A bill has been proposed to prevent the largest shareholders, who must inherit management rights, from artificially suppressing stock prices to reduce inheritance and gift tax burdens. The bill stipulates that listed stocks with a price-to-book ratio (PBR; market capitalization ÷ net worth) of less than 0.8 should be taxed like unlisted stocks.
Representative Lee So-young of the Democratic Party of Korea, who proposed the bill, claims it is a solution to the chronic undervaluation of Korean stocks, but there are criticisms that it overlooks industry-specific characteristics and has many gaps.
Applying this content uniformly to all listed companies could lead to extreme cases where inherited assets would have to be paid entirely in taxes. For instance, if the shares I inherit belong to a chimney company with a PBR of 0.3, and I must pay taxes based on a rate of 0.8, the inheritance tax would exceed the assets I inherit.
According to financial investment industry sources on the 17th, the inheritance and gift tax amendment bill recently proposed by Representative Lee So-young of the Democratic Party of Korea focuses on applying an evaluation method that reflects assets and revenue for listed stocks with a PBR of less than 0.8, similar to unlisted stocks, and setting a lower limit on the evaluation value at 80% of net worth. Additionally, it has been agreed to abolish the additional tax rate of 20% for inheritance and gift tax for major shareholders.
Representative Lee and others noted the reason for proposing the amendment, stating, "In the case of listed stocks, low share prices are more favorable for inheritance and gift purposes," adding that "for corporations undergoing management succession, there have been criticisms that non-business-related stock exchanges and capital increases, mergers, and partitions induce undervaluation of stock prices, and this has been pointed out as a cause for the overflow of undervalued stocks with a PBR of less than 1 in the Korean market."
If this amendment passes the National Assembly and is enacted, how will things change? A comparison was made regarding Company A in the manufacturing sector, where the largest shareholder is elderly. Under current law, inheritance tax is based on the average price of listed stocks two months before and after the heir's death. The largest shareholder's equity stake in Company A is 5.4%, representing a value of 2.2 trillion won based on simple calculations. If the maximum inheritance tax rate of 60% is applied, including the additional tax rate, the inheritance tax would be around 1.32 trillion won.
Company A's PBR based on the closing price the previous day is around 0.48. Thus, if the maximum tax rate of 50% is levied without the additional tax rate and based on 80% of net worth as per the amendment, the inheritance tax would be 1.85 trillion won. This would mean paying more than 500 billion won in additional inheritance tax, which is 85% of the listed stock's market value.
In the case of another manufacturing Company B, which has a PBR of 0.35, the situation is even more extreme. The value of the largest shareholder's 14.2% equity stake is roughly 27 billion won. If following current law, the inheritance tax would be over 16 billion won, but under the amendment, based on the company's net worth, the inheritance tax would amount to 310 million won. This means having to pay more in taxes than the inherited assets.
Of course, if the value of listed stocks is boosted to over a PBR of 0.8, like Company B, it can avoid a situation where the tax exceeds the inheritance. The problem is that industries with high asset ratios, such as manufacturing plants and production facilities, find it difficult to increase their PBR. The world's largest steel company, ArcelorMittal, also stays around a PBR of 0.4, and General Motors in the U.S. has a PBR of not even 0.8.
In contrast, the biotechnology industry, which has high growth expectations relative to its modest asset base, tends to have a high PBR. The PBR of a bio company listed on the KOSDAQ market, which has been suspended due to a substantive examination for delisting, exceeded 80. A source in the financial investment industry stated, "If regulations are imposed uniformly without considering industry valuations, unintended consequences will inevitably follow."
The threshold of a PBR of 0.8 is merely an average within the KOSPI 200 index and does not carry any special implications. There are opinions suggesting that to improve situations where PBR falls behind in countries like Brazil and Thailand, the system needs to become more sophisticated.
Another industry source involved in independent research remarked, "For example, companies with a PBR exceeding 0.8 might think, 'There’s no need to raise the corporate value anymore' if the amendment is enacted," adding, "Reducing inheritance and gift taxes is the most certain way, yet they keep deviating and seeking alternative paths."