South Korea's Ministry of Finance announced a tax reform on August 3rd targeting inheritance and gift tax avoidance through stock price manipulation by listed company owners. The reform closes a loophole where owners could lower tax burdens by maintaining depressed stock prices during the four-month valuation period surrounding inheritance or gift transactions. The new rule, effective April 1, 2027, applies extended evaluation periods and higher tax bases to companies with persistently low price-to-book ratios, specifically those in the bottom 25% for KOSPI-listed firms or bottom 10% for KOSDAQ-listed firms over six years. The policy aims to eliminate incentives for artificial stock price suppression that conflict with the government's corporate value-up initiative. Industry observers note the reform fundamentally changes succession planning strategies for listed company owners who previously relied on undervaluation tactics.
Current Law Allows Four-Month Stock Price Averaging for Tax Valuation
Existing inheritance and gift tax law calculates the value of listed stocks using the average closing price over four months — two months before and two months after the valuation date. This structure created opportunities for owners to reduce tax bases by restraining share buybacks or cutting dividends during the four-month window to keep stock prices artificially low. The practice drew consistent criticism for contradicting the government's corporate value-up policy promoting higher shareholder returns.
New Evaluation Method Extends Review Period to 6.5 Years
The 2026 tax reform introduces a classification system for companies suspected of stock price suppression. Firms with price-to-book ratios in the bottom 25% for KOSPI or bottom 10% for KOSDAQ over the past six years fall under the new evaluation framework. These companies face extended valuation periods of up to 13 half-year periods, or 6.5 years total. The National Tax Service's evaluation review committee conducts assessments for flagged companies. Revaluated stock values are set at the higher of either 130% of the original assessment or the long-term average stock price, resulting in a minimum 30% increase in the tax base. The government also closed indirect routes by applying the alternative evaluation method to controlling shareholder transfers to related parties, even when conducted through normal exchange transactions.
Implementation Deadline Creates Eight-Month Window for Succession Decisions
The reform takes effect on April 1, 2027, for inheritance and gift transactions initiated on or after that date. Approximately eight months remain until implementation. Companies maintaining prolonged low price-to-book ratios face pressure to complete succession transfers before the new rules apply. Industry analysts note that holding companies and traditional manufacturing sectors with structurally low price-to-book ratios due to industry characteristics may be classified as stock price suppression suspects regardless of actual intent. These companies would bear the burden of demonstrating to the evaluation review committee that no deliberate stock price management occurred. VIP Asset Management stated on August 5th that using suppressed stock prices as a tax basis alone does not fundamentally eliminate incentives to lower tax burdens through reduced valuations, and recommended introducing net asset value at the time of inheritance or gift as a minimum evaluation standard.
Family Business Succession Deduction Increases Alongside Stricter Requirements
The same tax reform package raised the family business succession deduction ceiling from 60 billion won to 100 billion won. However, the required management period for the decedent increased from 10 years to 30 years, and the post-succession monitoring period extended from 5 years to 10 years. Eligible industries narrowed from 1,205 standard industrial classifications to 727, excluding franchise operations and real estate leasing businesses. Listed company owners with prolonged low price-to-book ratios who fail to meet the 30-year management requirement face dual barriers from both the stock price suppression prevention clause and the stricter family business succession deduction criteria. Industry consensus holds that the reform will fundamentally alter succession strategies for listed companies. The previous approach of maintaining undervalued status while waiting for succession timing no longer remains viable. The new structure creates tax advantages for normalizing corporate value through share buybacks and expanded dividends.
FAQ
What did South Korea's Ministry of Finance announce on August 3rd regarding inheritance tax?
The Ministry of Finance announced a 2026 tax reform targeting inheritance and gift tax avoidance through stock price manipulation. The reform applies extended evaluation periods and higher tax bases to companies with price-to-book ratios in the bottom 25% for KOSPI or bottom 10% for KOSDAQ over six years, effective April 1, 2027.
How does the new evaluation method change tax calculations for listed company stocks?
Companies flagged for suspected stock price suppression face extended valuation periods of up to 6.5 years instead of the current four-month average. Revaluated stock values are set at the higher of either 130% of the original assessment or the long-term average stock price, resulting in a minimum 30% increase in the tax base.
When does the new inheritance tax evaluation rule take effect?
The reform takes effect on April 1, 2027, for inheritance and gift transactions initiated on or after that date. Approximately eight months remain until implementation from the announcement on August 3rd.
