(Bloomberg) -- South Korea’s bid to lower its inheritance tax rate for the first time in decades is a welcome move that could help stimulate the economy and stocks, according to investors.
The step, which requires approval of the opposition-controlled parliament, would mark the first reduction of the nation’s inheritance tax rate since 1995 and benefit the families that control major firms from Samsung Electronics Co. to Hyundai Motor Co.
South Korea’s finance ministry is also seeking endorsement of sweeping tax breaks. Some of those benefits are intended to encourage a change in behavior at listed firms. President Yoon Suk Yeol’s administration’s so-called “Corporate Value-up” initiative is geared at improving management practices and shareholder returns at listed companies.
The benchmark Kospi rose 0.8% as financial stocks helped it outperforming the broader Asian equity gauge. The small-cap Kosdaq index was little changed.
Here are some comments from investors and strategists:
Sat Duhra, a fund manager at Janus Henderson Investors in Singapore
Prima facie tax cuts are a welcome tangible outcome of the Value-Up initiative and reducing inheritance tax is certainly a step in the right direction and would demonstrate a real commitment to this initiative. However, investor skepticism arises due to the opposition party’s strong position in the National Assembly and this is likely to ensure reforms are not straightforward to pass. The weak political position of the incumbent party will take the gloss of many of these announcements and so the immediate impact is likely to be muted. However, it is a key step in building confidence in Korean corporate reform and should not be looked at in isolation but as part of a raft of measures.
Jonathan Pines, fund manager at Federated Hermes in London
We consider the tax reforms, particularly the cut in inheritance tax, to be a significant positive development in lawmakers’ efforts to reduce the Korea Discount, as it meaningfully reduces the incentive for controlling shareholders to keep stock prices low. We hope that the government uses what seems to be a golden opportunity to combine the ‘carrot’ of these tax breaks with the ‘stick’ of the introduction of a fiduciary duty of directors to shareholders. The combination of both these measures, in our view, would result in a sharp rerating of Korea’s stocks.
Vikas Pershad, Asian equities fund manager at M&G Investments in Singapore
The recent proposal to reduce inheritance taxes in South Korea marks a significant shift, particularly for the country’s largest conglomerates (chaebols) and their controlling shareholders. While the primary beneficiaries of the inheritance tax cuts are Korea’s wealthiest families and largest corporations, the government positions this reform as part of a broader strategy to stimulate economic growth, attract investment, and address demographic challenges. The ultimate impact on the Korean economy and markets will depend on how effectively these measures translate into increased economic activity and investor confidence.
Douglas Kim, an analyst at Douglas Research Advisory who publishes on the Smartkarma platform
The reduction in high bracket inheritance taxes from 50% to 40% is a step in the right direction to improve corporate governance in Korea. Although this proposal is likely to be met with some stiff opposition in the National Assembly, we believe that there is an increasing probability of this proposal becoming law in 4Q 2024. All in all, the excessively high inheritance tax system in Korea is increasingly becoming recognized as a hindrance on the economic system of Korea. Although one can make a reasonable case of having moderate levels of inheritance taxes, most investors agree that the high-end inheritance taxes in Korea are excessive to the point of negatively impacting the corporate decisions of some of these companies.
Roh Jongwon, chief investment officer at Infinity Global Asset Management in Seoul
It is positive that the South Korean government is announcing the inheritance tax revision. But I don’t think it will have a huge impact on the stock market. The scrapping of the capital gains tax on financial investments will have a bigger impact on the stock market. The revised inheritance tax rate is still too high to keep the struggling Korean manufacturers competitive enough after succession. What would be more effective in lifting the stock market would be scrapping the planned capital gains tax, which will help individual investors a lot more.
Korea Corporate Governance Forum
The proposal was “deeply disappointing” as it appears to be a tax cut for the wealthy families that are the key reason behind the undervaluation of Korean stocks. It is also disappointing that the government suspended its efforts to revise commercial codes to ensure that the board of directors’ fiduciary duty lies to shareholders not just to the company. The key reason behind Korea Discount is corporate governance and inheritance tax should not be the main focus of the Value-up.
(Updates with comments by Korea Corporate Governance Forum; updates index levels.)
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