According to a recent report from the Ministry of Trade, Industry and Energy and the Federation of Middle Market Enterprise of Korea, 84.4 percent of respondents to a 2018 survey of major shareholders in midsize businesses had no plans to hand their shares down to their children. Heavy inheritance and gift taxes were the main reason, cited by 69.5 percent of respondents not planning to bequeath shares.

A local mergers and acquisitions brokerage and consulting firm reportedly estimated that 118 of the 730 companies put up for sale through its platform last year were on offer because of the inheritance tax burden. By extrapolation, about 300-400 businesses were probably placed up for sale nationwide for the same reason in 2018, the brokerage estimated.

The heavy inheritance tax does not just affect midsize companies. After the death of Hanjin Group Chairman Cho Yang-ho, his three children -- including his son, Korean Air President Cho Won-tae -- inherited a tax bill of more than 170 billion won ($148 million). Business observers speculate that the Cho family might have to take out loans using their stock as collateral, or sell off stock in some of the group’s affiliate companies.

South Korea’s inheritance tax rate is 50 percent, but rises to 65 percent when the inheritance benefits a company’s largest controlling stockholder, as in the case of the Hanjin Group chairman’s family.

Japan’s inheritance tax rate is 55 percent, the highest among the 34 members of the Organization for Economic Cooperation and Development. But Korea’s is effectively the highest when these extra taxes are included, and Korea’s 65 percent is more than quadruple the OECD average of 15 percent.

Laws allow family business succession, but this is of little practical benefit because heirs very often lose managerial control once the heavy inheritance taxes are paid. The inheritance tax threatens the financial status of businesses and might as well be a punitive tax.

A heavy inheritance tax is burdensome not only for controlling shareholders, but also for the economy. If a company founder places his or her company up for sale instead of keeping it in the family, and managerial control falls into the hands of corporate raiders or private equity funds as a result, valuable assets such as business know-how and core technology can vanish.

For major shareholders in large companies, the fear of losing managerial control is even greater. Their stakes in the companies they control are generally much smaller in proportion to the total than those of their counterparts at midsize companies. Business owners are easily tempted to resort to expedient means to avoid estate taxes, such as moving businesses overseas or migrating to countries where there is no inheritance tax.

According to the 2019 Global Wealth Migration Review by AfrAsia Bank and New World Wealth, Australia was the top destination country for millionaire migrants in 2018. One reason was the absence of an inheritance tax. Switzerland and Singapore were also popular destinations. These countries impose no inheritance taxes. The inheritance tax rate is zero in 15 of the 34 OECD member countries.

Here in Korea, the government offers inheritance tax credits to encourage family succession in midsize businesses. Deductions are limited to companies that post less than 300 billion won in annual sales. The amount deducted depends on how long the major shareholders have managed their businesses.

The sticking points lie in the follow-through obligations that heirs must meet to qualify for tax relief. They can’t sell more than 20 percent of the assets they’ve inherited, reduce regular staff positions by more than 20 percent, or change the field of business for 10 years. If an heir fails to comply with any one of these terms, he or she must cough up the tax deductions plus a surtax. These conditions are too stringent and outdated.

The government has recognized the need to amend the inheritance tax law and is considering reducing the follow-through period to seven years. But this approach seems insufficient. The business environment is changing at the speed of light in this age of the “fourth industrial revolution.”

The government has so far focused on the negative aspects of intrafamilial business succession and kept the inheritance tax heavy. However, it is undesirable for business founders or major shareholders to put their companies up for sale because of the inheritance tax burden. It is unreasonable for heirs to have no other choice but to borrow money or sell their stock to pay estate taxes, at the risk of losing managerial control.

Inheritance is a major motivator of economic activity in a capitalist society. Now is the time for the government to turn its eyes to the positive aspects of business succession. The inheritance tax burden must be eased.