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October 26, 2020

Samsung Chairman leaves behind 21$ Billion have to pay Inheritance Tax of 50%

by CA Shivam Jaiswal in Income Tax

Samsung Chairman leaves behind 21$ Billion have to pay Inheritance Tax of 50%

Lee Kun-hee, South Korea’s richest person and chairman of Samsung Electronics Co, died on Sunday, leaving behind considerable assets subject to be potentially inherited by his surviving family as well as inheritance tax. Lee Kun-hee had transformed Samsung Electronics Co. from a copycat South Korean appliance maker into the world’s biggest producer of smartphones, televisions and memory chips. He had an estimated net worth of $20.7 billion, according to the Bloomberg Billionaires Index. Samsung, the biggest of South Korea’s family-run industrial groups, known as chaebol, has been led by his only son since the heart attack.

Legacy of Lee Kun-Hee

  • The Samsung empire includes 62 companies. It was Lee Kun-Hee who built the company into the electronics powerhouse of today, becoming synonymous with the rise of South Korea on a global economic stage.
  • Named one of the world’s 100 most influential people by Time magazine in 2005, Lee began overhauling Samsung Electronics after he saw the company’s products gathering dust in a Los Angeles electronics store.
  • Samsung, the maker of the Galaxy line of smartphones, was riding a COVID-era boom in online activity despite the legal clashes.
  • The company also supplied semiconductors for Google’s data centres and Apple Inc.’s iPhone, and is the world’s most advanced maker of displays for TVs, computers and mobile devices.
  • Samsung C&T Corp., the de facto holding company for the group, surged as much as 21%, while Samsung Life Insurance Co. rose as much as 16%.
  • Some units at Samsung Group were expected to raise dividends, according to Korea Investment & Securities.

Here is a summary of his net worth, which Forbes says is 23.5 trillion won (20.9 billion US dollars), and an expected inheritance tax.

Stocks

  • Lee was the wealthiest stock owner in South Korea, and had stakes in four listed Samsung companies valued at about 18.2 trillion won ($16.1 billion) as of Friday’s closing price (23rd October, 2020).
  • According to Reuters calculations based on Fair Trade Commission data, his stock ownership included:
  • 4.18% of Samsung Electronics common shares
  • 0.08% of preferred shares, worth about 15 trillion won in total
  • 20.76% stake in Samsung Life Insurance worth about 2.6 trillion won
  • 2.88% stake in Samsung C&T worth about 564 billion won and
  • 0.01% stake in Samsung SDS worth about 1.67 billion won

Real Estate

  • Lee’s two known houses in central Seoul are the priciest individual homes in the country, with ground area of 1,245.1 and 3,422.9 square metres, respectively.
  • A Yonhap news agency reported earlier this year that they were valued at about 40.9 billion won and 34.2 billion won.

Children’s Wealth

  • Jay Y. Lee, de facto heir to the elder Lee, has stakes worth a total of about 7.2 trillion won in six of Samsung Group’s listed affiliates as of Friday’s closing, according to a Reuters calculation.
  • The younger Lee has a 0.7% stake in Samsung Electronics and a 17.3% stake in Samsung C&T, the group’s de facto holding firm.
  • He also owns a 9.2% stake in Samsung SDS, 1.5% in Samsung Engineering, and less than 0.1% of Samsung Life Insurance and Samsung Fire & Marine Insurance each, according to regulatory filings.
  • Daughters Lee Boo-jin, CEO of Hotel Shilla, and Lee Seo-hyun, who runs the Samsung Foundation, each own stake in Samsung C&T and Samsung SDS worth about 1.6 trillion won.

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South Korea has a hefty inheritance tax

The transfer of wealth from parents to children has many complex problems since it relates with multi-stage decisions based on the benefits and costs of many different asset forms of the parents.

An inheritance tax is a tax imposed by certain states on those who inherit assets from the estate of a deceased person. Its tax rate depends on the state of residence, the value of the inheritance, and the beneficiary’s relationship to the decedent.

According to South Korean tax rules, before applying the country’s 50% inheritance tax rate on listed stocks, a 20% premium is added to the appraisal value of the deceased person’s holdings, which will be based on the four-month average of the shares’ closing market price before and after the death.

Korea virtually forbids inheritance with the world’s cruelest taxation. Japan on the face of it levies the highest maximum rate at 55%. But Korea slaps penalties on corporate inheritance and collects a maximum 65% when ownership in a business is passed onto the heir.



The descendent rarely can afford the full tax. They would have to sell their assets to pay it. But the sale of property or financial assets requires additional income tax. One may have to sell much of the inherited wealth to cover the tax. If not, one may have to lend that much to secure management rights. He or she could be indebted for life to pay for the loans.

Corporate inheritance through non-profit foundations is also prohibited in Korea. Up to 5% of the stake is exempted for inheritance. But 5% cannot ensure management rights. If the government judges that the non-profit foundation does not serve its original purpose, the government has the right to seize it.

On current estimates, the inheritance tax for the above stocks alone of Lee Kun Hee is expected to be around 10.6 trillion won, according to a Reuters calculation. His beneficiaries would likely have to sell some assets to cover the tax, diluting their stake in Samsung

The killer inheritance rule was established due to the innate distrust for chaebol. The Korean public thinks the heirs to chaebol enjoy excess power through the family premium. Political forces then use the anti-chaebol sentiment. Misconceptions about corporate management and the financial environment have led to a negative sentiment.

Koo Kwang-ho, chair of LG Group, received a tax bill of over 700 billion won ($587 million). He paid it through loan collateral from his stock holdings. Koo and other heirs to big companies may be willing to live in debt rather than give up the family business.

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