Inheritance Tax Estimated at over 10 Tril. Won
Possible changes in the governance structure of Samsung Group are drawing much attention after the death of its chairman.
Samsung Electronics vice chairman Lee Jae-yong needs at least some of the late chairman Lee Kun-hee’s shares in Samsung Electronics and Samsung Life Insurance in order to keep governing Samsung Group. Variables include the fact that the government and the ruling party are working on an Insurance Business Act amendment, which may affect the governance structure of Samsung Group, and the fact that the vice chairman’s trial is ongoing regarding management succession.
At the end of June this year, the deceased owned 4.18 percent of Samsung Electronics common shares, 0.08 percent of Samsung Electronics preferred shares, 20.76 percent of Samsung Life Insurance, 0.01 percent of Samsung SDS and 2.88 percent of Samsung C&T. He is the largest shareholder in Samsung Life Insurance and his shareholding in the insurance company exceeds Samsung C&T’s 19.34 percent. The vice chairman’s shareholding in Samsung Electronics stands at 0.7 percent whereas the deceased owns more than 4 percent of the company.
This means the vice chairman needs to inherit some Samsung Life Insurance shares to strengthen his control. At the end of June, the vice chairman owned only 0.06 percent of Samsung Life Insurance. He is currently exercising management rights with Samsung C&T’s 5.01 percent shares in Samsung Electronics and those of Samsung Life Insurance.
Still, there is no need for the vice chairman and Samsung C&T to inherit all the shares from the late chairman. This is because Samsung C&T already owns 19.34 percent of Samsung Life Insurance and there are already a lot of friendly shareholders, including Samsung Foundation of Culture (4.68 percent) and Samsung Life Public Welfare Foundation (2.18 percent).
As mentioned above, the government and the ruling party are moving ahead with an Insurance Business Act amendment. Once the National Assembly passes it, Samsung Life Insurance must reduce its shareholding in Samsung Electronics from 8.51 percent to 3 percent. The shares that must be sold are equivalent to no less than 20 trillion won.
The vice chairman mentioned the necessity of a change in governance structure in May this year. In the long term, the change can take the form of holding company structure adoption, that is, division of Samsung Group into an operating holding company revolving around Samsung C&T and a financial holding company revolving around Samsung Life Insurance.
The adoption is unlikely in the near future because Samsung C&T needs to own 20 percent of Samsung Electronics to that end and this requires tens of trillions of won. In other words, the vice chairman may maintain the current structure by inheriting and keeping his father’s Samsung Electronics and Samsung C&T shares.
As for the trial, the prosecution is contending that Samsung C&T and Cheil Industries were merged for the purpose of his succession and, in the course of the merger, Samsung Group conducted illegal dealings to lower the stock price of Samsung C&T and boost the stock price of Cheil Industries, where the vice chairman had a large number of shares.
“Any change in Samsung’s governance structure may be time-consuming due to the trial,” said an industry insider, adding, “In addition, the shareholdings of his younger sisters are very low and management disputes are extremely unlikely.”
The legal heirs of the deceased are his wife, the vice chairman, Hotel Shilla president Lee Boo-jin and Samsung Welfare Foundation director Lee Seo-hyun. The combined inheritance tax is estimated at over 10 trillion won. An inheritance tax rate of 60 percent is applied to the appraised value of the late chairman’s shares and 50 percent is applied to the rest of his properties. According to the current law, a bequest of over three billion won is subject to the maximum tax rate of 50 percent and 20 percent is additionally charged on the appraised value when the deceased is the largest shareholder or a related person. Their tax return and payment is due on April 30, 2021.