"Tax Deferral for Holding Company Establishment: A Preferential Policy Encouraging Dual Listings"

Ninth Attempt to Extend Tax Deferral for Holding Companies by the Ministry of Economy and Finance

Criticized in a Statement by the Korea Corporate Governance Forum

"Root Cause of Dual Listings That Benefit Only Certain Business Groups"

The Ministry of Economy and Finance has announced plans to further extend the special tax deferral rule, which postpones taxes levied on in-kind contributions of shares during the establishment or conversion of holding companies, after having already extended it eight times over a span of 26 years. The deferred taxes amount to several trillion won, and since the system encourages dual listings—a key factor behind the so-called 'Korea Discount'—calls are mounting for these preferential measures to be abolished.

On August 18, the Korea Corporate Governance Forum released a statement urging the government to remove the extension clause for this special rule from the tax revision proposal before it is finalized at the Cabinet meeting on September 1.

Ninth Extension Attempt... Preferential Treatment for a Few Companies Only

The Ministry of Economy and Finance announced its 2024 tax revision plan on August 3, proposing to extend the tax deferral rule for in-kind share contributions related to the establishment or conversion of holding companies for an additional two years, until the end of 2028. The implementation of the 'four-year grace period and three-year installment payment' plan, which was finalized in 2019, will also be postponed from 2027 to 2029. This marks the ninth extension for the special rule, and the third postponement for the installment payment implementation.

This measure defers the capital gains tax and corporate tax arising from controlling shareholders' in-kind contributions of shares in business subsidiaries to holding companies until they actually dispose of their holding company shares. It was introduced after the Asian financial crisis to promote corporate restructuring and resolve complex cross-shareholding structures.

The Korea Corporate Governance Forum pointed out, "Since only a tiny minority of business groups now have remaining cross-shareholding structures, any further extension purely benefits a select few." The forum argued that, in the absence of cross-shareholding, companies have split into holding and business operating entities, listed both companies, and taken advantage of the holding company discount to both reduce inheritance and gift tax burdens and strengthen the controlling shareholder’s grip.

When a company is spin-off into a holding company and a business operating company, it is common for the share price of the holding company to fall while that of the subsidiary rises. The controlling shareholder then contributes the appreciated subsidiary shares to the holding company as an in-kind contribution and receives the now-discounted holding company shares in return. This process significantly increases their control over the holding company, but weakens the oversight and check functions of general shareholders, undermining shareholder value.

The phenomenon of dual listings, where both the holding company and listed subsidiaries remain on the stock market, has also been criticized. In many cases, the holding company’s market capitalization reflects far less than half the value of its shareholdings in subsidiaries. Where holding companies, intermediate holding companies, and subsidiaries are all listed in a chain structure, the overall corporate value discount is even more pronounced. The Korea Corporate Governance Forum argued, "Such a discount reduces the actual inheritance and gift tax burden for controlling shareholders and makes ownership succession easier."

Some have also pointed out that, contrary to its name, the tax deferral system is essentially tantamount to a tax exemption, since it is rare for controlling shareholders to actually dispose of their holding company stakes. With decades of inflation and asset price gains taken into account, the real tax burden effectively approaches zero.

The beneficiaries are limited to a handful of large corporations. The special rule applies only to holding companies, as defined by the Monopoly Regulation and Fair Trade Act, whose total assets exceed 500 billion won. Previously, before the criteria were tightened in 2017, companies with total assets over 100 billion won could also qualify.

Tax Savings for Specific Firms Match Entire Tax Reform Gains

The Korea Corporate Governance Forum emphasized that this measure, introduced at the end of 2000 for just three years as a temporary policy, was already an exceptional benefit that can no longer be justified. According to data from the office of National Innovation Party lawmaker Cha Kyugeun, 118 holding companies had reported making use of the special measure since its introduction. From 2014 to 2023, capital gains tax deferral was granted for 13.2669 trillion won in capital gains at 70 companies over 10 years. The forum estimates the deferred tax as a result totals around 3 trillion won.

The forum pointed out, "The Ministry of Economy and Finance itself projects a tax revenue effect of 3.443 trillion won for the five years after 2027 under this year’s tax revision plan," adding, "The taxes postponed under this single special measure over ten years will roughly equal the total tax gain from the entire tax reform for five years."

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The Ministry of Economy and Finance has itself admitted in the past that the benefits of this system are excessive. When unveiling its 2019 tax code amendment, the Ministry of Strategy and Finance stated, "There has been criticism that taxes are indefinitely deferred until shares are disposed of by controlling shareholders and others, thus conferring excessive benefits." The ministry further explained that governance reform could be accomplished even with the standard special tax rules for qualifying mergers, spinoffs, and comprehensive share swaps, without any need for a separate special rule for in-kind share contribution tax deferral—something not present in major countries like the US, Japan, or Germany. The ministry had also sought to shift from indefinite deferral to the 'four-year grace, three-year installment' model, but implementation has been repeatedly delayed.

The Korea Corporate Governance Forum called this policy inconsistent, stating, "The government claims to be acting to prevent 'stock price suppression' in this tax reform, while at the same time granting preferential treatment to actions that both create more dual listings and can be abused for stock price suppression. The extension clauses for the special rule and renewed postponement of installment payments should be deleted before the Cabinet decision."

This content was produced with the assistance of AI translation services.