[Korea] October 26, 2020 Conglomerates (Overweight/Maintain) Samsung Group ’s inheritance tax issue : What to expect Mirae Asset Daewoo Co., Ltd. Dae-ro Jeong [email protected] Inheritance taxes on listed W11tr likely to be paid in full A significant burden even if paid in long -term installments affiliate stakes to be around We estimate inheritance taxes on the late Chairman Lee Kun-hee’s stakes in publicly traded W11tr Samsung companies will be around W11tr (stakes valued at around W18.2tr). Even if the taxes are paid in long-term installments, Samsung Electronics (SEC) Vice Chairman Lee Jae-yong will have to come up with more than W1.8tr every year for up to six years to fund the taxes. In 2015, the group stated that it was committed to paying inheritance taxes in full . Given this, we do not expect the group to seek to avoid the taxes (e.g., through contributions to public interest/nonprofit corporations). SEC stake sale inevitable given Even after partial sale of SEC stake, voting rights likely to remain unchanged huge tax bill To fund the inheritance taxes, we believe a sale of SEC shares is inevitable. Even though the group’s combined stake in SEC is 20.9%, the actual voting power the group can exercise is limited to 15% under the Monopoly Regulation and Fair Trade Act (MRFTA). Thus, the group can sell up to a 5.9% stake without affecting its voting rights. Status quo to be maintained Pledge to end management succession drastically reduces need for ownership structure regarding group ownership overhaul structure Lee Jae-yong exercises stable control over the entire group through his stake in Samsung C&T. In his public apology in May, Lee pledged not to pass down managerial rights to his children. Given that there is less need for Lee to further tighten his grip on the group, we expect the status quo to be maintained regarding the group ownership structure. Investment ideas High confidence in re -rating of Samsung Group stocks Samsung C&T (028260 KS): With most ownership structure-related uncertainties now removed, we expect the value of Samsung C&T’s affiliate stakes to be quickly reflected in its marke t value. SEC (005930 KS): Enhancing SEC’s corporate value is essential for the group to maintain control over the company. Samsung Life (032830 KS): Given that Samsung Life is the largest shareholder of SEC within the group, it is essential for Vice Chairman Lee to inherit his father’s stake in the insurer. The insurer is likely to expand its dividend payments. Samsung SDS (018260 KS): We believe the controlling family will be incentivized to dispose of some of its stake in Samsung SDS, which should prove favorable to the firm’s corporate value. Even if Samsung Group sells some of its stake in SEC to fund inheritance taxes, its voting rights will likely remain at 15% (%) 25 Controlling family/public interest corporations Samsung C&T Samsung F&M Samsung Life 20 Group can sell up to a 5.9% stake and 8.5 still maintain 15% voting rights 15 2.6 1.5 1.5 6.8 20.9% 15.0% 10 5.0 (Voting rights 5.0 1.5 restricted to 15% 5 under the MRFTA) 5.0 5.9 5.9 1.7 0 Stake Voting rights Voting rights if 4.2% stake is sold Source: DART, Mirae Asset Daewoo Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including t he US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. October 26, 2020 Conglomerates 1. Inheritance taxes on listed affiliate stakes estimated at around W11tr Inheritance taxes likely to be paid in full Significant burden even if paid in long- term installments With the passing of Chairman Lee Kun-hee on Oct. 25, Samsung Group and its controlling family must now confront the issue of inheritance taxes. Back in 2015, the group told the press it intended to pay inheritance taxes in full. Accordingly, we do not expect the group to seek to avoid taxes (e.g., through contributions to public interest/nonprofit corporations). The late chairman’s stakes in publicly traded Samsung companies are collectively valued at around W18.2tr, including a 4.2% stake in SEC, 20.8% in Samsung Life, and 2.9% in Samsung C&T. Inheritance taxes on those stakes (to be determined at a later date; calculated as the average daily closing price during the two-month periods before and after the assessment date) are estimated to reach around W11tr, with taxes on the 4.2% SEC stake accounting for the majority (roughly W9tr). Thus, even if SEC Vice Chairman Lee Jae-yong were to pay in long- term installments, he would have to come up with more than W1.8tr every year for up to six years to inherit all of his father’s stakes in listed affiliates. Table 1. Samsung Group controlling family’s shareholdings (%, Wbn) Shareholder Title Stock No. of shares Stake Value Breakdown Lee Kun-hee SEC chairman SEC 249,273,200 4.2 15,006 82.3 (1942) SEC (P) 619,900 0.1 33 0.2 Samsung Life 41,519,180 20.8 2,620 14.4 Samsung C&T 5,425,733 2.9 564 3.1 Samsung SDS 9,701 0.0 2 0.0 Total 18,225 100.0 Hong Ra-hee Former director of Leeum SEC 54,153,600 0.9 3,260 100.0 (1945) Total 3,260 100.0 Lee Jae-yong SEC vice chairman SEC 42,020,150 0.7 2,530 35.1 (1968) Samsung C&T 32,674,500 17.2 3,398 47.2 Samsung SDS 7,116,555 9.2 1,228 17.0 Samsung Engineering 3,024,038 1.5 33 0.5 Samsung Life 120,000 0.1 8 0.1 Samsung F&M 44,000 0.1 9 0.1 Total 7,205 100.0 Lee Boo-jin Hotel Shilla CEO Samsung C&T 10,456,450 5.5 1,087 67.6 (1970) Samsung SDS 3,018,859 3.9 521 32.4 Total 1,608 100.0 Lee Seo-hyun Director of Samsung Welfare Foundation Samsung C&T 10,456,450 5.5 1,087 67.6 (1973) Samsung SDS 3,018,859 3.9 521 32.4 Total 1,608 100.0 Note: Based on Oct. 23 closing prices Source: DART , Mirae Asset Daewoo Research Table 2. Estimated inheritance taxes on Lee Kun-hee’s stakes in listed affiliates (%, Wbn) Stake in listed affiliates Inheritance tax Company No. of shares Stake Share price (W) Tax basis Tax (est.) SEC 249,273,200 4.2 60,200 15,006.2 9,003.3 SEC (P) 619,900 0.1 53,300 33.0 19.4 Samsung Life 41,519,180 20.8 63,100 2,619.9 1,571.5 Samsung C&T 5,425,733 2.9 104,000 564.3 338.1 Samsung SDS 9,701 0.0 172,500 1.7 0.7 Total 18,225.1 10,932.9 Notes: Based on Oct. 23 closing prices; potential deductions not reflected Source: D ART , Mirae Asset Daewoo Research Table 3. Estimated inheritance tax payments (installment plan) (Wbn) Start +1Y +2Y +3Y +4Y +5Y Total 1,822 2,013 1,975 1,937 1,899 1,860 11,507 Note: Assuming 2.1% annual interest rate Source: Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 October 26, 2020 Conglomerates * Assessment of inheritance taxes on listed shares In the assessment of inheritance taxes on listed shares in Korea, 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) during the two-month periods before and after the assessment date. In cases where the assessment period falls short of four months, the assessed value is 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 preceding day becomes the base date instead. Figure 1. Assessment of listed shares under Inheritance Tax and Gift Tax Act Source: Mirae Asset Daewoo Research Inheritance taxes are calculated by applying a tax rate to the tax basis (taxable value minus deductions). The applied tax rate changes in a progressive manner along five brackets, ranging from 10% (for W100mn or lower) to 50% (for more than W3bn). When a company’s shares are inherited or given to its largest shareholder, additional taxes are imposed to reflect a premium for management control. Table 4. Tax brackets and rates for inheritance and gift taxes Tax base Rate Deduction Up to W100mn 10% - Over W100mn to W500mn 20% W10mn Over W500mn to W1bn 30% W60mn Over W1bn to W3bn 40% W160mn Over W3bn 50% W460mn Source: Article 26 of Inheritance Tax and Gift Tax Act, Mirae Asset Daewoo Research Table 5. Additional taxation on major shareholders General enterprises SMEs Additional taxation 20% 0% Note: Excluding stakes in companies that have incurred losses in any of the three fiscal years preceding the assessment year Source: MOLEG , Mirae Asset Daewoo Research An heir or a legatee is obligated to report the taxable value of the inheritance and file inheritance taxes to the tax office within six months from the last day of the month during which the inheritance commences (nine months if the predecessor or his/her heir has established a domicile in a foreign country).