespective of whether they are registered executives or not). In addition, the payment of compensation without a reasonable basis (in light of capabilities, performance, and corporate conditions) should increasingly face resistance from shareholders and the public.
Accordingly, holding companies will likely be incentivized to increase dividends for controlling shareholders to secure sufficient cash flows via their stakes in holding companies. Going forward, holding and controlling companies should have to focus on enhancing corporate value to raise funds for dividend payments.
Table 15. Mandatory disclosure of compensation for top five executives or employees (2018-) Law Details
3. Compensation of each executive with annual compensation greater than or equal to W500mn and detailed calculation methodology (top five executives or employees by compensation)
Source: M inistry of Government Legislation, Mirae Asset Daewoo Research
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IV. Restrictions on inheritance through the use of public interest corporations
Bills to limit the voting power of conglomerate-owned public interest corporations were introduced
Going forward, inheritance and/or ownership succession via conglomerate-owned public interest corporations should become difficult. In the past, controlling families of conglomerates had maintained or even strengthened their grip on the companies by donating their shares in affiliates to public-interest corporations to be exempt from inheritance and gift taxes and exercise voting rights in affiliates via the public-interest corporations. To restrict such acts, the FTC proposed to lower the cap on public-interest corporations’ voting rights in affiliates to 15% from 30% of the total shares, including those held by controlling families. Lawmakers also introduced bills to revise the Monopoly Regulation and Fair Trade Act (MRFTA) to limit the voting rights of public-interest corporations belonging to conglomerates in affiliates. Meanwhile, the National Tax Service is considering applying regulations on companies’ expenses for public purposes to public-interest corporations regardless of their stakes in affiliates.
Public-interest corporations have been criticized for serving as vehicles for controlling families to strengthen their control, succeed ownership, support affiliates, and make unfair profits.
Indeed, according to the FTC’s report published in June 2018, 40% of 165 public-interest corporations under the umbrella of conglomerates hold shares in a total of 119 of their respective affiliates. Of note, their shareholdings are concentrated on listed affiliates with an asset value of W1tr or over, or those companies that represent corporate groups or are held by controlling families. In addition, in 83.6% of public-interest corporations, special-interest parties are working as directors (as CEOs or managing directors in 59.4%). Furthermore, those corporations have always voted in favor of the affiliates in which they held stakes.
Table 16. Listing status and asset value for affiliates of conglomerate-owned public-interest corporations (No.) Listing Asset value Total Listed Unlisted W1tr and over Below W1tr Affiliates owned by public - 119 76 (63.9%) 43 (36.1%) 81 (68.1%) 38 (31.9%) interest corporations Affiliates of conglomerates 1,980 261 (13.2%) 1,719 (86.8%) 253 (12.8%) 1,727 (87.2%) Note: Based on end of 16 data Source: FTC , Mirae Asset Daewoo Research
Table 17. The FTC’s proposal to revise the MRFTA Agenda Current Proposal by the FTC Public -interest corporations belonging to conglomerates with an asset value of W10tr or over Regulations shall not exercise voting rights in affiliates. on public- No However, they shall be allowed to exercise voting rights in listed affiliates for agendas on the interest regulations designation/removal of executives, revisions to the articles of incorporation, or M&As. corporations Two-year grace period and gradual implementation (by 5% annually for three years) for the 15% voting interest cap. Source: FTC, Mirae Asset Daewoo R esearch
Table 18. Lawmakers’ proposal to revise the MRFTA Park Young-sun (June 7, 2016) Park Yong-jin (June 8, 2016)
Public -interest corporations subject Corporations defined in the Article 2 of the Act on the Establishment and Operation to voting -right regulations of Public Interest Corporations. To be allowed only for th ose cases in which a Exercise of voting rights in affiliates public-interest corporation had owned a 100% wholly-owned by a public-interest To be allowed stake in affiliates before the implementation of corporation the law and still owns by the day of the exercise of voting rights. Source: Bill Information, Mirae Asset Daewoo Research
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V. Samsung Group’s inheritance taxes
1. Inheritance taxes on Chairman Lee Kun-hee are estimated at W9tr; sale of SEC stakes is inevitable
Samsung Group announced in 2015 that the heir to Lee Kun-hee would fulfill his obligation to pay inheritance taxes in a legal and reasonable way. Inheritance taxes on Chairman Lee Kun-hee’s stakes in publicly traded Samsung companies (valued at approximately W14.9tr), including a 4.2% stake in SEC, 20.8% in Samsung Life, and 2.9% in Samsung C&T, are estimated to reach around W9tr. Even if Lee Jae-yong, the heir apparent to Lee Kun-hee, were to pay the taxes in installments, he would have to raise W1.5tr annually for a maximum of six years. Of note, taxes on Lee Kun-hee’s SEC stake are expected to exceed W6tr, accounting for the lion’s share of the expected inheritance taxes.
We believe that Lee Jae-yong will sell his inherited stake in SEC, partly or entirely, to reduce the burden of inheritance taxes and to raise the sufficient funds to inherit Lee Kun-hee’s stake in Samsung Life, the largest SEC shareholder among group affiliates.
Table 19. Samsung Group controlling family’s shareholdings (No. of shares, %, Wbn) Shareholder Title Stock holdings No. of shares Stake Value % Lee Kun-hee SEC Chairman SEC 249,273,200 4.2 11,018 73.8 (1942) SEC (P) 619,900 0.1 22 0.2 Samsung Life 41,519,180 20.8 3,380 22.6 Samsung C&T 5,425,733 2.9 504 3.4 Samsung SDS 9,701 0.0 2 0.0 Total 14,926 100.0 Hong Ra-hee Former Director of Leeum SEC 54,153,600 0.9 2,394 100.0 (1945) Total 2,394 100.0 Lee Jae-yong SEC Vice Chairman SEC 42,020,150 0.7 1,857 28.9 (1968) Samsung C&T 32,674,500 17.2 3,032 47.1 Samsung SDS 7,116,555 9.2 1,473 22.9 Samsung 3,024,038 1.5 48 0.7 Engineering Samsung Life 120,000 0.1 10 0.2 Samsung F&M 44,000 0.1 12 0.2 Total 6,432 100.0 Lee Boo-jin Hotel Shilla CEO Samsung C&T 10,456,450 5.5 970 60.8 (1970) Samsung SDS 3,018,859 3.9 625 39.2 Total 1,595 100.0 Lee Seo-hyun Director of Samsung Samsung C&T 10,456,450 5.5 970 60.8 Welfare Foundation (1973) Samsung SDS 3,018,859 3.9 625 39.2 Total 1,595 100.0 Source: D ART , Mirae Asset Daewoo Research
Table 20. Estimated inheritance taxes on Lee Kun-hee’s stake in listed affiliates (No. of shares, %, Wbn) Stake in listed affiliates Inheritance tax Company No. of shares Stake Per share market price of inheritance (W) Value of inheritance Inheritance tax (F) SEC 249,273,200 4.2 44,200 11,017.9 6,610.3 SEC (P) 619,900 0.1 36,250 22.5 13.0 Samsung Life 41,519,180 20.8 81,400 3,379.7 2,027.3 Samsung C&T 5,425,733 2.9 92,800 503.5 301.6 Samsung SDS 9,701 0.0 207,000 2.0 0.9 Total 14,925.5 8,953.2 Note: Based on June 7th closing price ; potential deductions are not reflected ; Source: Dart, Mirae Asset Daewoo Research
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Table 21. Estimated inheritance tax payments by installments (Wbn) Beginning of +1Y +2Y +3Y +4Y +5Y Total inheritance 1,492 1,626 1,600 1,573 1,546 1,519 9,356 Note: Based on 1.8% annual interest rates Source: Mirae Asset Daewoo Research
2. Samsung Group’s control on SEC to remain unchanged
Currently, Samsung Group affiliates hold a combined stake of 20.9% in SEC (based on common shares). Under the Article 11 of the MRFTA, however, their voting rights should not exceed 15%.
In other words, even if special-interest parties and group affiliates dispose of up to 5.9%p stakes in SEC, their combined voting rights should remain unchanged at 15%. Given the huge tax bill, we believe a sale of SEC shares is inevitable.
Table 22. SEC’s major shareholders (No. of shares, %, Wbn) Shareholder No. of shares Stake Value Lee Kun-hee 249,273,200 4.2 11,018 Hong Ra-hee 54,153,600 0.9 2,394 Controlling family (1) Lee Jae-yong 42,020,150 0.7 1,857 Subtotal 345,446,950 5.8 15,269 Samsung Life 508,157,148 8.5 22,461 Samsung C&T 298,818,100 5.0 13,208 Samsung F&M 88,802,052 1.5 3,925 Affiliates (2) Samsung Welfare Foundation 4,484,150 0.1 198 Samsung Foundation of Culture 1,880,750 0.0 83 Subtotal 902,142,200 15.1 39,875 Controlling family + Affiliates (1)+(2) 1,247,589,150 20.9 55,143 Total shares issued 5,969,782,550 100.0 263,864 Note: Based on June 7th closing price, Source: Dart, Mirae Asset Daewoo Research
Table 23. Group affiliates’ voting rights on SEC should not exceed 15% (No. of shares, %) Common stock Voting rights Expected SEC stake after Chg. under the current No. of shares Stake stake acquisition/disposal (%p) MRFTA Financial Affiliates (1) 596,959,200 10.0 4.1 8.3 +4.2 Samsung Life 508,157,148 8.5 - - - Samsung F&M 88,802,052 1.5 - - - Other Affiliates (2) 650,629,950 10.9 10.9 6.7 -4.2 Samsung C&T 298,818,100 5.0 5.0 5.0 0.0 Lee Kun-hee 249,273,200 4.2 4.2 0.0 -4.2 Hong Ra-hee 54,153,600 0.9 0.9 0.9 0.0 Lee Jae-yong 42,020,150 0.7 0.7 0.7 0.0 Samsung Welfare Foundation 4,484,150 0.1 0.1 0.1 0.0 Samsung Foundation of Culture 1,880,750 0.0 0.0 0.0 0.0 Controlling family + Affiliates 1,247,589,150 20.9 15.0 15.0 0.0 (1)+(2) Source: Dart, Mirae Asset Daewoo Research
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Table 6. MRFTA: Limitation of voting rights of financial companies Article Details Neither financial nor insurance companies which belong to an enterprise group subject to the limitations on mutual investment shall exercise their voting rights in stocks of domestic affiliated companies, under their acquisition or ownership, provided that the same shall not apply to cases falling under the following subparagraphs:. Article 11: Limitation of voting rights of 1) Where the acquisition or ownership of stocks of the company is in order to carry on the financial business or insurance business; financial companies or 2) Where the acquisition or ownership of stocks of the company is obtained by approval pursuant to the Insurance Business Act in insurance order to ensure efficient operation and management of the insurance assets; companies Article 11: 3) Where the general meeting of stockholders of a relevant domestic affiliated company (limited to the listed corporation) passes a Limitation of voting rights of resolution for matters falling under the following items. In such cases, the number of voting stocks from among stocks of the said financial companies or affiliated company shall not exceed 15/100 of the gross number of stocks issued by the said affiliated company, including the insurance number of stocks to be exercised 916 Ministry of Government Legislation by the persons other than those as stipulated by companies Presidential Decree, from among the specially-related persons with the said affiliated company: (a) Appointment or dismissal of officers; (b) Alteration of the articles of incorporation; (c) Merger of the said affiliated company with another company, or transfer of the who le or part of business to another compan y Source: Office of Legislation, Mirae Asset Daewoo Research
Figure 9. Even if Samsung Life unloads its SEC shares, the Figure 8. Changes in SEC stake group’s voting power in SEC would remain unchanged
(%) Samsung Life Samsung F&M Voting power (%) Samsung Life Controlling family & foundation Controlling family & foundation Samsung C&T restricted to15% 25 Samsung F&M Samsung C&T 20
8.5 8.5 20 15 8.2 Voting power would be maintained at 15% 7.2 7.6 2.6 2.6 2.6 even if up to 5.9% of SEC shares were sold 3.3 2.9 8.5 1.6 1.5 1.5 1.5 1.5 1.5 1.5 1.4 15 Voting power 10 1.3 1.3 2.6 restricted to 15%
5.5 5.7 5.5 5.9 5.9 5.9 5.9 5.9 20.9% 1.5 1.5 4.8 5 10 5 5.915.0% 5.9 4.1 4.7 4.2 4.9 4.6 5 5 5 5 5 5 0 Stake Voting Stake Voting Stake Voting Stake Voting Stake Voting 5 5 shares shares shares shares shares 0 2015 2016 2017 2018 2019 Stake Voting shares
Source: DART, Mirae Asset Daewoo Research Source: DART, Mirae Asset Daewoo Research
Figure 10. Samsung Group’s ownership structure
Source: DART, Mirae Asset Daewoo Research
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APPENDIX 1
Important Disclosures & Disclaimers Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.
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Mirae Asset Daewoo Research 17 June 11, 2019 Conglomerates
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